You
should consider carefully the following information about the risks described below, together with the other information contained in this Quarterly Report and in our other public filings in evaluating our business. The risk factors set forth below
with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Item 1A. of our annual report on Form 10-K for the year ended December 31, 2012.
Additional risks and uncertainties that we are unaware of may also become important factors that affect us. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline. With the exception of the risks relating to the proposed Offer and Merger, the risks described below relate to our
continued operation as a stand alone entity.
Risks Related to the Proposed Offer and Merger
If a sufficient number of shares are not tendered pursuant to the pending Offer, the Offer and Merger may not be completed and our business could
be impaired.*
If Cubist and Purchaser acquire at least 90% of our issued and outstanding shares pursuant to the Offer, the
Merger can be effected as a short form merger under Delaware law. A short form merger would enable Cubist and Purchaser to complete the acquisition of us without any action on the part of the other holders of our shares. If Cubist and
Purchaser satisfy the Minimum Condition for completion of the Offer but do not acquire 90% of the issued and outstanding shares pursuant to the Offer (including through the exercise of a top-up option and any subsequent offering period), we will be
required to hold a stockholders meeting in order to obtain the approval of our stockholders to consummate the Merger. Although this would not prevent the Merger from occurring because Cubist and Purchaser would control a sufficient number of
our shares to approve the Merger, it would delay the completion of the Merger and could create uncertainty for us and our business could be adversely affected. If less than the required minimum number of shares are tendered, then neither the Offer
nor the Merger may be completed and this could also cause significant uncertainty for us and our business could be severely and adversely affected.
Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.*
Our executive officers and directors may have interests in the Offer and the Merger that are different from, or are in addition to, those
of our stockholders generally. These interests include direct or indirect ownership of our common stock and stock options and the potential receipt of change in control payments by certain executive officers in connection with the proposed Offer and
Merger.
Failure to complete the pending Offer and Merger could adversely affect our stock price and our future business and operations.*
The Offer is subject to customary closing conditions and is contingent upon the tender of a sufficient number of shares
held by our current stockholders pursuant to the Offer and clearance under US antitrust laws. Neither we, Cubist nor Purchaser can assure you that the Offer will be consummated. In the event that the Offer and Merger is not consummated, we will be
subject to significant costs, including legal, accounting and advisory fees related to the Offer and the Merger, which must be paid even if the Offer is not completed, and the payment of a termination fee under certain circumstances. If the Offer is
not consummated, the market price of our common stock may decline to the extent that the current market price of our common stock reflects a positive market assumption that the Merger will be completed. In addition, if the Offer is not completed, we
may fail to retain key employees who have sought and obtained different employment in anticipation of the Offer and Merger being completed.
We are subject to litigation initiated in connection with the tender offer and proposed merger with Cubist, which could be time consuming and divert
our resources and the attention of our management.*
On August 1, 2013, one putative class-action lawsuit (
Bemis v.
Trius Therapeutics, Inc.
, Case No. 37-2013-00060593-CU-SL-STL) was filed in Superior Court of the State of California, County of San Diego, against (a) the Company; (b) each member of the Companys board of directors (including its chief
executive officer); and (3) Cubist Pharmaceuticals, Inc. and BRGO Corporation, collectively the Cubist Entities, arising out of the proposed acquisition of Trius by Cubist, or the Proposed Transaction. The Complaint alleges that the Companys
directors breached their fiduciary duties in connection with the proposed acquisition of the Company by the Cubist Entities, and that the other defendants aided and abetted these alleged breaches of fiduciary duty. Specifically, the Complaint
asserts that the Companys directors breached their fiduciary duties to the Companys public stockholders by, among other things, (i) agreeing to sell the Company to the Cubist Entities at an unfair price; (ii) implementing an unfair
process; and (iii) agreeing to certain provisions of the merger agreement that are alleged to favor the Cubist Entities and deter alternative bids. The Complaint seeks an injunction against the consummation of the merger and rescission of the
Merger Agreement to the extent already implemented, and an award of costs and expenses, including a reasonable allowance for attorneys and experts fees.
On August 6, 2013, another putative class-action lawsuit (Hurst v. Trius Therapeutics, Inc., (the Second Complaint)) was filed in the Superior Court of the State of California, County of San
Diego, against: (a) the Company; (b) each member of the Companys board of directors (including its chief executive officer); and (3) the Cubist Entities. The Second Complaint alleges that the Companys directors breached their
fiduciary duties in connection with the proposed acquisition of the Company by the Cubist Entities, and that the other defendants aided and abetted these alleged breaches of fiduciary duty. Specifically, the Second Complaint asserts that the
Companys directors breached their fiduciary duties to the Companys public stockholders by, among other things, (i) agreeing to sell the Company to the Cubist Entities at an unfair price; (ii) implementing an unfair process; and (iii)
agreeing to certain provisions of the merger agreement that are alleged to favor the Cubist Entities and deter alternative bids. The Second Complaint seeks an injunction against the consummation of the merger and rescission of the Merger
Agreement to the extent already implemented, an award of damages, and an award of costs and expenses, including a reasonable allowance for attorneys and experts fees.
The Company intends to vigorously defend against these claims. The outcome of this litigation cannot be predicted at this time and any
outcome in favor of the plaintiffs could have a significant adverse effect on the Proposed Transaction, our financial condition, and our results of operations.
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Risks Related to Our Financial Condition and Capital Requirements
We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future. We may
never become profitable.*
As of June 30, 2013, we had an accumulated deficit of $186.3 million. We have funded, and
plan to continue to fund, our operations from the sale of our securities, through research funding and from collaboration and license payments, including payments under the Bayer collaboration. However, we have generated no revenues from product
sales to date. We expect that the uncertainty of our ability to achieve milestones under the Bayer collaboration and any other collaboration agreements we may enter into in the future and the timing of those payments will lead to significant
fluctuations in our earnings and profitability. However, even with these funds, we expect to continue to incur substantial additional operating losses for the next several years as we advance tedizolid phosphate and our preclinical programs. In
addition, if we obtain regulatory approval for tedizolid phosphate, we may incur significant sales, marketing, licensing and outsourced manufacturing expenses. As a result, we expect to continue to incur significant and increasing losses for the
foreseeable future. Because of the numerous risks and uncertainties associated with developing and commercializing pharmaceutical drugs, we are unable to predict the extent of any future losses. We may never successfully commercialize any products
and thus may never have any significant future revenues or achieve and sustain profitability.
We have limited sources of revenues and have
not to date generated any revenues from product sales.*
We are a biopharmaceutical company with no products approved for
commercial sale. To date, substantially all of our revenues have been derived from federal contract and grant revenues and fees for development and regulatory services from license or collaboration agreements, and we have not generated any revenues
from product sales. Our ability to generate future revenues from product sales depends heavily on our success in:
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Successfully advancing the development of tedizolid phosphate for the treatment of ABSSSI;
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Obtaining United States and/or foreign regulatory approvals for tedizolid phosphate;
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Commercializing tedizolid phosphate and any other product candidates for which we obtain FDA approval, including by building a hospital-directed sales
force and/or collaborating with third parties;
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Achieving broad market acceptance of tedizolid phosphate in the medical community and with third-party payers;
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Pursuing clinical development of tedizolid phosphate for the treatment of pneumonia and potentially for other indications;
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Generating a pipeline of innovative product candidates using our drug discovery platform or through licensing strategies;
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Maintaining our current federal contracts that support our current drug discovery efforts and obtaining new federal contracts to help pay for future
drug discovery efforts; and
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Maintaining our collaboration and license agreement with Bayer to support our continuing development and regulatory efforts for tedizolid phosphate for
the treatment of ABSSSI and pneumonia.
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Tedizolid phosphate will require extensive additional clinical study
and evaluation, regulatory approval in multiple jurisdictions, substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote tedizolid phosphate, or any other
antibiotic product candidates that we develop, before we obtain regulatory approval from the FDA or comparable foreign regulatory authorities. If we do not obtain regulatory approval for and successfully commercialize tedizolid phosphate, we may not
generate any revenues from product sales, and we may not be able to continue our operations. Even if we successfully obtain regulatory approval to market tedizolid phosphate, our revenues are dependent upon the size of the markets in the territories
for which we obtain regulatory approval and have commercial rights, as well as our ability to gain market acceptance and achieve commercial success. If we do not generate revenues, or the markets for the treatment of ABSSSI are not as significant as
we estimate, our business and prospects will be materially harmed.
If we fail to obtain additional financing, we may not be able to
complete the development and commercialization of tedizolid phosphate or any other product candidates.*
Our operations
have consumed substantial amounts of cash since our inception. In the event that we do not complete the Merger, we expect to continue to spend substantial amounts to:
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Complete the development of tedizolid phosphate for the treatment of ABSSSI;
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Launch and commercialize tedizolid phosphate and any other product candidates for which we obtain regulatory approval, including by building a
hospital-directed sales force and/or collaborating with third parties;
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Pursue clinical development of tedizolid phosphate for the treatment of pneumonia and potentially for other indications; and
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Continue our discovery and development programs to advance our preclinical product pipeline.
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In May 2011, we completed a private placement, raising $28.0
million in net proceeds. In July 2011, we signed a collaboration agreement with Bayer where they agreed to pay us $25.0 million in upfront fees, and agreed to support approximately 25% of our development costs of tedizolid phosphate for ABSSSI and
pneumonia, pay us up to $69.1 million upon the achievement of certain milestones, and pay us royalties on net sales of tedizolid phosphate in the Bayer Licensed Territory. In addition, Bayer agreed to pay for 100% of the development efforts in the
Bayer Licensed Territory. In January 2012, we completed a public offering, raising $48.4 million in net proceeds. In August 2012, we entered into a committed equity line of credit under which we may sell up to $25.0 million of our common stock from
time to time to Terrapin over a 24-month period. To date, we have received aggregate net proceeds of $8.4 million under the committed equity line of credit. In January 2013, we completed a public offering, raising $31.6 million in net proceeds. We
expect that the net proceeds from the sale of our common stock, revenues under our Bayer collaboration and our existing cash and cash
25
equivalents, together with interest thereon, will be sufficient to fund our capital requirements through the estimated time that we expect to receive a response from the FDA on our NDA for
tedizolid phosphate. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For
example, our clinical trials may encounter technical, enrollment or other issues that could cause our development costs to increase more than we expected. We may also need to raise additional funds sooner if we choose to initiate clinical trials
more rapidly than we presently anticipate. In any event, we expect that we will require additional capital to obtain regulatory approval of and to commercialize tedizolid phosphate, and we expect the costs and duration of a Phase 3 program required
for approval for the treatment of pneumonia to exceed those for the treatment of ABSSSI. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of its
attention away from our day-to-day activities, which may adversely affect our managements ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
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Significantly delay, scale back or discontinue the development or commercialization of tedizolid phosphate or our preclinical programs;
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Seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that
are less favorable than might otherwise be available; or
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Relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize
ourselves.
