ITEM 1A. RISK FACTORS
We operate in an environment that
involves a number of significant risks and uncertainties. We caution you to read
the following risk factors, which have affected, and/or in the future could
affect, our business, operating results, financial condition, and cash flows.
The risks described below include forward-looking statements, and actual events
and our actual results may differ substantially from those discussed in these
forward-looking statements. Additional risks and uncertainties not currently
known to us or that we currently deem immaterial may also impair our business
operations. Furthermore, additional risks and uncertainties are described under
other captions in this report and should be considered by our investors.
Risks Related to Our Financial Results and
Need for Additional Financing
We have had a history of operating losses and we may never achieve
profitability. If we continue to incur operating losses, we may be unable to
continue our operations.
From inception on January 8, 1988
through March 31, 2010, we had a cumulative loss of $971.6 million. If we
continue to incur operating losses and fail to become a profitable company, we
may be unable to continue our operations. In the absence of substantial revenue
from the sale of products or other sources, the amount, timing, nature or source
of which cannot be predicted, our losses will continue as we conduct our
research and development activities.
We may need additional funding in the future, which may not be available
to us, and which may force us to delay, reduce or eliminate our product
development programs or commercialization efforts.
We will need to expend substantial
resources for research and development, including costs associated with clinical
testing of our product candidates. We believe our existing capital resources,
including funding we are entitled to receive under our collaboration agreements,
will enable us to meet operating needs through at least 2012; however, one or
more of our collaboration agreements may terminate, our projected revenue may
decrease, or our expenses may increase and that would lead to our capital being
consumed significantly before such time. Our expenses may increase for many
reasons, including for expenses in connection with the commercial launch of our
products, for expenses related to new clinical trials testing rilonacept or VEGF
Trap-Eye, or for the potential requirement for us to fund 20% of Phase 3
clinical trial costs for any of our antibody product candidates pursuant to the
terms of our collaboration with sanofi-aventis.
We may require additional financing
in the future and we may not be able to raise such additional funds. If we are
able to obtain additional financing through the sale of equity or convertible
debt securities, such sales may be dilutive to our shareholders. Debt financing
arrangements may require us to pledge certain assets or enter into covenants
that would restrict our business activities or our ability to incur further
indebtedness and may contain other terms that are not favorable to our
shareholders. If we are unable to raise sufficient funds to complete the
development of our product candidates, we may face delay, reduction or
elimination of our research and development programs or preclinical or clinical
trials, in which case our business, financial condition or results of operations
may be materially harmed.
34
The value of our investment portfolio, which includes cash, cash
equivalents, and marketable securities, is influenced by varying economic and
market conditions. A decrease in the value of an asset in our investment
portfolio or a default by the issuer may result in our inability to recover the
principal we invested and/or a recognition of a loss charged against income.
As of March 31, 2010, cash, cash
equivalents, restricted cash, and marketable securities totaled $413.5 million
and represented 53% of our total assets. We have invested our excess cash
primarily in direct obligations of the U.S. government and its agencies, other
debt securities guaranteed by the U.S. government, and money market funds that
invest in U.S. government securities and, to a lesser extent, investment grade
debt securities issued by corporations, bank deposits, and asset-backed
securities. We consider assets classified as marketable securities to be
“available-for-sale,” as defined by FASB authoritative guidance. Marketable
securities totaled $294.6 million at March 31, 2010, are carried at fair value,
and the unrealized gains and losses are included in other accumulated
comprehensive income (loss) as a separate component of stockholders’ equity. If
the decline in the value of a security in our investment portfolio is deemed to
be other-than-temporary, we write down the security to its current fair value
and recognize a loss which may be fully charged against income. For example, we
recognized other-than-temporary impairment charges related to certain marketable
securities of $2.5 million, $0.1 million, and $0.1 million in 2008, 2009, and
the first three months of 2010, respectively. The current economic environment,
the deterioration in the credit quality of some of the issuers of securities
that we hold, and the recent volatility of securities markets increase the risk
that we may not recover the principal we invested and/or there may be further
declines in the market value of securities in our investment portfolio. As a
result, we may incur additional charges against income in future periods for
other-than-temporary impairments or realized losses upon a security’s sale or
maturity, and such amounts may be material.
Risks Related to ARCALYST
®
(rilonacept) and the
Development of Our Product Candidates
Successful development of any of our product candidates is highly
uncertain.
Only a small minority of all research and
development programs ultimately result in commercially successful drugs. Even if
clinical trials demonstrate safety and effectiveness of any of our product
candidates for a specific disease and the necessary regulatory approvals are
obtained, the commercial success of any of our product candidates will depend
upon their acceptance by patients, the medical community, and third-party payers
and on our partners’ ability to successfully manufacture and commercialize our
product candidates. Our product candidates are delivered either by intravenous
infusion or by intravitreal or subcutaneous injections, which are generally less
well received by patients than tablet or capsule delivery. If our products are
not successfully commercialized, we will not be able to recover the significant
investment we have made in developing such products and our business would be
severely harmed.
We are testing aflibercept, VEGF
Trap-Eye, and rilonacept in a number of late-stage clinical trials. Clinical
trials may not demonstrate statistically sufficient effectiveness and safety to
obtain the requisite regulatory approvals for these product candidates. In a
number of instances, we have terminated the development of product candidates
due to a lack of or only modest effectiveness.
Aflibercept is in Phase 3 clinical trials
in combination with standard chemotherapy regimens for the treatment of 2nd line
metastatic colorectal cancer, 1st line androgen independent prostate cancer, and
2nd line metastatic non-small cell lung cancer. Aflibercept may not demonstrate
the required safety or efficacy to support an application for approval in any of
these indications. We do not have proof of concept data from early-stage,
double-blind, controlled clinical trials that aflibercept will be safe or
effective in any of these cancer settings. In March 2010, Genentech announced
that a Phase 3 trial of its VEGF antagonist, Avastin
®
(bevacizumab), in
combination with chemotherapy in men with prostate cancer, did not meet its
primary endpoint. This trial had a very similar design to our ongoing Phase 3
trial of aflibercept in prostate cancer.
We are testing VEGF Trap-Eye in Phase 3 trials for the treatment of wet
AMD and the treatment of CRVO. Although we reported positive Phase 2 trial
results with VEGF Trap-Eye in wet AMD, based on a limited number of patients,
the results from the larger Phase 3 trials may not demonstrate that VEGF
Trap-Eye is safe and effective or compares favorably to Lucentis (Genentech). A
number of other potential new drugs and biologics which showed promising results
in initial clinical trials subsequently failed to establish sufficient safety
and efficacy data to obtain necessary regulatory approvals. VEGF Trap-Eye has
not been previously studied in CRVO.
35
Rilonacept is in Phase 3 clinical trials for two different gout
indications – the prevention of gout flares in patients initiating
urate-lowering drug therapy and acute gout. We do not have proof of concept data
from Phase 2 clinical trials that rilonacept will be safe or effective in the
acute gout setting. Although we reported positive Phase 2 proof of concept data
from a small number of patients initiating urate-lowering drug therapy, there is
a risk that the results of the larger Phase 3 trials of rilonacept in patients
initiating urate-lowering drug therapy will differ from the previously reported
Phase 2 trial. A number of potential new drugs and biologics which showed
promising results in initial clinical trials subsequently failed to establish
sufficient safety and efficacy data to obtain necessary regulatory approvals.
We are studying our antibody candidates
in a wide variety of indications in early stage clinical trials. Many of these
trials are exploratory studies designed to evaluate the safety profile of these
compounds and to identify what diseases and uses, if any, are best suited for
these product candidates. These early stage product candidates may not
demonstrate the requisite efficacy and/or safety profile to support continued
development for some or all of the indications that are being, or are planned to
be, studied.