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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us,
we may not be able to maintain our collaboration and license agreement with Bayer and we will be prevented from pursuing discovery, development and commercialization efforts and our ability to generate revenues and achieve or sustain profitability
will be substantially harmed. In addition, if the United States government stops funding our preclinical programs or we are unable to enter into new government funding contracts , we may not be able to continue our preclinical programs, and our
business and prospects may be materially harmed.
To raise additional funds to support our business operations, we may sell additional
equity or convertible debt securities, which would result in dilution to our stockholders, or incur indebtedness which could result in restrictive covenants that adversely impact the operation of our business.*
The sale of additional equity would result, and the issuance of convertible debt securities would likely result, in the issuance of
additional shares of our capital stock and dilution to our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to
incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.
The timing of the milestone and royalty payments we are required to make to Dong-A is uncertain and could adversely affect our cash flows and results
of operations.*
In January 2007, we entered into a license agreement with Dong-A pursuant to which we acquired an
exclusive license to certain patent applications and other intellectual property related to the oral and injectable forms of tedizolid phosphate to develop and commercialize licensed products, including tedizolid phosphate, outside of Korea. In
addition to milestone payments we have already made to Dong-A, we have an obligation to make up to an aggregate of $11.5 million in additional payments upon achievement of specified development and regulatory approval milestones. We are also
required to pay Dong-A mid-single digit tiered royalties on net sales of tedizolid phosphate. The timing of our achievement of these events and corresponding milestone payments to Dong-A is subject to factors relating to the clinical and regulatory
development and commercialization of tedizolid phosphate, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our
clinical trials, curtail our operations, scale back our planned commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us. In addition, if we are unable to make any payment to Dong-A when due or if we
fail to use commercially reasonable efforts to achieve certain development and commercialization milestones within the timeframes required by our license agreement with Dong-A, Dong-A has the right to terminate the license agreement and all of our
rights to develop and commercialize tedizolid phosphate upon 90 days written notice of our failure to make any such payment or to timely achieve the specified development and commercialization milestones.
The timing of the milestone and royalty payments we are entitled to receive from Bayer is uncertain and could adversely affect our cash flows and
results of operations.
The timing of the up to $55.0 million remaining that we are entitled to receive upon the
achievement of certain milestones under our collaboration and license agreement with Bayer is inherently uncertain. The receipt of milestone payments under the Bayer collaboration and license agreement can have a significant impact on our cash flows
and results of operations for the periods of time in which such payments are made. However, while receipt of milestone and royalty payments would result in significant income, the absence of collaboration revenues in subsequent quarters could result
in significant reductions in net income and could cause our stock price to drop.
Our limited operating history makes it difficult to
evaluate our business and prospects.*
We were incorporated in 2004. Our operations to date have been limited to organizing
and staffing our company, conducting product development activities for tedizolid phosphate and performing research and development with respect to our preclinical programs. We have not yet demonstrated an ability to obtain regulatory approval for
or commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully achieving regulatory approval of and commercializing pharmaceutical
products.
26
Risks Related to our Business
We are heavily dependent on the success of tedizolid phosphate, which is still under development. We cannot assure you that we will obtain regulatory approval for tedizolid phosphate. If we fail to
obtain regulatory approval for tedizolid phosphate, our business will be materially harmed.*
To date, we have not
marketed, distributed or sold any products. Our near-term prospects are substantially dependent on our ability to develop and commercialize tedizolid phosphate. To date, we have completed two Phase 3 studies, two Phase 2 studies and fifteen Phase 1
studies of tedizolid phosphate. In October 2009, we completed our end of Phase 2 meeting with the FDA. Based on the feedback and guidance we received from the FDA as well as the Special Protocol Assessment, or SPA, agreement we reached with the FDA
on the protocol for our ESTABLISH 1 clinical trial of tedizolid phosphate for the treatment of ABSSSI, we conducted our ESTABLISH 1 Phase 3 clinical trial of tedizolid phosphate. We completed our ESTABLISH 1 Phase 3 trial in ABSSSI and, in December
2011, announced the positive results on both the early endpoints used by the FDA and the post-treatment assessment used by EMA. In addition, we obtained a SPA agreement for our ESTABLISH 2 Phase 3 clinical trial of tedizolid phosphate and, in March
2013, announced the achievement of all primary and secondary endpoints established by the FDA and EMA. We plan to use both Phase 3 trials as a basis for our NDA and Marketing Authorization Application submissions, seeking approvals to commercialize
the IV and oral dosage forms of tedizolid phosphate for the treatment of ABSSSI. Additional clinical safety and special population Phase 1 clinical trials necessary for registration have also been performed. We cannot commercialize tedizolid
phosphate prior to obtaining FDA approval. However, tedizolid phosphate is susceptible to the risks of failure inherent at any stage of drug development, including the appearance of adverse events, or AEs, failure to maintain efficacy across a broad
population of patients and the FDAs determination that a drug product is not approvable. We cannot assure you that our clinical trials for tedizolid phosphate will be completed timely or at all, or that we will be able to obtain FDA or EMA
approvals for this product candidate, and we expect that the costs and duration of a Phase 3 program required for approval for the treatment of pneumonia to exceed those for the treatment of ABSSSI. If we are not able to commercialize tedizolid
phosphate for ABSSSI or for any other indications, we will not be able to generate product revenues in the foreseeable future, or at all. Tedizolid phosphate is the only product candidate for which we have conducted clinical trials, and we cannot be
certain that we will advance any other product candidates into clinical trials. As a company, we have never obtained regulatory approval for or commercialized a drug. It is possible that the FDA may refuse to accept our NDA for substantive review or
may conclude after review of our data that our application is insufficient to obtain regulatory approval of tedizolid phosphate. If the FDA does not accept or approve our NDA, it may require that we conduct additional clinical, preclinical or
manufacturing validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other FDA required studies, approval of any NDA or application that we submit may be delayed by several years,
or may require us to expend more resources than we have available. In addition, increased scrutiny by the United States Congress of the FDAs approval process, particularly in our areas of focus, may significantly delay or prevent regulatory
approval, as well as impose more stringent product labeling and post-marketing testing and other requirements. Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from commercializing tedizolid phosphate,
generating revenues and achieving and sustaining profitability. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve our NDA. If any of these outcomes occur, we may be forced
to abandon our NDA for tedizolid phosphate, which would materially adversely affect our business and could potentially cause us to cease operations.
Clinical trials involve 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 testing is expensive and can take many years to complete, and its outcome is highly uncertain. Failure can occur at any time
during the clinical trial process due to inadequate performance of a drug or inadequate adherence by patients or investigators to clinical trial protocols, leading to poor data quality. The results of preclinical studies and early clinical trials of
product candidates may not be predictive of the results of later-stage clinical trials. Investigational drugs in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed satisfactorily through
preclinical studies and initial clinical testing. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks even after seeing promising
results in earlier clinical trials. Despite the results reported in clinical trials for tedizolid phosphate so far, we do not know whether any other clinical and nonclinical studies we may conduct will demonstrate adequate efficacy and safety to
result in regulatory approval to market tedizolid phosphate.
The FDA regulatory approval process is lengthy, time consuming and inherently
unpredictable, and if we are ultimately unable to obtain regulatory approval for tedizolid phosphate, our business will be substantially harmed.*
The time required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials,
depending upon numerous factors, and we expect that our Phase 3 program of tedizolid phosphate for the treatment of pneumonia will be of longer duration than our Phase 3 program for the treatment of ABSSSI. In addition, approval policies,
regulations, or the type and amount of clinical data necessary to obtain regulatory approval may change during the course of a product candidates clinical development.
We may fail to obtain regulatory approval for tedizolid phosphate or any other product candidate for many reasons, including the following:
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We may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and
effective for any indication;
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The results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for
approval;
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The FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
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We may not be able to demonstrate that a product candidates clinical and other benefits outweigh its safety risks;
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We may not be able to demonstrate that a product candidate provides an advantage over current standard of care, future competitive therapies in
development, or over placebo in any indications for which the FDA requires a placebo-controlled trial;
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The FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;
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The FDA or comparable foreign regulatory authorities may not accept data generated at our clinical trial sites, including as a result of pre-approval
inspections of us, our CROs or clinical sites;
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The data collected from clinical trials of any product candidates that we develop may not be sufficient to support the submission of an NDA or other
submission or to obtain regulatory approval in the United States or elsewhere;
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The FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with
which we or our collaborators enter into agreements for clinical and commercial supplies; and
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The approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our
clinical data insufficient for approval.
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This lengthy approval process as well as the unpredictability of
future clinical trial results may result in our failing to obtain regulatory approval to market tedizolid phosphate or any future product candidates, which would significantly harm our business, results of operations and prospects.
Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize or delay our
ability to obtain regulatory approval and commence product sales as currently contemplated.*
We may experience delays in
clinical trials of our product candidates. To date, tedizolid phosphate has completed two Phase 3 studies for the treatment of ABSSSI. We have conducted additional safety, pharmacology and special population clinical studies necessary for
registration. We intend to use both of our Phase 3 studies as a basis to submit an NDA and EMA submission for the approval of the IV and oral dosage forms of tedizolid phosphate for the treatment of ABSSSI. We also expect to initiate a Phase 3
program of tedizolid phosphate for the treatment of pneumonia, and we may in the future perform clinical studies of tedizolid phosphate for other indications. We do not know whether our planned clinical trials will begin on time, need to be
redesigned, enroll a sufficient number of patients or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:
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Delays in obtaining regulatory approval to commence a trial;
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Delays in reaching agreement with the FDA on any SPAs we submit;
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Imposition of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;
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Delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
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Delays in obtaining required institutional review board approval at each clinical trial site;
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Delays in recruiting suitable patients to participate in a clinical trial;
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Delays in having patients complete participation in a trial or return for post-treatment follow-up;
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Clinical trial sites dropping out of a trial to the detriment of enrollment;
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Time required to add new sites;
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Delays in obtaining sufficient supplies of clinical trial materials; or
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Delays resulting from negative or equivocal findings of a data safety monitoring board, or DSMB, for a clinical trial.
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Patient enrollment, a significant factor in the timing of
clinical trials, is affected by many factors, including the size and nature of the patient population, enrollment criteria imposed by the FDA, the proximity of patients to clinical sites, the eligibility criteria for participating in the trial, the
design of the clinical trial, competing clinical trials and clinicians and patients perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be
approved for the indications we are investigating. For example, we could encounter delays in our clinical trials of tedizolid phosphate if participating physician investigators encounter unresolved ethical issues associated with enrolling patients
in clinical trials of tedizolid phosphate in lieu of prescribing approved antibiotics that have established safety and efficacy profiles. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical
trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. Any delays in completing our clinical trials could increase our costs, slow down our product development and approval
process and jeopardize our ability to commence product sales and generate revenues.
We may be required to suspend or discontinue clinical
trials due to adverse side effects or other safety risks that could preclude approval of tedizolid phosphate or any of our future product candidates.*
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Our clinical trials may be suspended at any time for a number of reasons. A clinical trial
may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, unforeseen safety issues including
adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of
a DSMB, an Institutional Review Board or an Independent Ethics Committee for a clinical trial. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition,
regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present
an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any product candidates that we develop, the commercial prospects of such product candidates will be harmed and our ability to
generate product revenues, if at all, from any of these product candidates will be delayed or eliminated. Any of these occurrences may harm our business, financial condition and prospects significantly.
To date, the drug-related adverse events experienced by patients while being treated with tedizolid phosphate were mostly mild or
moderate side effects that included nausea, diarrhea, vomiting and headache. However future clinical trials will involve broader populations and could reveal a higher prevalence or different severity of these or other side effects. In such an event,
our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of tedizolid phosphate for any or all targeted indications. Any of these occurrences
may harm our business and prospects significantly.
The SPAs for our Phase 3 studies of tedizolid phosphate do not guarantee any particular
outcome from regulatory review of our Phase 3 studies.*
The FDAs SPA process creates a written agreement between the
sponsoring company and the FDA regarding clinical trial design and data analysis and other clinical trial issues that can be used to support approval of a product candidate. The SPA is intended to provide assurance that if the agreed upon clinical
trial protocols are followed, the clinical trial endpoints are achieved, and there is a favorable risk-benefit profile, the data may serve as the primary basis for an efficacy claim in support of an NDA. However, SPA agreements are not a guarantee
of an approval of a product candidate or any permissible claims about the product candidate. In particular, SPAs are not binding on the FDA if previously unrecognized public health concerns arise during the performance of the clinical trial, other
new scientific developments regarding product candidate safety or efficacy arise or if the sponsoring company fails to comply with the agreed upon clinical trial protocols. We do not know how the FDA will interpret the commitments under the agreed
upon SPAs, how it will interpret the data and results or whether it will approve tedizolid phosphate for the treatment of ABSSSI or any other indication. In addition, although the FDA has provided us with feedback as to the adequacy of the proposed
size of our safety population to support an NDA, it may require us to conduct additional clinical trials. As a result, we cannot guarantee any particular outcome from regulatory review of our Phase 3 studies.
We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected
deadlines, we may be delayed in obtaining or ultimately not be able to obtain regulatory approval for or commercialize tedizolid phosphate or any other product candidates.*
We have relied and plan to continue to rely upon CROs to monitor and manage data for our on-going clinical programs for tedizolid phosphate as well as the execution of our preclinical and nonclinical
studies, and control only certain aspects of our CROs 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 the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with the FDAs current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA for all
of our products in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data
generated in our clinical trials may be deemed unreliable, and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of
our clinical trials comply with cGCPs. In addition, our clinical trials will require an adequately large number of test subjects to evaluate the safety and effectiveness of tedizolid phosphate. Accordingly, if our CROs fail to comply with these
regulations or recruit a sufficient number of patients, the FDA may require us to repeat clinical trials, which would delay the regulatory approval process. In addition, our CROs are not our employees, and we cannot control whether or not they
devote sufficient time and resources to our on-going clinical, nonclinical and preclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical
studies or other drug development activities, which could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or
accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to
obtain regulatory approval for or successfully commercialize tedizolid phosphate or any other product candidates that we develop. As a result, our financial results and the commercial prospects for tedizolid phosphate and any other product
candidates that we develop would be harmed, our costs could increase and our ability to generate revenues could be delayed or diminished.
We plan to maintain our relationships with existing CROs and enter into agreements with additional CROs to obtain additional resources
and expertise in an attempt to accelerate our progress with regard to on-going clinical, nonclinical and preclinical programs and specifically, the initiation of our Phase 3 clinical trial program for tedizolid phosphate for the treatment of
pneumonia and potentially for other indications. Switching or entering into new relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO
commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter
similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our operating results, financial condition or future prospects.
29
Our dependence upon third parties for the manufacture and supply of tedizolid phosphate and any future
product candidates and products may cause delays in, or prevent us from, successfully developing and commercializing products.*
We do not currently have nor do we plan to implement the infrastructure or capability internally to manufacture tedizolid phosphate for use in the conduct of our clinical trials. We employ the services of
Albany Molecular Research, Inc., or AMRI, to produce tedizolid phosphate API and Patheon, Inc., or Patheon, to produce the solid oral and sterile IV tedizolid phosphate finished products. We have entered into clinical supply master services
agreements with AMRI and Patheon for our short-term clinical supply needs, but we do not have any other agreements for the clinical supply of tedizolid phosphate or any future product candidates with AMRI, Patheon or any other third party.
With respect to the manufacturing for our commercial scale products, we have entered into a worldwide agreement with Patheon
to supply the commercial quantities of solid oral and sterile IV tedizolid phosphate bulk and finished products that we expect to require to support the markets in which we and our licensors, including Bayer, intend to commercialize the product,
subject to regulatory approval. However, tedizolid phosphate is a new chemical entity that has never been produced at commercial scale, and, as such, there are underlying risks associated with its manufacture, which could include cost overruns, new
impurities, difficulties in scaling up or reproducing manufacturing processes and lack of timely availability of raw materials. Any of these risks may prevent or delay us from successfully developing and commercializing tedizolid phosphate. Reliance
on third-party manufacturers entails many risks, including regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control and the possibility of
termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.
Our third-party manufacturers are required to comply with applicable FDA current good manufacturing practice, or cGMP, regulations. In addition, our manufacturers will be subject to ongoing periodic
unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements. These regulations cover all aspects of the manufacturing, testing, quality control and record keeping
relating to our product candidates. We do not have control over our manufacturers compliance with these regulations and standards. Failure by any of our manufacturers to comply with applicable regulations could result in sanctions being
imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions, and interruptions in supply and criminal prosecutions,
any of which could significantly and adversely affect our business.
We could also experience manufacturing delays if our
third-party manufacturers give greater priority to the supply of other products over our product candidates. If AMRI, Patheon or any alternate supplier of bulk or finished drug product, experiences any significant difficulties in its respective
manufacturing processes for tedizolid phosphate API or bulk or finished drug product, we could experience significant interruptions in the supply of tedizolid phosphate. Our inability to coordinate the efforts of our third-party manufacturing
partners, or the lack of capacity available at our third-party manufacturing partners, could impair our ability to supply tedizolid phosphate at the levels required for successful commercialization. If our current suppliers are unable or unwilling
to perform under their agreements, we could experience significant interruptions in the supply of tedizolid phosphate because of the significant regulatory requirements that we would need to satisfy in order to qualify a new tedizolid phosphate API
or bulk or finished drug product supplier.
If for any reason we are unable to use our currently available supply of tedizolid
phosphate, the inability to acquire additional quantities of tedizolid phosphate in a timely manner from third parties could delay clinical trials of tedizolid phosphate or result in product shortages and prevent us from developing and
commercializing tedizolid phosphate in a cost-effective manner or on a timely basis.
The failure to maintain our collaboration with Bayer
or the failure of Bayer to perform its obligations under this collaboration, could negatively impact our business.*
Pursuant to the terms of our collaboration and license agreement with Bayer, we granted to Bayer exclusive rights to develop and
commercialize tedizolid phosphate in the Bayer Licensed Territory. Consequently, our ability to generate any revenues from tedizolid phosphate in the Bayer Licensed Territory depends on our ability to maintain our collaboration with Bayer and
Bayers ability to obtain regulatory approvals for and to successfully commercialize tedizolid phosphate in the Bayer Licensed Territory. We have limited control over the amount and timing of resources that Bayer will dedicate to these
efforts.
We are subject to a number of other risks associated with our collaboration and license agreement with Bayer,
including:
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Bayer has the right to terminate the Agreement within 30 days of becoming aware of any material toxicity and/or material drug safety event or issue
concerning tedizolid.