Clinical trials required for our product candidates are expensive and
time-consuming, and their outcome is highly uncertain. If any of our drug trials
are delayed or yield unfavorable results, we will have to delay or may be unable
to obtain regulatory approval for our product candidates.
We must conduct extensive testing of our
product candidates before we can obtain regulatory approval to market and sell
them. We need to conduct both preclinical animal testing and human clinical
trials. Conducting these trials is a lengthy, time-consuming, and expensive
process. These tests and trials may not achieve favorable results for many
reasons, including, among others, failure of the product candidate to
demonstrate safety or efficacy, the development of serious or life-threatening
adverse events (or side effects) caused by or connected with exposure to the
product candidate, difficulty in enrolling and maintaining subjects in the
clinical trial, lack of sufficient supplies of the product candidate or
comparator drug, and the failure of clinical investigators, trial monitors,
contractors, consultants, or trial subjects to comply with the trial plan or
protocol. A clinical trial may fail because it did not include a sufficient
number of patients to detect the endpoint being measured or reach statistical
significance. A clinical trial may also fail because the dose(s) of the
investigational drug included in the trial were either too low or too high to
determine the optimal effect of the investigational drug in the disease
setting.
Many of our clinical trials are conducted
under the oversight of Independent Data Monitoring Committees (or IDMCs). These
independent oversight bodies are made up of external experts who review the
progress of ongoing clinical trials, including available safety and efficacy
data, and make recommendations concerning a trial’s continuation, modification,
or termination based on interim, unblinded data. Any of our ongoing clinical
trials may be discontinued or amended in response to recommendations made by
responsible IDMCs based on their review of such interim trial results. For
example, in September 2009, a Phase 3 trial that was evaluating aflibercept as a
1st line treatment for metastic pancreatic cancer in combination with
gemcitabine was discontinued at the recommendation of an IDMC after a planned
analysis of interim efficacy data determined that the trial would not meet its
efficacy endpoint. The recommended termination of any of our ongoing late-stage
clinical trials by an IDMC could harm the future development of our product
candidate(s) and our business may be materially harmed.
We will need to reevaluate any drug
candidate that does not test favorably and either conduct new trials, which are
expensive and time consuming, or abandon the drug development program. Even if
we obtain positive results from preclinical or clinical trials, we may not
achieve the same success in future trials. Many companies in the
biopharmaceutical industry, including Regeneron, have suffered significant
setbacks in clinical trials, even after promising results have been obtained in
earlier trials. The failure of clinical trials to demonstrate safety and
effectiveness for the desired indication(s) could harm the development of our
product candidate(s), and our business, financial condition, and results of
operations may be materially harmed.
Serious complications or side effects have occurred, and may continue to
occur, in connection with the use of our approved product and in clinical trials
of some of our product candidates which could cause our regulatory approval to
be revoked or otherwise negatively affected or lead to delay or discontinuation
of development of our product candidates which could severely harm our business.
During the conduct of clinical trials,
patients report changes in their health, including illnesses, injuries, and
discomforts, to their study doctor. Often, it is not possible to determine
whether or not the drug candidate being studied caused these conditions. Various
illnesses, injuries, and discomforts have been reported from time-to-time during
clinical trials of our product candidates. It is possible that as we test our
drug candidates in larger, longer, and more extensive clinical programs,
illnesses, injuries, and discomforts that were observed in earlier trials, as
well as conditions that did not occur or went undetected in smaller previous
trials, will be reported by patients. Many times, side effects are only
detectable after investigational drugs are tested in large scale, Phase 3
clinical trials or, in some cases, after they are made available to patients
after approval. If additional clinical experience indicates that any of our
product candidates has many side effects or causes serious or life-threatening
side effects, the development of the product candidate may fail or be delayed,
which would severely harm our business.
36
Aflibercept (VEGF Trap) is being studied for the potential treatment of
certain types of cancer and our VEGF Trap-Eye candidate is being studied in
diseases of the eye. There are many potential safety concerns associated with
significant blockade of vascular endothelial growth factor, or VEGF, that may
limit our ability to successfully develop aflibercept and VEGF Trap-Eye. These
serious and potentially life-threatening risks, based on clinical and
preclinical experience of VEGF inhibitors, include bleeding, intestinal
perforation, hypertension, proteinuria, congestive heart failure, heart attack,
and stroke. In addition, patients given infusions of any protein, including VEGF
Trap delivered through intravenous administration, may develop severe
hypersensitivity reactions or infusion reactions. Other VEGF blockers have
reported side effects that became evident only after large scale trials or after
marketing approval when large number of patients were treated. These and other
complications or side effects could harm the development of aflibercept for the
treatment of cancer or VEGF Trap-Eye for the treatment of diseases of the eye.
We have tested ARCALYST
®
(rilonacept) in only a
small number of patients. As more patients begin to use our product and as we
test it in new disease settings, new risks and side effects associated with
ARCALYST
®
(rilonacept) may be discovered, and risks previously viewed as inconsequential
could be determined to be significant. Like cytokine antagonists such as
Kineret
®
(anakinra), marketed by Biovitrum, Enbrel
®
(etanercept), marketed
by Amgen Inc. and Wyeth Pharmaceuticals, Inc., and Remicade
®
(infliximab) marketed
by Centocor Ortho Biotech, Inc., ARCALYST
®
(rilonacept) affects
the immune defense system of the body by blocking some of its functions.
Therefore, ARCALYST
®
(rilonacept) may
interfere with the body’s ability to fight infections. Treatment with Kineret
(Biovitrum), a medication that works through the inhibition of IL-1, has been
associated with an increased risk of serious infections, and serious, life
threatening infections have been reported in patients taking ARCALYST
®
(rilonacept). These or
other complications or side effects could cause regulatory authorities to revoke
approvals of ARCALYST
®
(rilonacept).
Alternatively, we may be required to conduct additional clinical trials, make
changes in the labeling of our product, or limit or abandon our efforts to
develop ARCALYST
®
(rilonacept) in new disease settings. Any such side effects may also result in a
reduction, or even the elimination, of sales of ARCALYST
®
(rilonacept) in
approved indications.
ARCALYST
®
(rilonacept) and our product candidates in development are recombinant proteins
that could cause an immune response, resulting in the creation of harmful or
neutralizing antibodies against the therapeutic protein.
In addition to the safety, efficacy,
manufacturing, and regulatory hurdles faced by our product candidates, the
administration of recombinant proteins frequently causes an immune response,
resulting in the creation of antibodies against the therapeutic protein. The
antibodies can have no effect or can totally neutralize the effectiveness of the
protein, or require that higher doses be used to obtain a therapeutic effect. In
some cases, the antibody can cross react with the patient’s own proteins,
resulting in an “auto-immune” type disease. Whether antibodies will be created
can often not be predicted from preclinical or clinical experiments, and their
detection or appearance is often delayed, so that there can be no assurance that
neutralizing antibodies will not be detected at a later date, in some cases even
after pivotal clinical trials have been completed. Antibodies directed against
the receptor domains of rilonacept were detected in patients with CAPS after
treatment with ARCALYST
®
(rilonacept). Nineteen
of 55 subjects (35%) who received ARCALYST
®
(rilonacept) for at
least 6 weeks tested positive for treatment-emerging binding antibodies on at
least one occasion. To date, no side effects related to antibodies were observed
in these subjects and there were no observed effects on drug efficacy or drug
levels. It is possible that as we continue to test aflibercept and VEGF Trap-Eye
with more sensitive assays in different patient populations and larger clinical
trials, we will find that subjects given aflibercept and VEGF Trap-Eye develop
antibodies to these product candidates, and may also experience side effects
related to the antibodies, which could adversely impact the development of such
candidates.
37
We may be unable to formulate or manufacture our product candidates in a
way that is suitable for clinical or commercial use.
Changes in product formulations and manufacturing processes may be
required as product candidates progress in clinical development and are
ultimately commercialized. If we are unable to develop suitable product
formulations or manufacturing processes to support large scale clinical testing
of our product candidates, including aflibercept, VEGF Trap-Eye, and our
antibody candidates, we may be unable to supply necessary materials for our
clinical trials, which would delay the development of our product candidates.
Similarly, if we are unable to supply sufficient quantities of our product or
develop product formulations suitable for commercial use, we will not be able to
successfully commercialize our product candidates.
Risks Related to Intellectual Property
If we cannot protect the confidentiality of our trade secrets or our
patents are insufficient to protect our proprietary rights, our business and
competitive position will be harmed.
Our business requires using sensitive and
proprietary technology and other information that we protect as trade secrets.
We seek to prevent improper disclosure of these trade secrets through
confidentiality agreements. If our trade secrets are improperly exposed, either
by our own employees or our collaborators, it would help our competitors and
adversely affect our business. We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that our rights are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The patent position of biotechnology companies involves complex legal
and factual questions and, therefore, enforceability cannot be predicted with
certainty. Our patents may be challenged, invalidated, or circumvented. Patent
applications filed outside the United States may be challenged by third parties
who file an opposition. Such opposition proceedings are increasingly common in
the European Union and are costly to defend. We have pending patent applications
in the European Patent Office and it is likely that we will need to defend
patent applications from third party challengers from time to time in the
future. Our patent rights may not provide us with a proprietary position or
competitive advantages against competitors. Furthermore, even if the outcome is
favorable to us, the enforcement of our intellectual property rights can be
extremely expensive and time consuming.
We may be restricted in our development and/or commercialization
activities by, and could be subject to damage awards if we are found to have
infringed, third party patents or other proprietary rights.
Our commercial success depends
significantly on our ability to operate without infringing the patents and other
proprietary rights of third parties. Other parties may allege that they have
blocking patents to our products in clinical development, either because they
claim to hold proprietary rights to the composition of a product or the way it
is manufactured or used. Moreover, other parties may allege that they have
blocking patents to antibody products made using our
VelocImmune
®
technology, either
because of the way the antibodies are discovered or produced or because of a
proprietary position covering an antibody or the antibody’s target.
We are aware of patents and pending
applications owned by Genentech that claim certain chimeric VEGF receptors.
Although we do not believe that aflibercept or VEGF Trap-Eye infringes any valid
claim in these patents or patent applications, Genentech could initiate a
lawsuit for patent infringement and assert that its patents are valid and cover
aflibercept or VEGF Trap-Eye or uses thereof. Genentech may be motivated to
initiate such a lawsuit at some point in an effort to impair our ability to
develop and sell aflibercept or VEGF Trap-Eye, which represent potential
competitive threats to Genentech’s VEGF-binding products and product candidates.
An adverse determination by a court in any such potential patent litigation
would likely materially harm our business by requiring us to seek a license,
which may not be available, or resulting in our inability to manufacture,
develop, and sell aflibercept or VEGF Trap-Eye or in a damage award.
We are aware of patents and pending
applications owned by Roche that claim antibodies to the interleukin-6 receptor
and methods of treating rheumatoid arthritis with such antibodies. We are
developing REGN88, an antibody to the interleukin-6 receptor, for the treatment
of rheumatoid arthritis. Although we do not believe that REGN88 infringes any
valid claim in these patents or patent applications, Roche could initiate a
lawsuit for patent infringement and assert its patents are valid and cover
REGN88.
38
We are aware of a U.S. patent jointly owned by Genentech and City of Hope
relating to the production of recombinant antibodies in host cells. We currently
produce our antibody product candidates using recombinant antibodies from host
cells and may choose to produce additional antibody product candidates in this
manner. Neither ARCALYST
®
(rilonacept),
aflibercept, nor VEGF Trap-Eye are recombinant antibodies. If any of our
antibody product candidates are produced in a manner subject to valid claims in
the Genentech patent, then we may need to obtain a license from Genentech,
should one be available. Genentech has licensed this patent to several different
companies under confidential license agreements. If we desire a license for any
of our antibody product candidates and are unable to obtain a license on
commercially reasonable terms or at all, we may be restricted in our ability to
use Genentech’s techniques to make recombinant antibodies in or to import them
into the United States.
Further, we are aware of a number of
other third party patent applications that, if granted, with claims as currently
drafted, may cover our current or planned activities. We cannot assure you that
our products and/or actions in manufacturing and selling our product candidates
will not infringe such patents.
Any patent holders could sue us for
damages and seek to prevent us from manufacturing, selling, or developing our
drug candidates, and a court may find that we are infringing validly issued
patents of third parties. In the event that the manufacture, use, or sale of any
of our clinical candidates infringes on the patents or violates other
proprietary rights of third parties, we may be prevented from pursuing product
development, manufacturing, and commercialization of our drugs and may be
required to pay costly damages. Such a result may materially harm our business,
financial condition, and results of operations. Legal disputes are likely to be
costly and time consuming to defend.
We seek to obtain licenses to patents
when, in our judgment, such licenses are needed. If any licenses are required,
we may not be able to obtain such licenses on commercially reasonable terms, if
at all. The failure to obtain any such license could prevent us from developing
or commercializing any one or more of our product candidates, which could
severely harm our business.
Regulatory and Litigation Risks
If we do not obtain regulatory approval for our product candidates, we
will not be able to market or sell them.
We cannot sell or market products without
regulatory approval. If we do not obtain and maintain regulatory approval for
our product candidates, including ARCALYST
®
(rilonacept) for the
treatment of diseases other than CAPS, the value of our company and our results
of operations will be harmed. In the United States, we must obtain and maintain
approval from the United States Food and Drug Administration (FDA) for each drug
we intend to sell. Obtaining FDA approval is typically a lengthy and expensive
process, and approval is highly uncertain. Foreign governments also regulate
drugs distributed in their country and approval in any country is likely to be a
lengthy and expensive process, and approval is highly uncertain. Except for the
FDA approval of ARCALYST
®
(rilonacept) and the
Europeans Medicines Agency approval of rilonacept for the treatment of CAPS,
none of our product candidates has ever received regulatory approval to be
marketed and sold in the United States or any other country. We may never
receive regulatory approval for any of our product candidates.
The FDA enforces good clinical practices
and other regulations through periodic inspections of trial sponsors, clinical
research organizations (CROs), principal investigators, and trial sites. If we
or any of the third parties conducting our clinical studies are determined to
have failed to fully comply with Good Clinical Practice regulations (GCPs), the
study protocol or applicable regulations, the clinical data generated in our
studies may be deemed unreliable. This could result in non-approval of our
product candidates by the FDA, or we or the FDA may decide to conduct additional
audits or require additional clinical studies, which would delay our development
programs and substantially harm our business.
Before approving a new drug or biologic
product, the FDA requires that the facilities at which the product will be
manufactured be in compliance with current Good Manufacturing Practices, or cGMP
requirements. Manufacturing product candidates in compliance with these
regulatory requirements is complex, time-consuming, and expensive. To be
successful, our products must be manufactured for development, following
approval, in commercial quantities, in compliance with regulatory requirements,
and at competitive costs. If we or any of our product collaborators or
third-party manufacturers, product packagers, or labelers are unable to maintain
regulatory compliance, the FDA can impose regulatory sanctions, including, among
other things, refusal to approve a pending application for a new drug or
biologic product, or revocation of a pre-existing approval. As a result, our
business, financial condition, and results of operations may be materially
harmed.
39
In addition to the FDA and other regulatory agency regulations in the
United States, we are subject to a variety of foreign regulatory requirements
governing human clinical trials, manufacturing, marketing and approval of drugs,
and commercial sale and distribution of drugs in foreign countries. The foreign
regulatory approval process includes all of the risks associated with FDA
approval as well as country specific regulations. Whether or not we obtain FDA
approval for a product in the United States, we must obtain approval by the
comparable regulatory authorities of foreign countries before we can commence
clinical trials or marketing of ARCALYST
®
(rilonacept) or any of
our product candidates in those countries.