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Bayer may not comply with applicable regulatory guidelines with respect to developing or commercializing tedizolid phosphate, which could adversely
impact future development or sales of tedizolid phosphate in the Bayer Licensed Territory and elsewhere;
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We and Bayer could disagree as to current or future development plans for tedizolid phosphate for the treatment of ABSSSI or pneumonia and Bayer may
delay clinical trials or stop a clinical trial;
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There may be disputes between us and Bayer, including disagreements regarding the collaboration and license agreement, that may result in (1) the
delay of or failure to achieve regulatory and commercial objectives that would result in milestone or royalty payments, (2) the delay or termination of any future development or commercialization of tedizolid phosphate for the treatment of
ABSSSI or pneumonia, and/or (3) costly litigation or arbitration that diverts our managements attention and resources;
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30
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Bayer may not provide us with timely and accurate information regarding supply forecasts, which could adversely impact our ability to comply with our
supply obligations to Bayer and manage our own inventory of tedizolid phosphate, as well as our ability to generate accurate financial forecasts;
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Business combinations or significant changes in Bayers business strategy may adversely affect Bayers ability or willingness to perform its
obligations under our collaboration agreement;
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We may not be able to raise additional capital in sufficient amounts or on terms acceptable to us, or business combinations or significant changes in
our business strategy may adversely affect our ability or willingness to perform our obligations under our collaboration agreement;
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The royalties we are eligible to receive from Bayer may be reduced or eliminated based upon Bayers and our ability to maintain or defend our
intellectual property rights and the presence of generic competitors in the Bayer Licensed Territory;
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Limitations on our or an acquirers ability to maintain or pursue development or commercialization of products that are competitive with tedizolid
phosphate could deter a potential acquisition of us that our stockholders may otherwise view as beneficial; and
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If Bayer is unsuccessful in obtaining regulatory approvals for or commercializing tedizolid phosphate in the Bayer Licensed Territory, we may not
receive certain additional milestone payments or any royalty payments under the collaboration and license agreement and our business prospects and financial results may be materially harmed.
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The collaboration and license agreement is subject to early termination, including through Bayers right to terminate without cause
upon advance notice to us. If the agreement is terminated early, we may not be able to find another collaborator for the further development and commercialization of tedizolid phosphate in the Bayer Licensed Territory on acceptable terms, or at
all, and we may be unable to pursue continued development and commercialization of tedizolid phosphate in the Bayer Licensed Territory on our own.
In the event we are unable to complete the proposed Merger, we may enter into additional collaboration and license agreements for the development and commercialization of tedizolid phosphate or other of
our drug candidates, and may be similarly dependent on the performance of third parties with similar risk.
Other than our collaboration and
license agreement with Bayer, we may not be able to enter into acceptable agreements to develop and commercialize tedizolid phosphate or, if needed, adequately build our own marketing and sales capabilities.*
We intend to pursue the development and commercialization of tedizolid phosphate through strategic arrangements with third parties, such
as our collaboration and license agreement with Bayer. We may be unable to enter into additional arrangements outside of the Bayer Licensed Territory. In addition, there can be no guarantee that Bayer or any other parties that we may enter
into strategic arrangements with will be successful or generate more revenues than we could obtain by developing and commercializing tedizolid phosphate on our own. If we are unable to enter into additional strategic arrangements for tedizolid
phosphate or develop an effective international sales force, our ability to generate product revenues would be limited, which would adversely affect our business, financial condition, results of operations and prospects. If we are unable to enter
into such arrangements for development of tedizolid phosphate in areas outside of the Bayer Licensed Territory, we may need to develop our own marketing and sales force to market tedizolid phosphate in these territories, for which currently we do
not have sufficient funds. There is no guarantee that we will be able to develop an effective international sales force to successfully commercialize tedizolid phosphate or any other future products in these markets. If we cannot
commercialize tedizolid phosphate in any territory that represents a significant market opportunity, our ability to achieve and sustain profitability will be substantially limited.
If the FDA does not approve the manufacturing facilities of AMRI, Patheon or any future manufacturing partners for commercial production, we may not be able to commercialize tedizolid phosphate.
After we submit our NDA to the FDA and before approval of tedizolid phosphate, the facilities used by AMRI, Patheon and
any of our future manufacturers to manufacture tedizolid phosphate must be approved by the FDA. We do not control the manufacturing process of tedizolid phosphate and are completely dependent on these third-party manufacturing partners for
compliance with the FDAs requirements for manufacture of tedizolid phosphate API and finished product. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the FDAs strict regulatory
requirements, they will not be able to secure FDA approval for their manufacturing facilities. If the FDA does not approve these facilities for the commercial manufacture of tedizolid phosphate, we may need to find alternative manufacturing
facilities, which would result in significant delays of up to several years in obtaining FDA approval for tedizolid phosphate.
If approved,
tedizolid phosphate will face competition from less expensive generic versions of branded antibiotics of competitors and, if we are unable to differentiate the benefits of tedizolid phosphate over these less expensive alternatives, we may never
generate meaningful product revenues.*
Generic antibiotic therapies are typically sold at lower prices than branded
antibiotics and are generally preferred by hospital formularies and managed care providers of health services. We anticipate that, if approved, tedizolid phosphate will face increasing competition in the form of generic versions of branded products
of competitors that have lost or will lose their patent exclusivity. For example, tedizolid phosphate, if approved, will initially face competition from the inexpensive generic forms of vancomycin that are currently available and, in the future,
would face additional competition from a generic form of linezolid when licenses to the patents covering it are expected to commence in 2015, or earlier if the patents are successfully challenged. If we are unable to demonstrate to physicians and
payers that the key differentiating features of tedizolid phosphate translate to overall clinical benefit or lower cost of care, we may not be able to compete with generic antibiotics.
31
We face significant competition from other biotechnology and pharmaceutical companies and our operating
results will suffer if we fail to compete effectively.*
The biotechnology and pharmaceutical industries are intensely
competitive and subject to rapid and significant technological change. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty
pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and
manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large, established companies. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more
effective or less costly than tedizolid phosphate or any other drug candidate that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive.
The competition in the market for antibiotics is intense. If approved, tedizolid phosphate will face competition
from commercially available antibiotics such as vancomycin, marketed as a generic by Abbott Laboratories and others; teicoplanin, marketed as Targocid
®
by Sanofi Aventis and as a generic by others; daptomycin, marketed by Cubist Pharmaceuticals, Inc. as Cubicin
®
; linezolid, marketed by Pfizer Inc. as
Zyvox
®
; ceftaroline, marketed by Forest Laboratories, Inc. and AstraZeneca PLC as Teflaro
®
; ceftobiprole, under development by Basilea Pharmaceutica AG; quinupristin/dalfopristin, marketed by King
Pharmaceuticals, Inc, a subsidiary of Pfizer, as Synercid
®
; tigecycline, marketed by Pfizer as Tygacil
®
; and telavancin, marketed by Theravance, Inc. as Vibativ
®
. Vancomycin has been a widely used and well known antibiotic for over 50 years and is sold in a relatively inexpensive generic IV form. Vancomycin, daptomycin,
linezolid, telavancin, tigecycline, quinupristin/dalfopristin and ceftaroline are all approved treatments for serious Gram-positive infections such as complicated skin and skin structure infections, or cSSSI or ABSSSI. Additionally, daptomycin is an
approved treatment for bacteremia, linezolid is an approved treatment for pneumonia and vancomycin is an approved treatment for both bacteremia and pneumonia. In addition, if approved, tedizolid phosphate may face additional competition from
antibiotics currently in clinical development. Other antibiotics currently in development include CEM-102, under development by Cempra Pharmaceuticals, Inc., dalbavancin, under development by Durata Therapeutics, Inc., delafloxacin and radezolid,
both under development by Rib-X Pharmaceuticals, Inc., NXL-103, under development by AstraZeneca PLC, oritavancin, under development by The Medicines Company, PTK 0796, under development by Paratek Pharmaceuticals, Inc., BC-3781, under development
by Nabrivia, GSK1322322, under development by GlaxoSmithKline, AFN-1252, under development by Affinium Pharmaceuticals, Inc. and JNJ-Q2, under development by Furiex Pharmaceuticals, Inc., which, if approved, would compete in the antibiotic market
and would target indications such as ABSSSI. In addition, tedizolid phosphate may face competition from drug candidates currently in clinical development and drug candidates that could receive regulatory approval before tedizolid phosphate in
countries outside the United States and the European Union, or EU. If we are unable to obtain regulatory approval of tedizolid phosphate for some or all of the indications for which our competitors are approved, or if we are unable to demonstrate
the advantages of tedizolid phosphate over competing drugs and drug candidates, we will not be able to successfully commercialize tedizolid phosphate and our results of operations will suffer.
Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license
novel compounds that could make tedizolid phosphate or any other product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or FDA approval or discovering,
developing and commercializing antibiotics before we do.
Coverage and adequate reimbursement may not be available for tedizolid phosphate
or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.*
Market acceptance and sales of tedizolid phosphate or any other product candidates that we develop will depend on reimbursement policies
and may be affected by future healthcare reform measures. Government authorities, hospital formularies and third-party payers, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish
reimbursement levels. We cannot be sure that coverage and adequate reimbursement will be available for tedizolid phosphate or any other product candidates that we develop. Also, we cannot be sure that coverage decisions or reimbursement amounts will
not reduce the demand for, or the price of, our products. In addition, third-party payers may implement prior authorizations which may lead to a decrease in sales of our future products. If coverage or reimbursement is not available or is available
only to limited levels or extensive prior authorizations are introduced, we may not be able to successfully commercialize tedizolid phosphate or any other product candidates that we develop.
In the U.S., the EU and other potentially significant markets for our product candidates, government authorities and third-party payers
are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices. Further, the increased emphasis on managed
healthcare in the U.S. and on country and regional pricing and reimbursement controls in the EU will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our future product sales and results of operations.
These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.
The United States and some foreign jurisdictions are considering or have enacted a number of additional legislative and
regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in
healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by
major legislative initiatives.
32
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases
by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation
Act, or collectively PPACA, became law. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Among other cost containment measures, the PPACA
establishes: an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; and a new formula that increases the rebates a
manufacturer must pay under the Medicaid Drug Rebate Program. In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we are able to charge for
our products, or the amounts of reimbursement available for our products.