If we fail to meet the stringent requirements of governmental regulation
in the manufacture of our marketed product and clinical candidates, we could
incur substantial remedial costs, delays in the development of our clinical
candidates, and a reduction in sales.
We and our third party providers are
required to maintain compliance with current Good Manufacturing Practice, or
cGMP, and are subject to inspections by the FDA or comparable agencies in other
jurisdictions to confirm such compliance. Changes of suppliers or modifications
of methods of manufacturing may require amending our application to the FDA and
acceptance of the change by the FDA prior to release of product. Because we
produce multiple product candidates at our facility in Rensselaer, New York,
there are increased risks associated with cGMP compliance. Our inability, or the
inability of our third party service providers, to demonstrate ongoing cGMP
compliance could require us to engage in lengthy and expensive remediation
efforts, withdraw or recall product, halt or interrupt clinical trials, and/or
interrupt commercial supply of our marketed product. Any delay, interruption or
other issues that arise in the manufacture, fill-finish, packaging, or storage
of our product candidates as a result of a failure of our facilities or the
facilities or operations of third parties to pass any regulatory agency
inspection or maintain cGMP compliance could significantly impair our ability to
develop and commercialize our products. Any finding of non-compliance could
increase our costs, cause us to delay the development of our product candidates,
and cause us to lose revenue from our marketed product.
If the testing or use of our products harms people, we could be subject
to costly and damaging product liability claims.
The testing, manufacturing, marketing,
and sale of drugs for use in people expose us to product liability risk. Any
informed consent or waivers obtained from people who sign up for our clinical
trials may not protect us from liability or the cost of litigation. We may be
subject to claims by CAPS patients who use ARCALYST
®
(rilonacept) that they
have been injured by a side effect associated with the drug. Our product
liability insurance may not cover all potential liabilities or may not
completely cover any liability arising from any such litigation. Moreover, in
the future we may not have access to liability insurance or be able to maintain
our insurance on acceptable terms.
If we market and sell ARCALYST
®
(rilonacept) in a way
that violates federal or state fraud and abuse laws, we may be subject to civil
or criminal penalties.
In addition to FDA and related regulatory
requirements, we are subject to health care “fraud and abuse” laws, such as the
federal False Claims Act, the anti-kickback provisions of the federal Social
Security Act, and other state and federal laws and regulations. Federal and
state anti-kickback laws prohibit, among other things, knowingly and willfully
offering, paying, soliciting or receiving remuneration to induce, or in return
for, purchasing, leasing, ordering or arranging for the purchase, lease or order
of any health care item or service reimbursable under Medicare, Medicaid, or
other federally or state financed health care programs.
Federal false claims laws prohibit any
person from knowingly presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or causing to be made, a
false statement to get a false claim paid. Pharmaceutical companies have been
prosecuted under these laws for a variety of alleged promotional and marketing
activities, such as allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the product;
reporting to pricing services inflated average wholesale prices that were then
used by federal programs to set reimbursement rates; engaging in promotion for
uses that the FDA has not approved, or off-label uses, that caused claims to be
submitted to Medicaid for non-covered off-label uses, and submitting inflated
best price information to the Medicaid Rebate program.
40
The majority of states also have statutes or regulations similar to the
federal anti-kickback law and false claims laws, which apply to items and
services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payer. Sanctions under these federal and state
laws may include civil monetary penalties, exclusion of a manufacturer’s
products from reimbursement under government programs, criminal fines, and
imprisonment.
Even if we are not determined to have
violated these laws, government investigations into these issues typically
require the expenditure of significant resources and generate negative
publicity, which would also harm our financial condition. Because of the breadth
of these laws and the narrowness of the safe harbors, it is possible that some
of our business activities could be subject to challenge under one or more of
such laws.
In recent years, several states and
localities, including California, the District of Columbia, Massachusetts,
Maine, Minnesota, Nevada, New Mexico, Vermont, and West Virginia, have enacted
legislation requiring pharmaceutical companies to establish marketing compliance
programs, and file periodic reports with the state or make periodic public
disclosures on sales, marketing, pricing, clinical trials, and other activities.
Similar requirements are being considered in other states and were included in
health care reform legislation recently enacted by the federal government. Many
of these requirements are new and uncertain, and the penalties for failure to
comply with these requirements are unclear. Nonetheless, if we are found not to
be in full compliance with these laws, we could face enforcement action and
fines and other penalties, and could receive adverse publicity.
Our operations may involve hazardous materials and are subject to
environmental, health, and safety laws and regulations. We may incur substantial
liability arising from our activities involving the use of hazardous materials.
As a biopharmaceutical company with
significant manufacturing operations, we are subject to extensive environmental,
health, and safety laws and regulations, including those governing the use of
hazardous materials. Our research and development and manufacturing activities
involve the controlled use of chemicals, viruses, radioactive compounds, and
other hazardous materials. The cost of compliance with environmental, health,
and safety regulations is substantial. If an accident involving these materials
or an environmental discharge were to occur, we could be held liable for any
resulting damages, or face regulatory actions, which could exceed our resources
or insurance coverage.
In future years, if we are unable to conclude that our internal control
over financial reporting is effective, the market value of our Common Stock
could be adversely affected.
As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to
include a report of management on the Company’s internal control over financial
reporting in their annual reports on Form 10-K that contains an assessment by
management of the effectiveness of our internal control over financial
reporting. In addition, the independent registered public accounting firm
auditing our financial statements must attest to and report on the effectiveness
of our internal control over financial reporting. Our independent registered
public accounting firm provided us with an unqualified report as to the
effectiveness of our internal control over financial reporting as of December
31, 2009, which report is included in our Annual Report on Form 10-K. However,
we cannot assure you that management or our independent registered public
accounting firm will be able to provide such an unqualified report as of future
year-ends. In this event, investors could lose confidence in the reliability of
our financial statements, which could result in a decrease in the market value
of our Common Stock. In addition, if it is determined that deficiencies in the
design or operation of internal controls exist and that they are reasonably
likely to adversely affect our ability to record, process, summarize, and report
financial information, we would likely incur additional costs to remediate these
deficiencies and the costs of such remediation could be material.
41
Changes in laws and regulations affecting the healthcare industry could
adversely affect our business.
All aspects of our business, including
research and development, manufacturing, marketing, pricing, sales, litigation,
and intellectual property rights, are subject to extensive legislation and
regulation. Changes in applicable federal and state laws and agency regulations
could have a material adverse effect on our business. These
include:
-
c
hanges in the FDA and foreign regulatory
processes for new therapeutics that may delay or prevent the approval of any
of our current or future product candidates;
-
new laws, regulations, or judicial
decisions related to healthcare availability or the payment for healthcare
products and services, including prescription drugs, that would make it more
difficult for us to market and sell products once they are approved by the FDA
or foreign regulatory agencies;
-
changes in FDA and foreign
regulations that may require additional safety monitoring prior to or after
the introduction of new products to market, which could materially increase
our costs of doing business; and
-
changes in FDA and foreign current
Good Manufacturing Practice, or cGMPs, that make it more difficult for us to
manufacture our marketed product and clinical candidates in accordance with
cGMPs.
The enactment in the U.S. of health care reform, potential regulations
easing the entry of competing follow-on biologics in the marketplace, new
legislation or implementation of existing statutory provisions on importation of
lower-cost competing drugs from other jurisdictions, and legislation on
comparative effectiveness research are examples of previously enacted and
possible future changes in laws that could adversely affect our business.
Risks Related to Our Reliance on Third Parties
If our antibody collaboration with sanofi-aventis is terminated, our
business operations and our ability to discover, develop, manufacture, and
commercialize our pipeline of product candidates in the time expected, or at
all, would be materially harmed.
We rely heavily on funding from
sanofi-aventis to support our target discovery and antibody research and
development programs. Sanofi-aventis has committed to pay up to $1.28 billion
between 2010 and 2017 to fund our efforts to identify and validate drug
discovery targets and pre-clinically develop fully human monoclonal antibodies
against such targets. In addition, sanofi-aventis funds almost all of the
development expenses incurred by both companies in connection with the clinical
development of antibodies that sanofi-aventis elects to co-develop with us. We
rely on sanofi-aventis to fund these activities. In addition, with respect to
those antibodies that sanofi-aventis elects to co-develop with us, such as
REGN88, REGN421, REGN475, REGN727, and REGN668 we rely on sanofi-aventis to lead
much of the clinical development efforts and assist with obtaining regulatory
approval, particularly outside the United States. We also rely on sanofi-aventis
to lead the commercialization efforts to support all of the antibody products
that are co-developed by sanofi-aventis and us. If sanofi-aventis does not elect
to co-develop the antibodies that we discover or opts-out of their development,
we would be required to fund and oversee on our own the clinical trials, any
regulatory responsibilities, and the ensuing commercialization efforts to
support our antibody products. If sanofi-aventis terminates the antibody
collaboration or fails to comply with its payment obligations thereunder, our
business, financial condition, and results of operations would be materially
harmed. We would be required to either expend substantially more resources than
we have anticipated to support our research and development efforts, which could
require us to seek additional funding that might not be available on favorable
terms or at all, or materially cut back on such activities. While we cannot
assure you that any of the antibodies from this collaboration will ever be
successfully developed and commercialized, if sanofi-aventis does not perform
its obligations with respect to antibodies that it elects to co-develop, our
ability to develop, manufacture, and commercialize these antibody product
candidates will be significantly adversely affected.
If our collaboration with sanofi-aventis for aflibercept (VEGF Trap) is
terminated, or sanofi-aventis materially breaches its obligations thereunder,
our business operations and financial condition, and our ability to develop,
manufacture, and commercialize aflibercept in the time expected, or at all,
would be materially harmed.
We rely heavily on sanofi-aventis to lead
much of the development of aflibercept. Sanofi-aventis funds all of the
development expenses incurred by both companies in connection with the
aflibercept program. If the aflibercept program continues, we will rely on
sanofi-aventis to assist with funding the aflibercept program, provide
commercial manufacturing capacity, enroll and monitor clinical trials, obtain
regulatory approval, particularly outside the United States, and lead the
commercialization of aflibercept. While we cannot assure you that aflibercept
will ever be successfully developed and commercialized, if sanofi-aventis does
not perform its obligations in a timely manner, or at all, our ability to
develop, manufacture, and commercialize aflibercept in cancer indications will
be significantly adversely affected. Sanofi-aventis has the right to terminate
its collaboration agreement with us at any time upon twelve months advance
notice. If sanofi-aventis were to terminate its collaboration agreement with us,
we would not have the resources or skills to replace those of our partner, which
could require us to seek additional funding that might not be available on
favorable terms or at all, and could cause significant delays in the development
and/or manufacture of aflibercept and result in substantial additional costs to
us. We have limited commercial capabilities and would have to develop or
outsource these capabilities. Termination of the sanofi-aventis collaboration
agreement for aflibercept would create substantial new and additional risks to
the successful development and commercialization of aflibercept.
42
If our collaboration with Bayer HealthCare for VEGF Trap-Eye is
terminated, or Bayer HealthCare materially breaches its obligations thereunder,
our business operations and financial condition, and our ability to develop and
commercialize VEGF Trap-Eye in the time expected, or at all, would be materially
harmed.
We rely heavily on Bayer HealthCare to assist with the development of
VEGF Trap-Eye. Under our agreement with them, Bayer HealthCare is required to
fund approximately half of the development expenses incurred by both companies
in connection with the global VEGF Trap-Eye development program. If the VEGF
Trap-Eye program continues, we will rely on Bayer HealthCare to assist with
funding the VEGF Trap-Eye development program, lead the development of VEGF
Trap-Eye outside the United States, obtain regulatory approval outside the
United States, and provide all sales, marketing, and commercial support for the
product outside the United States. In particular, Bayer HealthCare has
responsibility for selling VEGF Trap-Eye outside the United States using its
sales force. While we cannot assure you that VEGF Trap-Eye will ever be
successfully developed and commercialized, if Bayer HealthCare does not perform
its obligations in a timely manner, or at all, our ability to develop,
manufacture, and commercialize VEGF Trap-Eye outside the United States will be
significantly adversely affected. Bayer HealthCare has the right to terminate
its collaboration agreement with us at any time upon six or twelve months
advance notice, depending on the circumstances giving rise to termination. If
Bayer HealthCare were to terminate its collaboration agreement with us, we would
not have the resources or skills to replace those of our partner, which could
require us to seek additional funding that might not be available on favorable
terms or at all, and could cause significant delays in the development and/or
commercialization of VEGF Trap-Eye outside the United States and result in
substantial additional costs to us. We have limited commercial capabilities and
would have to develop or outsource these capabilities outside the United States.
Termination of the Bayer HealthCare collaboration agreement would create
substantial new and additional risks to the successful development and
commercialization of VEGF Trap-Eye.
Our collaborators and
service providers may fail to perform adequately in their efforts to support the
development, manufacture, and commercialization of ARCALYST
®
(rilonacept) and our
drug candidates.
We depend upon third-party collaborators,
including sanofi-aventis, Bayer HealthCare, and service providers such as
clinical research organizations, outside testing laboratories, clinical
investigator sites, and third-party manufacturers and product packagers and
labelers, to assist us in the manufacture and preclinical and clinical
development of our product candidates. If any of our existing collaborators or
service providers breaches or terminates its agreement with us or does not
perform its development or manufacturing services under an agreement in a timely
manner or in compliance with applicable Good Manufacturing Practices (GMPs),
Good Laboratory Practices (GLPs), or Good Clinical Practice (GCP) Standards, we
could experience additional costs, delays, and difficulties in the manufacture
or development or in obtaining approval by regulatory authorities for our
product candidates.
We rely on third party service providers
to support the distribution of ARCALYST
®
(rilonacept) and many
other related activities in connection with the commercialization of
ARCALYST
®
(rilonacept) for the treatment of CAPS. We cannot be certain that these third
parties will perform adequately. If these service providers do not perform their
services adequately, our efforts to market and sell ARCALYST
®
(rilonacept) for the
treatment of CAPS will not be successful.
Risks Related to the Manufacture of Our
Product Candidates
We have limited manufacturing capacity, which could inhibit our ability
to successfully develop or commercialize our drugs.
Our manufacturing facility is likely to
be inadequate to produce sufficient quantities of product for commercial sale.
We intend to rely on our corporate collaborators, as well as contract
manufacturers, to produce the large quantities of drug material needed for
commercialization of our products. We rely entirely on third-party manufacturers
for filling and finishing services. We will have to depend on these
manufacturers to deliver material on a timely basis and to comply with
regulatory requirements. If we are unable to supply sufficient material on
acceptable terms, or if we should encounter delays or difficulties in our
relationships with our corporate collaborators or contract manufacturers, our
business, financial condition, and results of operations may be materially
harmed.
43
We must expand our own manufacturing capacity to support the planned
growth of our clinical pipeline. Moreover, we may expand our manufacturing
capacity to support commercial production of active pharmaceutical ingredients,
or API, for our product candidates. This will require substantial additional
expenditures, and we will need to hire and train significant numbers of
employees and managerial personnel to staff our facility. Start-up costs can be
large and scale-up entails significant risks related to process development and
manufacturing yields. We may be unable to develop manufacturing facilities that
are sufficient to produce drug material for clinical trials or commercial use.