The availability of numerous generic antibiotics at
lower prices than branded antibiotics, such as tedizolid phosphate if it were approved for commercial introduction, may also substantially reduce the likelihood or levels of reimbursement for tedizolid phosphate. We expect to experience pricing
pressures in connection with the sale of tedizolid phosphate and any other products that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. If we
fail to successfully secure and maintain coverage and adequate reimbursement for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.
The commercial success of tedizolid phosphate and any other product candidates that we develop, if approved in the future, will depend upon attaining
significant market acceptance of these products among physicians and payers.*
We have never commercialized a product
candidate for any indication. Even if tedizolid phosphate or any other product candidates that we develop are approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe our approved products, which would
prevent us from generating revenues or becoming profitable. Market acceptance of tedizolid phosphate and any other product candidates that we develop by physicians and payers will depend on a number of factors, many of which are beyond our control,
including:
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The clinical indications for which the product is approved;
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Acceptance by physicians and payers of each product as a safe and effective treatment;
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The cost of treatment in relation to alternative treatments, including numerous generic drug products, such as vancomycin;
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The relative convenience, ease of administration and acceptance by physicians and payers of tedizolid phosphate in the treatment of the indications for
which it is approved;
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The availability and efficacy of competitive drugs;
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The extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations;
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The extent to which bacteria develop resistance to any antibiotic product candidates that we develop, thereby limiting its efficacy in treating or
managing infections;
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Whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular
infections;
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The availability of coverage and adequate reimbursement by third parties, such as insurance companies and other healthcare payers, and/or by government
healthcare programs, including Medicare and Medicaid;
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Limitations or warnings contained in a products approved labeling;
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Prevalence and severity of adverse side effects; and
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The ability to develop convincing health economics and outcomes research.
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Even if the medical community accepts that tedizolid phosphate is safe and efficacious for its approved indications, physicians may not
immediately be receptive to the use of tedizolid phosphate or may be slow to adopt it as an accepted treatment. In addition, even though we believe tedizolid phosphate has significant advantages, we cannot assure you that any labeling approved by
the health authority will contain claims that tedizolid phosphate is safer or more effective than linezolid, or that will permit us to promote tedizolid phosphate as being superior to linezolid or any other competing products. Moreover, in the
future, as has happened with other antibiotics, bacteria could over time develop resistance to tedizolid phosphate, particularly if it becomes widely used, which would render it less effective and therefore less appealing to physicians. If tedizolid
phosphate is approved but does not achieve an adequate level of acceptance by physicians and payers, we may not generate sufficient or any revenues from this product candidate and we may not become profitable. In addition, our efforts to educate the
medical community and third-party payers on the benefits of tedizolid phosphate may require significant resources and may never be successful.
We currently have limited marketing capabilities and no sales organization and have no experience in marketing drug products. If we are unable to
establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell our products after they are approved, we may not be able to generate product revenues.
33
We currently have limited marketing capabilities and do not have a sales organization or
distribution capabilities. In order to commercialize any products, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. Outside of Korea
and the Bayer Licensed Territory, we own exclusive rights to commercialize tedizolid phosphate worldwide, and we contemplate establishing our own sales force or seeking third-party partners to sell tedizolid phosphate in those territories. We have
partnered with Bayer in the Bayer Licensed Territory and will be reliant on them to develop and commercialize tedizolid phosphate in the Bayer Licensed Territory. The establishment and development of our own sales force to market any products we may
develop will be expensive and time consuming and could delay any product launch, and we cannot be certain that we will be able to successfully develop this capability. We, Bayer for the Bayer Licensed Territory and any potential future third-party
commercialization partners will also have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.
In addition, we may not be able to enter into collaboration and license arrangements with third parties to sell tedizolid phosphate on favorable terms or at all. If we fail to enter into marketing
arrangements for our products and are unable to develop an effective international sales force, our ability to generate revenue would be limited as a significant portion of the market opportunity for tedizolid phosphate and any other product
candidates we develop is likely to be in international markets. To the extent we rely on third parties to commercialize our approved products whether within or outside the United States, we will receive less revenues than if we commercialized these
products ourselves. In international markets in particular, we would have little or no control over the sales efforts of any other third parties involved in our commercialization efforts. In the event we are unable to develop our own marketing and
sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize tedizolid phosphate or any other product candidates that we develop, which would negatively impact our ability to generate product
revenues.
Even if the FDA approves tedizolid phosphate, adverse effects discovered after approval could limit the commercial profile of any
approved label.
If we obtain regulatory approval for tedizolid phosphate or any other product candidate that we develop,
and we or others later discover, after approval and use in an increasing number of patients for longer periods of time, that our products could have adverse effect profiles that limit their usefulness or require their withdrawal (whether or not
the therapies showed the adverse effect profile in Phase 1 through Phase 3 clinical trials), a number of potentially significant negative consequences could result, including:
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Regulatory authorities may withdraw their approval of the product;
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Regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
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We may be required to change the way the product is administered, conduct additional clinical studies, implement a burdensome risk evaluation and
mitigation strategy, or REMS, or restrict the distribution of the product;
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We could be sued and held liable for harm caused to patients; and
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Our reputation may suffer.
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Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.
If we are not successful in attracting and retaining highly qualified personnel, including our current senior executive team, we may not be able to
successfully implement our business strategy.*
Our ability to compete in the highly competitive biotechnology and
pharmaceuticals industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our executive team. In order to induce these and other valuable
employees to remain with us, we have provided stock options that vest over time. The value to employees of stock options is significantly affected by movements in our stock price that we cannot control and may at any time be insufficient to
counteract more lucrative offers from other companies.
Our scientific team has expertise in many different aspects of drug
discovery and development. We conduct our operations at our facility in San Diego, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions and, as a result, competition for
skilled personnel in our market is very intense and competition for experienced research scientists and development personnel may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.
Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment
with us on short notice given the announcement of the Merger. While we have employment agreements with all of our employees, these employment arrangements provide for at-will employment, which means that any of our employees could leave our
employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition. Our success also depends on our ability
to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.
Other biotechnology and pharmaceutical companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than
we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we have to offer. If we are unable to continue to attract and
retain high quality personnel, the rate and success at which we can discover, develop and commercialize drug candidates will be limited.
34
We will need to grow our organization, and we may experience difficulties in managing this growth, which
could disrupt our operations.*
As of August 1, 2013, we employed 94 full time employees. As our development and
commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of
management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a
substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business
opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional
product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced and we may not be able to implement our business
strategy. Our future financial performance and our ability to commercialize tedizolid phosphate and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.
If we fail to develop tedizolid phosphate for additional indications, our commercial opportunity will be limited.
To date, we have focused primarily on the development of tedizolid phosphate for the treatment of ABSSSI. A key element of our strategy is
to pursue clinical development of tedizolid phosphate for pneumonia and potentially for other indications. Although we believe there is large commercial opportunity for the treatment of ABSSSI alone, our ability to generate and grow revenues will be
highly dependent on our ability to successfully develop and commercialize tedizolid phosphate for the treatment of additional indications. The development of tedizolid phosphate for additional indications is prone to the risks of failure inherent in
drug development and we cannot provide you any assurance that we will be able to successfully advance any of these programs through the development process. Even if we receive FDA approval to market tedizolid phosphate for the treatment of any
additional indications, we cannot assure you that any such indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop
and commercialize tedizolid phosphate for additional indications, our commercial opportunity will be limited and our business prospects will suffer.
Even if we obtain FDA approval of tedizolid phosphate or any other product candidate we develop, we or Bayer may never obtain approval or commercialize our products outside of the United States, which
would limit our ability to realize their full market potential.*
In order to market any products outside of the United
States, we and Bayer in the Bayer Licensed Territory must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by
regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and
validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional preclinical studies or clinical trials which would be costly and
time consuming. Regulatory requirements can vary widely from country to country and are in many cases subject to the post hoc discretion of regulatory authorities, which requirements could delay or prevent the introduction of our products in those
countries. For example, certain countries require minimum trial sizes for clinical studies and certain other countries require minimum numbers of patients enrolled in such trials in such countries, and we may not be able to meet or satisfy such
requirements. Satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our or Bayers failure to obtain regulatory approval in any country may delay or have
negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval
in international markets. If we or Bayer fail to comply with regulatory requirements in our international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market potential of
our products will be harmed.
If we fail to develop and commercialize product candidates other than tedizolid phosphate, we may not be able
to grow our business or sustain profitability.
A key element of our strategy is to develop and commercialize a portfolio
of new product candidates in addition to tedizolid phosphate. As a significant part of this strategy, we intend to develop and commercialize additional products and product candidates through our proprietary drug discovery platform. The success of
this strategy depends upon our ability to leverage this platform to identify optimal bacterial targets and subsequently design small molecule inhibitors against these targets leading to the development of differentiated new antibiotics.
We cannot be certain that we will be successful in our efforts to identify and develop additional differentiated new antibiotics or that
any of our product candidates we do identify will produce commercially viable drugs that safely and effectively treat infectious diseases or other diseases. To date, our proprietary discovery platform has yielded certain candidates that are
advancing into IND enabling studies. While these candidates hold significant promise in treating serious infections, they might fail to advance to clinical development or might fail in clinical trials to show the desirable pharmacokinetics, safety
and efficacy needed to advance to a product. In addition, research and discovery programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any
candidates. To date, our discovery programs have been largely funded by United States government grants and research contracts. If we are unable to maintain existing funding or secure additional funding for these programs and/or continue to devote
the other technical and human resources to them, our ability to continue these programs will be adversely affected.
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Any product candidate we do successfully identify may require substantial additional
development efforts prior to commercial sale, including preclinical studies, extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are susceptible to the risks of failure that are
inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, we cannot assure you that any such
products that are approved will be manufactured or produced economically, successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives.
If we are unable to develop suitable potential product candidates through internal research and discovery programs or otherwise by
obtaining rights to novel therapeutics from third parties, our business and prospects will suffer.
A variety of risks associated with our
international business relationships could materially adversely affect our business.