This may delay our clinical development plans and interfere with our efforts to
commercialize our products. In addition, we may be unable to secure adequate
filling and finishing services to support our products. As a result, our
business, financial condition, and results of operations may be materially
harmed.
We may be unable to obtain key raw
materials and supplies for the manufacture of ARCALYST
®
(rilonacept) and our
product candidates. In addition, we may face difficulties in developing or
acquiring production technology and managerial personnel to manufacture
sufficient quantities of our product candidates at reasonable costs and in
compliance with applicable quality assurance and environmental regulations and
governmental permitting requirements.
If any of our clinical programs are discontinued, we may face costs
related to the unused capacity at our manufacturing facilities.
We have large-scale manufacturing
operations in Rensselaer, New York. We use our facilities to produce bulk
product for clinical and preclinical candidates for ourselves and our
collaborations. If our clinical candidates are discontinued, we will have to
absorb one hundred percent of related overhead costs and inefficiencies.
Third-party supply failures, business interruptions, or natural disasters
affecting our manufacturing facilities in Rensselaer, New York could adversely
affect our ability to supply our products.
We manufacture all of our bulk drug
materials for ARCALYST
®
(rilonacept) and our
product candidates at our manufacturing facilities in Rensselaer, New York. We
would be unable to supply our product requirements if we were to cease
production due to regulatory requirements or action, business interruptions,
labor shortages or disputes, contaminations, fire, natural disasters, or other
problems at the facilities.
Certain raw materials necessary for
manufacturing and formulation of ARCALYST
®
(rilonacept) and our
product candidates are provided by single-source unaffiliated third-party
suppliers. In addition, we rely on certain third parties to perform filling,
finishing, distribution, and other services related to the manufacture of our
products. We would be unable to obtain these raw materials or services for an
indeterminate period of time if any of these third-parties were to cease or
interrupt production or otherwise fail to supply these materials, products, or
services to us for any reason, including due to regulatory requirements or
action, adverse financial developments at or affecting the supplier, failure by
the supplier to comply with GMPs, business interruptions, or labor shortages or
disputes. This, in turn, could materially and adversely affect our ability to
manufacture or supply ARCALYST
®
(rilonacept) or our
product candidates for use in clinical trials, which could materially and
adversely affect our business and future prospects.
Also, certain of the raw materials
required in the manufacturing and the formulation of our clinical candidates may
be derived from biological sources, including mammalian tissues, bovine serum,
and human serum albumin. There are certain European regulatory restrictions on
using these biological source materials. If we are required to substitute for
these sources to comply with European regulatory requirements, our clinical
development activities may be delayed or interrupted.
44
Risks Related to Commercialization of Products
If we are unable to establish sales, marketing, and distribution
capabilities, or enter into agreements with third parties to do so, we will be
unable to successfully market and sell future
products.
We are marketing and selling
ARCALYST
®
(rilonacept) for the treatment of CAPS ourselves in the United States, primarily
through third party service providers. We have no sales or distribution
personnel in the United States and have only a small staff with commercial
capabilities. We currently have no sales, marketing, commercial, or distribution
capabilities outside the United States. If we are unable to obtain those
capabilities, either by developing our own organizations or entering into
agreements with service providers, even if our current or future product
candidates receive marketing approval, we will not be able to successfully sell
those products. In that event, we will not be able to generate significant
revenue, even if our product candidates are approved. We cannot guarantee that
we will be able to hire the qualified sales and marketing personnel we need or
that we will be able to enter into marketing or distribution agreements with
third-party providers on acceptable terms, if at all. Under the terms of our
collaboration agreement with sanofi-aventis, we will rely on sanofi-aventis for
sales, marketing, and distribution of aflibercept in cancer indications, should
it be approved in the future by regulatory authorities for marketing. We will
have to rely on a third party or devote significant resources to develop our own
sales, marketing, and distribution capabilities for our other product
candidates, including VEGF Trap-Eye in the United States, and we may be
unsuccessful in developing our own sales, marketing, and distribution
organization.
There may be too few patients with CAPS to profitably commercialize
ARCALYST
®
(rilonacept) in this indication.
Our only approved product is
ARCALYST
®
(rilonacept) for the treatment of CAPS, a group of rare, inherited
auto-inflammatory diseases. These rare diseases affect a very small group of
people. The incidence of CAPS has been reported to be approximately 1 in
1,000,000 people in the United States. Although the incidence rate of CAPS in
Europe has not been reported, it is known to be a rare set of diseases. In
October 2009 we received European marketing authorization for rilonacept for
CAPS. In 2009, Novartis received regulatory approval in the U.S. and Europe for
its IL-1 antibody product for the treatment of CAPS. Given the very rare nature
of the disease and the competition from Novartis’ IL-1 antibody product, we may
be unable to profitably commercialize ARCALYST
®
(rilonacept) in this
indication.
Even if our product candidates are approved for marketing, their
commercial success is highly uncertain because our competitors have received
approval for products with a similar mechanism of action, and competitors may
get to the marketplace with better or lower cost
drugs.
There is substantial competition in
the biotechnology and pharmaceutical industries from pharmaceutical,
biotechnology, and chemical companies. Many of our competitors have
substantially greater research, preclinical and clinical product development and
manufacturing capabilities, and financial, marketing, and human resources than
we do. Our smaller competitors may also enhance their competitive position if
they acquire or discover patentable inventions, form collaborative arrangements,
or merge with large pharmaceutical companies. Even if we achieve product
commercialization, our competitors have achieved, and may continue to achieve,
product commercialization before our products are approved for marketing and
sale.
Genentech has an approved VEGF
antagonist, Avastin, on the market for treating certain cancers and many
different pharmaceutical and biotechnology companies are working to develop
competing VEGF antagonists, including Novartis, Amgen, Imclone/Eli Lilly,
Pfizer, AstraZeneca, and GlaxoSmithKline. Many of these molecules are farther
along in development than aflibercept and may offer competitive advantages over
our molecule. Each of Pfizer and Onyx, (together with its partner Bayer
HealthCare) has received approval from the FDA to market and sell an oral
medication that targets tumor cell growth and new vasculature formation that
fuels the growth of tumors. The marketing approvals for Genentech’s VEGF
antagonist, Avastin, and their extensive, ongoing clinical development plan for
Avastin in other cancer indications, make it more difficult for us to enroll
patients in clinical trials to support aflibercept and to obtain regulatory
approval of aflibercept in these cancer settings. This may delay or impair our
ability to successfully develop and commercialize aflibercept. In addition, even
if aflibercept is ever approved for sale for the treatment of certain cancers,
it will be difficult for our drug to compete against Avastin (Genentech) and the
FDA approved kinase inhibitors, because doctors and patients will have
significant experience using these medicines. In addition, an oral medication
may be considerably less expensive for patients than a biologic medication,
providing a competitive advantage to companies that market such
products.
45
The market for eye disease products
is also very competitive. Novartis and Genentech are collaborating on the
commercialization and further development of a VEGF antibody fragment, Lucentis,
for the treatment of age-related macular degeneration (wet AMD), DME, and other
eye indications. Lucentis (Genentech) was approved by the FDA in June 2006 for
the treatment of wet AMD. Many other companies are working on the development of
product candidates for the potential treatment of wet AMD and DME that act by
blocking VEGF and VEGF receptors, and through the use of small interfering
ribonucleic acids (siRNAs) that modulate gene expression. In addition,
ophthalmologists are using off-label, with success for the treatment of wet AMD,
a third-party repackaged version of Genentech’s approved VEGF antagonist,
Avastin. The National Eye Institute and others are conducting long-term,
controlled clinical trials comparing Lucentis (Genentech) to Avastin (Genentech)
in the treatment of wet AMD. The marketing approval of Lucentis (Genentech) and
the potential off-label use of Avastin (Genentech) make it more difficult for us
to enroll patients in our clinical trials and successfully develop VEGF
Trap-Eye. Even if VEGF Trap-Eye is ever approved for sale for the treatment of
eye diseases, it may be difficult for our drug to compete against Lucentis
(Genentech), because doctors and patients will have significant experience using
this medicine. Moreover, the relatively low cost of therapy with Avastin
(Genentech) in patients with wet AMD presents a further competitive challenge in
this indication. While we believe that aflibercept would not be well tolerated
if administered directly to the eye, if aflibercept is ever approved for the
treatment of certain cancers, there is a risk that third parties will attempt to
repackage aflibercept for use and sale for the treatment of wet AMD and other
diseases of the eye, which would present a potential low-cost competitive threat
to the VEGF Trap-Eye if it is ever approved for sale.