We have entered into a collaboration
and license agreement with Bayer in the Bayer Licensed Territory and may enter into other agreements with third parties who will market tedizolid phosphate elsewhere. Consequently, we expect that we will be subject to additional risks related to
entering into international business relationships, including:
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Differing regulatory requirements for drug approvals in foreign countries;
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Potentially reduced protection for intellectual property rights;
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The potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods
from a foreign market (with low or lower prices) rather than buying them locally;
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Unexpected changes in tariffs, trade barriers and regulatory requirements;
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Economic weakness, including inflation, or political instability in particular foreign economies and markets;
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Compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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Foreign taxes, including withholding of payroll taxes;
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Foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing
business in another country;
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Workforce uncertainty in countries where labor unrest is more common than in the United States;
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Production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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Business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods
and fires.
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These and other risks may materially adversely affect our ability to attain or sustain
profitable operations.
Risks Related to Our Industry
We are subject to extensive and costly government regulation.
Antibiotics,
including those we are developing and plan to develop in the future, are subject to extensive and rigorous domestic government regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions of the United
States Department of Health and Human Services, the United States Department of Justice, state and local governments and their respective foreign equivalents. The FDA regulates the research, development, preclinical and clinical testing,
manufacture, safety, effectiveness, record-keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of biopharmaceutical products. If any products we or our partners develop are tested or
marketed abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding
United States regulation.
Government regulation substantially increases the cost and risk of researching, developing,
manufacturing and selling the products that we are developing.
New and future legislation, and/or regulations and policies adopted by the
FDA or other regulatory health authorities, in addition to findings in ongoing and future clinical and nonclinical studies, may increase the time and cost required for us to conduct and complete clinical trials for tedizolid phosphate or other
product candidates that we develop.*
The FDA revised its existing guidance for industry entitled, Uncomplicated and
Complicated Skin and Skin Structure InfectionsDeveloping Antimicrobial Drugs for Treatment (Final July 1998) and issued Guidance for Industry Acute Bacterial Skin and Skin Structure Infections: Developing Drugs for Treatment (Draft
August 2010). It is not known when the FDA will issue its final guidance on ABSSSI. In addition in March 2010, the FDA released draft guidance entitled Guidance for Industry Non-Inferiority Clinical Trials. This guidance document is
relevant to our Phase 3 clinical program because our Phase 3 clinical trials use a non-inferiority trial design. It is not known when the FDA will issue a final guidance document or whether the final guidance will differ significantly from the draft
guidance. In January 2012, the EMA issued its finalized revision to the Guideline on the Evaluation of Medicinal Products Indicated for the Treatment of Bacterial Infections. In July 2012, the EMA issued a draft addendum to the Note for
Guidance on Evaluation of New Anti-bacterial Medicinal Products that addresses indication specific guidance. The timing for the issuance of the EMA finalized addendum, as well as its contents, is
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not known. In November 2010, the FDA issued draft guidance entitled Guidance for Industry Hospital-Acquired Bacterial Pneumonia and Ventilator-Associated Bacterial Pneumonia: Developing
Drugs for Treatment. It is not known when the FDA will issue final HABP guidance.
Along with the information in the
draft guidance for ABSSSI, we have received input from the FDA regarding specific changes that are being contemplated. Based on this input, we know that the enrollment criteria for patients in our Phase 3 clinical trials for treatment of ABSSSI was
different than those that were applicable under the July 1998 guidance regarding cSSSI. As a result, we needed to enroll patients with a different proportion of infection types than we enrolled in our completed Phase 2 clinical trial for the
treatment of cSSSI. In addition, the draft guidance recommends a change in the time at which the clinical cure is tested relative to the end of antibiotic therapy. As part of the SPA procedure, we reached agreement with the FDA on the appropriate
endpoints.
While we have received information from the FDA regarding certain aspects that have been incorporated into the
draft guidance, we will not know the potential impact that any finalized guidance, should it be issued, may have on the design and conduct of our planned Phase 3 clinical trials and supportive studies or on the FDAs approval of ABSSSI or any
other indication for which we are seeking or may seek approval, which could potentially significantly increase the time and cost required for us to conduct and complete these trials if size and scope were to be modified. Additionally, changes in
regulatory requirements due to the adoption by the FDA and/or any foreign health authorities of new legislation, regulation, or policies may require us to amend clinical trial protocols or add new clinical trials to comply with these changes. Such
amendments to existing protocols and/or clinical trial applications or the need for new ones, may impact the cost, timing and completion of the clinical trials.
Even if we obtain regulatory approval for tedizolid phosphate or any of our future product candidates, we will still face extensive regulatory requirements and our products may face future development
and regulatory difficulties.*
Even if regulatory approval in the United States is obtained, the FDA may still impose
significant restrictions on a products indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the labeling ultimately approved for tedizolid phosphate,
if any, may include restrictions on use. Tedizolid phosphate or any of our other product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising,
promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is subject to obligations to monitor and report AEs and instances of the failure of a product to meet the specifications in the NDA.
Application holders must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Application holders must also submit advertising and other promotional
material to the FDA and report on ongoing clinical trials. New legal requirements have also been enacted to require disclosure of clinical trial results on publicly available databases.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and
other regulatory authorities for compliance with current good manufacturing practices regulations. If we or a regulatory agency discovers problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on
that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. The FDA and other regulatory authorities may also revisit the risk-benefit profile of an approved
product if, for example, previously unknown problems with a product, such as AEs of unanticipated severity or frequency arise. In such circumstances, the FDA or other regulatory authorities may withdraw approval, require new warnings or other
labeling changes to limit use of the drug, impose new study or monitoring requirements or require that we establish a REMS. Advertising and promotional materials must comply with FDA rules in addition to other potentially applicable federal and
state laws. Our relationships with healthcare providers will be subject to federal and state requirements prohibiting or requiring the disclosure of payments or items of value given to potential prescribers of our products. For example, as part of
PPACA, pharmaceutical manufacturers must report certain gifts and payments to physicians beginning in 2014. These reports will then be placed on a public database. Failure to so report could subject companies to significant financial penalties.
The distribution of product samples to physicians must comply with the requirements of the Prescription Drug Marketing Act.
Sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act and similar state laws, each as amended. Pricing and rebate programs must comply with
the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General
Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws. If we or Bayer fail to comply with applicable regulatory
requirements, a regulatory agency may:
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Issue warning letters or untitled letters asserting that we are in violation of the law;
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Seek an injunction or impose civil or criminal penalties or monetary fines;
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Suspend or withdraw regulatory approval;
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Suspend any ongoing clinical trials;
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Refuse to approve pending applications or supplements to applications filed by us;
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Suspend or impose restrictions on operations, including costly new manufacturing requirements or exclusions from doing business with federal or state
programs;
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Seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall; or
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Refuse to allow us to enter into supply contracts, including government contracts.
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Any government investigation of alleged violations of law could require us to expend
significant time and resources in response, and could generate negative publicity.
The occurrence of any event or penalty
described above may inhibit our ability to commercialize our products and generate revenues.
If we fail to comply with federal and state
healthcare laws, including fraud and abuse and health information privacy and security laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.
As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare,
Medicaid or other third-party payers, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and
patient privacy regulation 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 constrains our marketing practices, educational programs, pricing policies, and relationships with healthcare
providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual or the purchase or recommendation of
an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
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federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from
knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing
a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and its implementing regulations, which imposes
certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
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state and foreign 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 payer, including commercial insurers, and state and foreign 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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Because of the breadth of these laws and the
narrowness of available statutory and regulatory exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. To the extent that any of our product candidates is ultimately sold in a
foreign country, we may be subject to similar foreign laws and regulations. If we or 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, imprisonment, exclusion of products from reimbursement under U.S. federal or state healthcare programs, and the curtailment or restructuring of our operations. Any penalties,
damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for
violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products.
The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. Our products and the
clinical trials using our product candidates may expose us to product liability claims and possible adverse publicity. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are
held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forgo further development and commercialization of those products.
Although we maintain general liability and product liability insurance with limits of $2 million and $10 million, respectively, this insurance may not fully cover potential liabilities. The cost of any
product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product
liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, operating results and financial condition.
If we use hazardous and biological materials in a manner that causes injury
or violates applicable law, we may be liable for damages.
Our research and development activities involve the controlled
use of potentially hazardous substances, including chemical, biological and radioactive materials and viruses. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations in the United States govern
the use, manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant
additional costs to comply with applicable laws in the future. We also cannot predict the impact on our business of new or
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amended environmental laws or regulations, or any changes in the way existing and future laws and regulations are interpreted or enforced. Also, even if we are in compliance with applicable laws,
we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or
penalized with fines, and the liability could exceed our resources. If we fail to comply with applicable requirements, we could incur substantial costs, including civil or criminal fines and penalties, clean-up costs, or capital expenditures for
control equipment or operational changes necessary to achieve or maintain compliance. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development
and production efforts, which could harm our business, operating results and financial condition.
Risks Related to our
Intellectual Property
Our ability to pursue the development and commercialization of tedizolid phosphate depends upon the continuation
of our license from Dong-A.
Our license agreement with Dong-A provides us with a worldwide exclusive license to develop
and sell tedizolid phosphate outside of Korea. If we are unable to make the required milestone and royalty payments under the license agreement, if we do not continue to use commercially reasonable efforts to achieve certain development and
commercialization milestones for tedizolid phosphate within the timeframes required by the license agreement or if we otherwise materially breach the license agreement, our rights to develop and commercialize tedizolid phosphate would terminate and
revert to Dong-A. In addition, either we or Dong-A may terminate the license agreement upon an uncured material breach of the license agreement for 90 days. If our license agreement with Dong-A were terminated, we would lose our rights to develop
and commercialize tedizolid phosphate, which would materially and adversely affect our business, results of operations and future prospects.