The availability of highly effective
FDA approved TNF-antagonists such as Enbrel (Amgen and Wyeth), Remicade
(Centocor), Humira
®
(adalimumab), marketed
by Abbott, and Simponi
TM
(golimumab), marketed
by Centocor, and the IL-1 receptor antagonist Kineret (Biovitrum), and other
marketed therapies makes it more difficult to successfully develop and
commercialize rilonacept in other indications and this is one of the reasons we
discontinued the development of rilonacept in adult rheumatoid arthritis. In
addition, even if rilonacept is ever approved for sale in indications where
TNF-antagonists are approved, it will be difficult for our drug to compete
against these FDA approved TNF-antagonists because doctors and patients will
have significant experience using these effective medicines. Moreover, in such
indications these approved therapeutics may offer competitive advantages over
rilonacept, such as requiring fewer injections.
There are both small molecules and
antibodies in development by other companies that are designed to block the
synthesis of interleukin-1 or inhibit the signaling of interleukin-1. For
example, Eli Lilly, Xoma Ltd., and Novartis are each developing antibodies to
interleukin-1 and Amgen is developing an antibody to the interleukin-1 receptor.
Novartis received marketing approval for its IL-1 antibody for the treatment of
CAPS from the FDA in June 2009 and from the European Medicines Agency in October
2009. Novartis is also developing this IL-1 antibody in gout and other
inflammatory diseases. Novartis’ IL-1 antibody and these other drug candidates
could offer competitive advantages over ARCALYST
®
(rilonacept). For
example, Novartis’ IL-1 antibody is dosed once every eight weeks compared to the
once-weekly dosing regimen for ARCALYST
®
(rilonacept). The
successful development and/or commercialization of these competing molecules
could impair our ability to successfully commercialize ARCALYST
®
(rilonacept).
We have plans to develop rilonacept
for the treatment of certain gout indications. In October 2009, Novartis
announced positive Phase 2 results showing that canakinumab is more effective
than an injectable corticosteroid at reducing pain and preventing recurrent
attacks or “flares” in patients with hard-to-treat gout. Novartis’ IL-1 antibody
is dosed less frequently for the treatment of CAPS and may be perceived as
offering competitive advantages over rilonacept in gout by some physicians,
which would make it difficult for us to successfully commercialize rilonacept in
that disease.
Currently, inexpensive, oral
therapies such as analgesics and other non-steroidal anti-inflammatory drugs are
used as the standard of care to treat the symptoms of these gout diseases. These
established, inexpensive, orally delivered drugs may make it difficult for us to
successfully commercialize rilonacept in these diseases.
46
The successful commercialization of ARCALYST
®
(rilonacept) and our
product candidates will depend on obtaining coverage and reimbursement for use
of these products from third-party payers and these payers may not agree to
cover or reimburse for use of our products.
Our product candidates, if
commercialized, may be significantly more expensive than traditional drug
treatments. For example, we have initiated a Phase 3 program studying the use of
rilonacept for the treatment of certain gout indications. Patients suffering
from these gout indications are currently treated with inexpensive therapies,
including non-steroidal anti-inflammatory drugs. These existing treatment
options are likely to be considerably less expensive and may be preferable to a
biologic medication for some patients. Our future revenues and profitability
will be adversely affected if United States and foreign governmental, private
third-party insurers and payers, and other third-party payers, including
Medicare and Medicaid, do not agree to defray or reimburse the cost of our
products to the patients. If these entities refuse to provide coverage and
reimbursement with respect to our products or provide an insufficient level of
coverage and reimbursement, our products may be too costly for many patients to
afford them, and physicians may not prescribe them. Many third-party payers
cover only selected drugs, making drugs that are not preferred by such payers
more expensive for patients, and require prior authorization or failure on
another type of treatment before covering a particular drug. Payers may
especially impose these obstacles to coverage on higher-priced drugs, as our
product candidates are likely to be.
We market and sell ARCALYST
®
(rilonacept) in the
United States for the treatment of a group of rare genetic disorders called
CAPS. We recently received European Union marketing authorization for rilonacept
for the treatment of CAPS. There may be too few patients with CAPS to profitably
commercialize ARCALYST
®
(rilonacept).
Physicians may not prescribe ARCALYST
®
(rilonacept), and CAPS
patients may not be able to afford ARCALYST
®
(rilonacept), if third
party payers do not agree to reimburse the cost of ARCALYST
®
(rilonacept) therapy
and this would adversely affect our ability to commercialize ARCALYST
®
(rilonacept)
profitably.
In addition to potential
restrictions on coverage, the amount of reimbursement for our products may also
reduce our profitability. Government and other third-party payers are
challenging the prices charged for healthcare products and increasingly
limiting, and attempting to limit, both coverage and level of reimbursement for
prescription drugs. The U.S. Congress recently enacted legislation to reform the
health care system. This legislation imposes cost containment measures that are
likely to adversely affect the amount of reimbursement for our future products.
Some states are also considering legislation that would control the prices of
drugs, and state Medicaid programs are increasingly requesting manufacturers to
pay supplemental rebates and requiring prior authorization by the state program
for use of any drug for which supplemental rebates are not being paid. It is
likely that federal and state legislatures and health agencies will continue to
focus on additional health care reform in the future that will impose additional
constraints on prices and reimbursements for our products.
Since ARCALYST
®
(rilonacept) and our
product candidates in clinical development will likely be too expensive for most
patients to afford without health insurance coverage, if our products are unable
to obtain adequate coverage and reimbursement by third-party payers our ability
to successfully commercialize our product candidates may be adversely impacted.
Any limitation on the use of our products or any decrease in the price of our
products will have a material adverse effect on our ability to achieve
profitability.
In certain foreign countries,
pricing, coverage, and level of reimbursement of prescription drugs are subject
to governmental control, and we may be unable to negotiate coverage, pricing,
and reimbursement on terms that are favorable to us. In some foreign countries,
the proposed pricing for a drug must be approved before it may be lawfully
marketed. The requirements governing drug pricing vary widely from country to
country. For example, the European Union provides options for its member states
to restrict the range of medicinal products for which their national health
insurance systems provide reimbursement and to control the prices of medicinal
products for human use. A member state may approve a specific price for the
medicinal product or it may instead adopt a system of direct or indirect
controls on the profitability of the company placing the medicinal product on
the market. Our results of operations may suffer if we are unable to market our
products in foreign countries or if coverage and reimbursement for our products
in foreign countries is limited.
47
Risk Related to Employees
We are dependent on our key personnel and if we cannot recruit and retain
leaders in our research, development, manufacturing, and commercial
organizations, our business will be harmed.
We are highly dependent on certain
of our executive officers. If we are not able to retain any of these persons or
our Chairman, our business may suffer. In particular, we depend on the services
of P. Roy Vagelos, M.D., the Chairman of our board of directors, Leonard
Schleifer, M.D., Ph.D., our President and Chief Executive Officer, George D.