If our efforts to protect the proprietary nature of the intellectual property related to tedizolid phosphate and our other product candidates are not
adequate, we may not be able to compete effectively in our market.*
We rely upon a combination of patents, trade secret
protection and confidentiality agreements to protect the intellectual property related to tedizolid phosphate and our other product candidates. Any involuntary disclosure to or misappropriation by third parties of our confidential proprietary
information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain and our commercial success will depend on our ability to obtain
patents and maintain adequate protection for tedizolid phosphate and other product candidates in the United States and other countries. Through our license agreement with Dong-A, we currently license issued United States utility patents, a pending
United States utility patent application and issued and pending foreign national and regional counterpart patent applications covering various aspects of tedizolid and tedizolid phosphate. In addition, we own pending and issued United States utility
patent applications and pending foreign national and regional counterpart patent applications directed to aspects of tedizolid phosphate discovered by our scientists. The patent applications that we licensed or have filed on our own may fail to
result in issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third parties may challenge the patents. Further, the future patents to which we have rights based on our agreement with Dong-A, or
that we file on our own, may be too narrow to prevent third parties from developing or designing around these patents. If the sufficiency of the breadth or strength of protection provided by the patent applications we licensed or own with respect to
tedizolid phosphate or the patents we pursue related to any of our other product candidates is threatened, it could dissuade companies from collaborating with us to develop, and threaten our ability to commercialize, tedizolid phosphate and our
other product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market our drug candidates under patent protection would be reduced. In addition, we do not know whether:
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We or Dong-A were the first to make the inventions covered by each of our pending or issued patent applications or our licensed pending or issued
patent applications;
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We or Dong-A were the first to file patent applications for these inventions;
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Others will independently develop similar or alternative technologies or duplicate any of our technologies;
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Any of our or Dong-As pending patent applications will result in issued patents;
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Any of our or Dong-As patents, once issued, will be valid or enforceable;
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Any patents issued to us or Dong-A will provide us with any competitive advantages, or will be challenged by third parties;
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We will develop additional proprietary technologies that are patentable;
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The patents of others will have an adverse effect on our business; or
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Our unissued patents in the Bayer Licensed Territory will ever issue, and if they do not issue, this could adversely affect our collaboration and
license agreement with Bayer.
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In
addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other
elements of our drug discovery program that involve proprietary know-how, information and technology that is not covered by patents. Although we require all of our employees, consultants, advisors and third parties who have access to our proprietary
know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or
independently develop substantially equivalent information and techniques.
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Our and Dong-As ability to obtain patents is highly uncertain because, to date, some
legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and the specific content of patents and patent applications that are necessary to
support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Changes in either patent laws or interpretations of patent laws in the United States and other countries may
diminish the value of our intellectual property or narrow the scope of our patent protection. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a
number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office, or USPTO, has
developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions,
became effective in March 2013. The Leahy-Smith Act has also introduced procedures making it easier for third-parties to challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act
contains new statutory provisions that still require the USPTO to issue new regulations for their implementation and it may take the courts years to interpret the provisions of the new statute. Accordingly, it is too early to tell what, if any,
impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the
prosecution of our patent applications and the enforcement or defense of our issued patents. An inability to obtain, enforce and defend patents covering our proprietary technologies would materially and adversely affect our business prospects
and financial condition.
Further, the laws of some foreign countries do not protect proprietary rights to the same extent as
the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. For example, if the issuance to us or Dong-A, in a given country, of a
patent covering an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims in, or the written description or
enablement in, a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited. Changes in either
patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection. If we are unable to prevent material disclosure of
the intellectual property related to our technologies to third parties, we will not be able to establish or, if established, maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and
financial condition.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,
fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be
paid to the USPTO and various foreign governmental patent agencies in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm, Computer Patent
Annuities, to pay these fees due to foreign patent agencies. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent
application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter
the market and this circumstance would have a material adverse effect on our business.
We have not yet registered our trademarks in all of
our potential markets, and failure to secure those registrations could adversely affect our business.*
The TRIUS
THERAPEUTICS mark has been registered in the United States, Canada, Australia, European Community, India, Japan, China, New Zealand and Singapore for use in connection with pharmaceutical research and development services and for anti-infective and
antibacterial pharmaceutical preparations for the treatment of infections. We are not aware of any third party opposition or cancellation proceedings against the TRIUS THERAPEUTICS mark. We cannot be sure that our pending trademark applications will
ultimately mature into registrations.
Third-party claims of intellectual property infringement may prevent or delay our drug discovery and
development efforts.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary
rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents with claims to materials, methods of manufacture or methods for treatment related to the use
or manufacture of tedizolid phosphate and/or our other product candidates. Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. If any third-party patents were held by a court of
competent jurisdiction to cover the tedizolid phosphate manufacturing process, any molecules formed during the tedizolid phosphate manufacturing process or the final tedizolid phosphate product for any use thereof, the holders of any such patents
may be able to block our ability to commercialize tedizolid phosphate unless we obtained a license under the applicable patent or patents, or until such patents expire. We cannot predict whether we would be able to obtain a license on commercially
reasonable terms, if at all. Any inability to obtain such a license under the applicable patents on commercially reasonable terms, or at all, may have a material adverse effect on our ability to commercialize tedizolid phosphate until such patents
expire.
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In addition, third parties may obtain patents in the future and claim that use of our
technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product
candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us,
we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow
commercialization of tedizolid phosphate or any of our other product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would not be able to further develop and
commercialize such product candidates, which could harm our business significantly.
We may be required to file lawsuits or take other
actions to protect or enforce our patents or the patents of our licensors, which could be expensive and time consuming.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to
file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from
using the technology at issue on the grounds that our patents, or those of Dong-A, do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents, or those of Dong-A, at risk
of being invalidated, held unenforceable or interpreted narrowly and could put our patent applications, or those of Dong-A, at risk of not issuing.
Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or
interference proceedings may fail and, even if successful, may result in substantial costs and distract our management. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries
where the laws may not protect those rights as fully as in the United States.
Issued patents may be challenged during
reexamination proceedings brought by a third party or the USPTO, or in foreign countries, during post-grant opposition proceedings or invalidation appeal proceedings. These proceedings may result in loss of patent claims, adverse changes to the
scope of the claims and may result in substantial costs and distract our management.
Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, if securities analysts or
investors perceive public announcements of the results of hearings, motions or other interim proceedings or developments to be negative, the price of our common stock could drop.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their
former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
Risks Related to Our United States Government Contracts and Grants
If we do not receive all of the funds under our sponsored research contracts or are unable to generate additional revenues from additional contracts, we may be forced to suspend or terminate one or
more of our preclinical programs.*
Substantially all of our contract research revenues that have supported our preclinical
programs have been derived from United States government grants and our government contracts. There can be no assurances that our contracts will continue or that we will be able to enter into new contracts with the United States government to
support our preclinical programs. The process of obtaining government contracts is lengthy and uncertain and we will have to compete with other companies and institutions for each contract. Further, changes in government budgets and agendas may
result in a decreased and de-prioritized emphasis on supporting the discovery and development of biodefense products in our preclinical programs. In such event, the sponsors of our research programs may not be required to continue funding our
existing contracts. In February 2013, we were notified by NIAID that they would not be extending funding under the contract beyond March 31, 2013 and that we will not be eligible to drawdown against the remaining amounts available under the
contract. In the near term, we will continue to fund our Gyrase-B program.
Due to the decline of federal tax receipts and
substantial increase in the federal deficit, the United States government may be forced or choose to reduce or delay spending in the biodefense field, which could decrease the likelihood of our receipt of future government contract revenues.
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United States government agencies have special contracting requirements that give them the ability to
unilaterally control our contracts.*
United States government contracts typically contain unfavorable termination
provisions and are subject to audit and modification by the government at its sole discretion, which will subject us to additional risks. These risks include the ability of the United States government to unilaterally:
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Audit and object to our NIAID, DTRA or Lawrence Livermore National Laboratory, or LLNL, contract-related costs and fees, and require us to reimburse
all such costs and fees;
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Suspend or prevent us for a set period of time from receiving new contracts or extending our existing contracts based on violations or suspected
violations of laws or regulations;
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Cancel, terminate or suspend our contracts based on violations or suspected violations of laws or regulations;
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Terminate our contracts if in the governments best interest, including if funds become unavailable to the applicable governmental agency;
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Reduce the scope and value of our contracts; and
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Change certain terms and conditions in our contracts.
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The United States government will be able to terminate each of its contracts with us, either for its best interests or if we default by failing to perform in accordance with or to achieve the milestones
set forth in the contract schedules and terms. Termination-for-convenience provisions generally enable us to recover only our costs incurred or committed and settlement expenses on the work completed prior to termination. In February 2013, we were
notified by NIAID that they would not be extending funding under the contract beyond March 31, 2013 and that we will not be eligible to drawdown against the remaining amounts available under the contract after that date. Except for the amount
of services received by the government, termination-for-default provisions do not permit these recoveries and would make us liable for excess costs incurred by the United States government in procuring undelivered items from another source.
The United States governments determination to award any contracts may be challenged by an interested party, such as another bidder,
at the United States Government Accountability Office, or the GAO, or in federal court. If such a challenge is successful, our LLNL contract or any future contract we may be awarded may be terminated.*
The laws and regulations governing the procurement of goods and services by the United States government provide procedures by which other
bidders and interested parties may challenge the award of a government contract. If we are awarded a government contract, such challenges or protests could be filed even if there are not any valid legal grounds on which to base the protest. If any
such protests are filed, the government agency may decide to suspend our performance under the contract while such protests are being considered by the GAO or the applicable federal court, thus potentially delaying delivery of payment. In addition,
we could be forced to expend considerable funds to defend any potential award. If a protest is successful, the government may be ordered to terminate any one or more of our contracts and reselect bids. The government agencies with which we have
contracts could even be directed to award a potential contract to one of the other bidders.
Our business is subject to audit by the United
States government, including under our contracts with NIAID, DTRA and LLNL, and a negative audit could adversely affect our business.
United States government agencies such as the Department of Health and Human Services, or DHHS, the Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government contractors and
recipients of Federal grants. These agencies review a contractors performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.
The DHHS and the DCAA also review the adequacy of, and a contractors compliance with, its internal control systems and policies,
including the contractors purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be
refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:
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Termination of contracts;
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Suspension of payments;
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Suspension or prohibition from conducting business with the United States government.
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In addition, we could suffer serious reputational harm if allegations of impropriety were made against us, which could cause our stock
price to decrease.
Laws and regulations affecting government
contracts make it more costly and difficult for us to successfully conduct our business.
We must comply with numerous laws
and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under our government contracts. These laws and regulations affect how we conduct business
with government agencies. Among the most significant government contracting regulations that affect our business are:
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The Federal Acquisition Regulations, or FAR, and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement,
formation, administration and performance of government contracts;
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The business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the
granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act and Foreign Corrupt Practices Act;
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Export and import control laws and regulations; and
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Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the
exportation of certain products and technical data.
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Foreign governments typically also have laws and
regulations governing contracts with their respective agencies. These foreign laws and regulations affect how we and our customers conduct business and, in some instances, impose added costs on our business. Any changes in applicable laws and
regulations could restrict our ability to maintain our existing government contracts and obtain new contracts, which could limit our ability to conduct our business and materially adversely affect our revenues and results of operations.
Agreements with government agencies may lead to claims against us under the Federal False Claims Act, and these claims could result in substantial
fines and other penalties.
The biopharmaceutical industry is, and in recent years has been, under heightened scrutiny as
the subject of government investigations and enforcement actions. Our government contracts are subject to substantial financial penalties under the Federal Civil Monetary Penalties Act and the Federal Civil False Claims Act. Under the False Claims
Acts whistleblower provisions, private enforcement of fraud claims against businesses on behalf of the United States government has increased due in part to amendments to the False Claims Act that encourage private individuals to
sue on behalf of the government. These whistleblower suits, known as qui tam actions, may be filed by private individuals, including present and former employees. The False Claims Act statute provides for treble damages and civil penalties between
$5,500 and $11,000 for each separate false claim. If our operations are found to be in violation of any of these laws, or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties,
damages, fines, exclusion of our products from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment, or restructuring of our operations could adversely
affect our ability to operate our business and our financial results.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above your purchase
price.*
We cannot assure you that an active trading market for our common stock will develop or persist, and, as of
August 1, 2013 our executive officers, directors, 5% shareholders and their affiliates own approximately 28% of our common stock, which may further reduce trading activity in our common stock. You may not be able to sell your shares quickly or
at the market price if trading in our common stock is not active.
The trading price of our common stock is likely to be
volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:
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Risks related to our pending Offer and Merger;
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Adverse results or delays in clinical trials;
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Any delay in filing our NDA for tedizolid phosphate and any adverse development or perceived adverse development with respect to the FDAs review
of the NDA, including without limitation the FDAs issuance of a refusal to file letter or a request for additional information;
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Failure to successfully commercialize tedizolid phosphate, develop additional product candidates and commercialize additional product candidates;
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Changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;
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Unanticipated serious safety concerns related to the use of tedizolid phosphate or any of our other product candidates;
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A decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
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Inability to obtain adequate product supply for tedizolid phosphate or any other approved drug product, or the inability to do so at acceptable prices;
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Adverse regulatory decisions;
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Introduction of new products, services or technologies offered by us or our competitors;
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Failure to meet or exceed revenue and financial projections we provide to the public;
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Actual or anticipated variations in quarterly operating results;
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Failure to meet or exceed the estimates and projections of the investment community;
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The perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
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General market conditions and overall fluctuations in United States equity markets;
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Developments concerning our sources of manufacturing supply and our future international commercialization partners;
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Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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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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Additions or departures of key scientific or management personnel;
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Issuances of debt or equity securities;
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Significant lawsuits, including patent or stockholder litigation;
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Changes in the market valuations of similar companies;
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Sales of our common stock by us or our stockholders in the future;
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Trading volume of our common stock; and
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Other events or factors, many of which are beyond our control.
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In addition, the stock market in general, and the Nasdaq Global Market and biotechnology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our
actual operating performance.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert
significant influence over matters subject to stockholder approval.*
As of August 1, 2013, our executive officers,
directors, 5% stockholders and their affiliates own approximately 28% of our outstanding voting stock. Therefore, these stockholders may have the ability to influence us through this ownership position. For example, these stockholders may be able to
significantly influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers
for our common stock that you may feel are in your best interest as one of our stockholders.
Sales of a substantial number of shares of our
common stock in the public market by our existing stockholders could cause our stock price to fall.
Sales of a substantial
number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity
securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the
Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the
Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in
additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.*
We expect
that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common
stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction,
investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.
Pursuant to our 2010 Equity Incentive Plan, or the 2010 Plan, and our 2010 Non-Employee Directors Stock Option Plan, or the 2010
Directors Plan, our management is authorized to grant stock options to our employees, directors and consultants. Our board of directors approved an amendment to the 2010 Plan, which was subsequently approved by stockholders at our 2013 annual
meeting of stockholders, to eliminate automatic annual increases to the number of shares available for future grant under the 2010 Plan. However, in connection with that amendment, the total number of shares available for future grant under the 2010
Plan was increased by 5,100,000 shares. The number of shares available for future grant under our 2010 Directors Plan will automatically increase each year by an amount equal to the lesser of the aggregate number of shares of common stock
subject to options granted during the immediately preceding calendar year or 150,000 shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. Our board of directors approved
an amendment to the 2010 Directors Plan, which was subsequently approved by stockholders at our 2013 annual meeting of stockholders, to eliminate such automatic annual increases under the 2010 Directors Plan immediately following the
increase in shares that takes effect on January 1, 2015.
Pursuant to our 2010 Employee Stock Purchase Plan, or the 2010
Purchase Plan, rights to purchase common stock are granted to our employees. The number of shares reserved for issuance under our 2010 Purchase Plan will automatically increase each year by an amount equal to the least of 1% of the total number of
shares of our common stock outstanding on December 31 of the preceding calendar year or 250,000 shares, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year.
We registered the increased number of shares available for
issuance under our 2010 Plan. Currently, we plan to register the increased number of shares available for issuance under our 2010 Directors Plan and 2010 Purchase Plan each year. Unless our board of directors elects not to increase the number
of shares available for future grant each year, our stockholders may experience additional dilution, which could cause our stock price to fall.
We are at risk of securities class action litigation.
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In the past, securities class action litigation has often been brought against a company
following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years.
On August 1, 2013, one putative class-action lawsuit (
Bemis v. Trius Therapeutics, Inc.
, Case No. 37-2013-00060593-CU-SL-STL (the
Complaint)) was filed in Superior Court of the State of California, County of San Diego, against (a) the Company; (b) each member of the Companys board of directors (including its chief executive officer); and (3) Cubist Pharmaceuticals,
Inc. and BRGO Corporation, collectively the Cubist Entities, arising out of the proposed acquisition of Trius by Cubist, or the Proposed Transaction. The Complaint alleges that the Companys directors breached their fiduciary duties in
connection with the proposed acquisition of the Company by the Cubist Entities, and that the other defendants aided and abetted these alleged breaches of fiduciary duty. Specifically, the Complaint asserts that the Companys directors
breached their fiduciary duties to the Companys public stockholders by, among other things, (i) agreeing to sell the Company to the Cubist Entities at an unfair price; (ii) implementing an unfair process; and (iii) agreeing to certain
provisions of the merger agreement that are alleged to favor the Cubist Entities and deter alternative bids. The Complaint seeks an injunction against the consummation of the merger and rescission of the Merger Agreement to the extent already
implemented, and an award of costs and expenses, including a reasonable allowance for attorneys and experts fees.
On August 6, 2013, another putative class-action lawsuit (Hurst v. Trius Therapeutics, Inc., (the Second Complaint)) was
filed in the Superior Court of the State of California, County of San Diego, against: (a) the Company; (b) each member of the Companys board of directors (including its chief executive officer); and (3) the Cubist Entities. The Second
Complaint alleges that the Companys directors breached their fiduciary duties in connection with the proposed acquisition of the Company by the Cubist Entities, and that the other defendants aided and abetted these alleged breaches of
fiduciary duty. Specifically, the Second Complaint asserts that the Companys directors breached their fiduciary duties to the Companys public stockholders by, among other things, (i) agreeing to sell the Company to the Cubist
Entities at an unfair price; (ii) implementing an unfair process; and (iii) agreeing to certain provisions of the merger agreement that are alleged to favor the Cubist Entities and deter alternative bids. The Second Complaint seeks an
injunction against the consummation of the merger and rescission of the Merger Agreement to the extent already implemented, an award of damages, and an award of costs and expenses, including a reasonable allowance for attorneys and
experts fees.
The Company intends to vigorously defend against these claims. The outcome of this litigation cannot be
predicted at this time and any outcome in favor of the plaintiffs could have a significant adverse effect on the Proposed Transaction, our financial condition, and our results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code, if a corporation undergoes an ownership change (generally defined as a greater than 50% change in its equity ownership over a three year
period), the corporations ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. After a public offering of common
stock in January 2012, we performed an analysis under Section 382 through January 31, 2012 and determined that an ownership change had occurred, but the resulting annual limitation does not have a material impact on our ability
to use our net operating loss and tax credit carryforwards. After our public offering in January 2013, we updated our Section 382 analysis and determined that it would not result in an additional ownership change. We may experience
additional ownership changes in the future as a result of subsequent shifts in our stock ownership. If this were to occur, our ability to use our net operating loss carryforwards to offset United States federal taxable income may be subject to
limitations, which could potentially result in increased future tax liability to us.
We do not intend to pay dividends on our common stock
so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividend on our common
stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will
therefore be limited to the appreciation of their stock.
Some provisions of our charter documents and Delaware law may have anti-takeover
effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more
difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:
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Authorizing the issuance of blank check preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
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Limiting the removal of directors by the stockholders;
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Creating a staggered board of directors;
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Prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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Eliminating the ability of stockholders to call a special meeting of stockholders;
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Permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control;
and
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Establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at
stockholder meetings.
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These provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder
became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.
Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.