Yancopoulos, M.D., Ph.D., our Executive Vice President, Chief Scientific Officer
and President, Regeneron Research Laboratories, and Neil Stahl, Ph.D., our
Senior Vice President, Research and Development Sciences. There is intense
competition in the biotechnology industry for qualified scientists and
managerial personnel in the development, manufacture, and commercialization of
drugs. We may not be able to continue to attract and retain the qualified
personnel necessary for developing our business.
Risks Related to Our Common
Stock
Our stock price is extremely volatile.
There has been significant
volatility in our stock price and generally in the market prices of
biotechnology companies’ securities. Various factors and events may have a
significant impact on the market price of our Common Stock. These factors
include, by way of example:
-
progress, delays, or adverse
results in clinical trials;
-
announcement of technological
innovations or product candidates by us or competitors;
-
fluctuations in our operating
results;
-
third party claims that our
products or technologies infringe their patents;
-
public concern as to the safety or
effectiveness of ARCALYST
®
(rilonacept) or any
of our product candidates;
-
developments in our relationship
with collaborative partners;
-
developments in the biotechnology
industry or in government regulation of healthcare;
-
large sales of our common stock by
our executive officers, directors, or significant shareholders;
-
arrivals and departures of key
personnel; and
-
general market conditions.
The trading price of our Common
Stock has been, and could continue to be, subject to wide fluctuations in
response to these and other factors, including the sale or attempted sale of a
large amount of our Common Stock in the market. Broad market fluctuations may
also adversely affect the market price of our Common Stock.
Future sales of our Common Stock by our significant shareholders or us
may depress our stock price and impair our ability to raise funds in new share
offerings.
A small number of our shareholders
beneficially own a substantial amount of our Common Stock. As of April 14, 2010,
our six largest shareholders plus Leonard Schleifer, M.D, Ph.D., our Chief
Executive Officer, beneficially owned 51.1% of our outstanding shares of Common
Stock, assuming, in the case of our Chief Executive Officer, the conversion of
his Class A Stock into Common Stock and the exercise of all options held by him
which are exercisable within 60 days of April 14, 2010. As of April 14, 2010,
sanofi-aventis beneficially owned 14,799,552 shares of Common Stock,
representing approximately 18.6% of the shares of Common Stock then outstanding.
Under our investor agreement, as amended, with sanofi-aventis, sanofi-aventis
may not sell these shares until December 20, 2017 except under limited
circumstances and subject to earlier termination of these restrictions upon the
occurrence of certain events. Notwithstanding these restrictions, if
sanofi-aventis, or our other significant shareholders or we, sell substantial
amounts of our Common Stock in the public market, or the perception that such
sales may occur exists, the market price of our Common Stock could fall. Sales
of Common Stock by our significant shareholders, including sanofi-aventis, also
might make it more difficult for us to raise funds by selling equity or
equity-related securities in the future at a time and price that we deem
appropriate.
48
Our existing shareholders may be able to exert significant influence over
matters requiring shareholder approval.
Holders of Class A Stock, who are
generally the shareholders who purchased their stock from us before our initial
public offering, are entitled to ten votes per share, while holders of Common
Stock are entitled to one vote per share. As of April 14, 2010, holders of Class
A Stock held 21.5% of the combined voting power of all shares of Common Stock
and Class A Stock then outstanding, including any voting power associated with
any shares of Common Stock beneficially owned by such Class A Stock holders.
These shareholders, if acting together, would be in a position to significantly
influence the election of our directors and to effect or prevent certain
corporate transactions that require majority or supermajority approval of the
combined classes, including mergers and other business combinations. This may
result in our taking corporate actions that other shareholders may not
consider to be in their best interest and may affect the price of our Common
Stock. As of April 14, 2010:
-
our current executive officers and
directors beneficially owned 13.7% of our outstanding shares of Common Stock,
assuming conversion of their Class A Stock into Common Stock and the exercise
of all options held by such persons which are exercisable within 60 days of
April 14, 2010, and 28.1% of the combined voting power of our outstanding
shares of Common Stock and Class A Stock, assuming the exercise of all options
held by such persons which are exercisable within 60 days of April 14, 2010;
and
-
our six largest shareholders plus
Leonard S. Schleifer, M.D., Ph.D. our Chief Executive Officer, beneficially
owned 51.1% of our outstanding shares of Common Stock, assuming, in the case
of our Chief Executive Officer, the conversion of his Class A Stock into
Common Stock and the exercise of all options held by him which are exercisable
within 60 days of April 14, 2010. In addition, these seven shareholders held
56.3% of the combined voting power of our outstanding shares of Common Stock
and Class A Stock, assuming the exercise of all options held by our Chief
Executive Officer which are exercisable within 60 days of April 14, 2010.
Pursuant to an investor agreement,
as amended, sanofi-aventis has agreed to vote its shares, at sanofi-aventis’
election, either as recommended by our board of directors or proportionally with
the votes cast by our other shareholders, except with respect to certain change
of control transactions, liquidation or dissolution, stock issuances equal to or
exceeding 10% of the then outstanding shares or voting rights of Common Stock
and Class A Stock, and new equity compensation plans or amendments if not
materially consistent with our historical equity compensation
practices.
The anti-takeover effects of provisions of our charter, by-laws, and of
New York corporate law and the contractual “standstill” provisions in our
investor agreement with sanofi-aventis, could deter, delay, or prevent an
acquisition or other “change in control” of us and could adversely affect the
price of our Common Stock.
Our amended and restated certificate
of incorporation, our by-laws, and the New York Business Corporation Law contain
various provisions that could have the effect of delaying or preventing a change
in control of our company or our management that shareholders may consider
favorable or beneficial. Some of these provisions could discourage proxy
contests and make it more difficult for shareholders to elect directors and take
other corporate actions. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our Common Stock.
These provisions include:
-
authorization to issue “blank
check” preferred stock, which is preferred stock that can be created and
issued by the board of directors without prior shareholder approval, with
rights senior to those of our common shareholders;
-
a staggered board of directors, so
that it would take three successive annual meetings to replace all of our
directors;
-
a requirement that removal of
directors may only be effected for cause and only upon the affirmative vote of
at least eighty percent (80%) of the outstanding shares entitled to vote for
directors, as well as a requirement that any vacancy on the board of directors
may be filled only by the remaining directors;
-
any action required or permitted
to be taken at any meeting of shareholders may be taken without a meeting,
only if, prior to such action, all of our shareholders consent, the effect of
which is to require that shareholder action may only be taken at a duly
convened meeting;
-
any shareholder seeking to bring
business before an annual meeting of shareholders must provide timely notice
of this intention in writing and meet various other requirements; and
-
under the New York Business
Corporation Law, in addition to certain restrictions which may apply to
“business combinations” involving the Company and an “interested shareholder”,
a plan of merger or consolidation of the Company must be approved by
two-thirds of the votes of all outstanding shares entitled to vote thereon.
See the risk factor immediately above captioned
“Our existing shareholders may be able to exert significant influence
over matters requiring shareholder approval.”
49
Until the later of the fifth
anniversaries of the expiration or earlier termination of our antibody
collaboration agreements with sanofi-aventis or our aflibercept collaboration
with sanofi-aventis, sanofi-aventis will be bound by certain “standstill”
provisions, as amended, which contractually prohibit sanofi-aventis from
acquiring more than certain specified percentages of our Class A Stock and
Common Stock (taken together) or otherwise seeking to obtain control of the
Company.
In addition, we have a Change in
Control Severance Plan and our Chief Executive Officer has an employment
agreement that provides severance benefits in the event our officers are
terminated as a result of a change in control of the Company. Many of our stock
options issued under our Amended and Restated 2000 Long-Term Incentive Plan may
become fully vested in connection with a “change in control” of our company, as
defined in the plan. These contractual provisions may also have the effect of
deterring, delaying, or preventing an acquisition or other change in
control.