PALATIN TECHNOLOGIES INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10 - K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended June 30, 2016
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ___________ to __________
Commission file
number: 001-15543
PALATIN TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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95-4078884
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(State
or other jurisdiction of
incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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4B Cedar Brook Drive
Cranbury, New Jersey
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08512
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(Address
of principal executive offices)
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(Zip
Code)
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(609)
495-2200
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange
on
Which Registered
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Common
Stock, par value $.01 per share
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NYSE
MKT
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes ☑ No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
Yes
☑ No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☑ |
| (Do not check if a smaller reporting company) |
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☑
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates, computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of
the registrant’s most recently completed second fiscal
quarter (December 31, 2015): $44,069,665.
Indicate the number
of shares outstanding of each of the registrant’s classes of
common stock, as of the latest practicable date (September 16,
2016): 85,934,037.
PALATIN TECHNOLOGIES, INC
.
Table
of Contents
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Page
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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18
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Item
1B.
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Unresolved Staff
Comments
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38
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Item
2.
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Properties
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38
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Item
3.
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Legal
Proceedings
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38
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Item
4.
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Mine
Safety Disclosures
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38
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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39
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Item
6.
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Selected Financial
Data
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39
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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39
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Item
7A.
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Quantitative and
Qualitative Disclosures About Market Risk
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43
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Item
8.
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Financial
Statements and Supplementary Data
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44
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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67
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Item
9A.
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Controls and
Procedures
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67
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Item
9B.
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Other
Information
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67
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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68
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Item
11.
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Executive
Compensation
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72
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Item
12.
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Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
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78
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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81
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Item
14.
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Principal
Accountant Fees and Services
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81
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PART
IV
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Item
15.
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Exhibits, Financial
Statement Schedules
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82
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Forward-Looking
Statements
Statements in this
Annual Report on Form 10-K (this Annual Report), as well as oral
statements that may be made by us or by our officers, directors, or
employees acting on our behalf, that are not historical facts
constitute “forward-looking statements,” which are made
pursuant to the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, or the Exchange Act. The
forward-looking statements in this Annual Report do not constitute
guarantees of future performance. Investors are cautioned that
statements that are not strictly historical facts contained in this
Annual Report, including, without limitation, those relating to our
current or future financial performance, management’s plans
and objectives for future operations, ability to raise capital or
repay debt, if required, clinical trials and results, uncertainties
associated with product research and development, product plans and
performance, management’s assessment of market factors, as
well as statements regarding our strategy and plans and those of
our strategic partners, constitute forward-looking statements. In
some cases, you can identify forward-looking statements by
terminology such as “believe,” will,”
“may,” “estimate,” “continue,”
“anticipated,” “intend,”
“should,” “plan,” “expect,”
“predict,” “could,”
“potentially,” or the negative of these terms or other
similar expressions. Such forward-looking statements involve
substantial risks, uncertainties and other factors that could cause
our actual results to be materially different from our historical
results or from any results expressed or implied by such
forward-looking statements. Our future operating results are
subject to risks and uncertainties and are dependent upon many
factors, including, without limitation, the risks identified under
the caption “Risk Factors” and elsewhere in this Annual
Report, and any of those made in our other reports filed with the
Securities and Exchange Commission, or the SEC. Except as required
by law, we do not intend, and undertake no obligation, to publicly
update forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
In this
Annual Report, references to “we,” “our,”
“us,” the “Company” or
“Palatin” means Palatin Technologies, Inc. and its
subsidiary.
Overview
We are
a biopharmaceutical company developing targeted, receptor-specific
peptide therapeutics for the treatment of diseases with significant
unmet medical need and commercial potential. Our programs are based
on molecules that modulate the activity of the melanocortin and
natriuretic peptide receptor systems. Our primary product in
clinical development is bremelanotide for the treatment of
premenopausal women with hypoactive sexual desire disorder, or
HSDD, which is a type of female sexual dysfunction, or FSD, defined
as low desire with associated distress. In addition, we have drug
candidates or development programs for obesity, erectile
dysfunction, cardiovascular diseases, pulmonary diseases,
inflammatory diseases and dermatologic diseases.
The
following drug development programs are actively under
development:
●
Bremelanotide, an
as needed subcutaneous injectable peptide melanocortin receptor
agonist, for treatment of HSDD in premenopausal women.
Bremelanotide, which is a melanocortin agonist, is a synthetic
peptide analog of the naturally occurring hormone alpha-MSH
(melanocyte-stimulating hormone). The novel mechanism of action
involves activating endogenous melanocortin hormone pathways
involved in sexual response. Bremelanotide has completed the
efficacy portion of patient studies in the primary Phase 3 clinical
studies;
●
Melanocortin
receptor-4, or MC4r, compounds for treatment of obesity and
diabetes. Results of our studies involving MC4r peptides suggest
that certain of these peptides may have significant commercial
potential for treatment of conditions responsive to MC4r
activation, including FSD, HSDD, erectile dysfunction or ED,
obesity and diabetes;
●
PL-3994, a
natriuretic peptide receptor-A, or NPR-A, agonist, for treatment of
cardiovascular and pulmonary indications. PL-3994 is our lead
natriuretic peptide receptor product candidate, and is a synthetic
mimetic of the neuropeptide hormone atrial natriuretic peptide, or
ANP. PL-3994 is in development for treatment of heart failure,
acute exacerbations of asthma and refractory hypertension;
and
●
Melanocortin
receptor-1, or MC1r, agonist peptides for treatment of inflammatory
and dermatologic disease indications. Our MC1r peptide drug
candidates are highly specific, with substantially greater binding
and efficacy at MC1r than at other melanocortin receptors. We have
selected one of our MC1r peptide drug candidates, designated
PL-8177, as a clinical trial candidate.
The
following chart illustrates the status of our drug development
programs.
1
Our
Strategy
Key
elements of our business strategy include:
●
Using our
technology and expertise to develop and commercialize products in
our active drug development programs;
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Entering into
strategic alliances and partnerships with pharmaceutical companies
to facilitate the development, manufacture, marketing, sale and
distribution of product candidates that we are
developing;
●
Partially funding
our product development programs with the cash flow generated from
research collaboration and license agreements and any potential
future agreements with third parties; and
●
Completing
development and seeking regulatory approval of bremelanotide for
HSDD and our other product candidates.
Our
Melanocortin Receptor-Specific Programs
The
melanocortin system is involved in a large and diverse number of
physiologic functions. Therapeutic agents modulating this system
may have the potential to treat a variety of conditions and
diseases, including sexual dysfunction, obesity and related
disorders, pigmentation disorders and inflammation-related
diseases.
Bremelanotide for HSDD.
We are
developing subcutaneously administered bremelanotide for the
treatment of HSDD in premenopausal women. HSDD is characterized by
a decrease in sexual desire with significant personal distress or
interpersonal difficulty as a result of the lack of desire.
Bremelanotide is a melanocortin agonist with a mechanism of action
involving activation of endogenous neuronal pathways regulating
sexual arousal and desire responses.
We
initiated patient screening in our Phase 3 clinical study program
of bremelanotide for the treatment of HSDD in premenopausal women,
called the RECONNECT STUDY, in the fourth quarter of calendar 2014,
completed patient enrollment in the fourth quarter of calendar
2015, and completed the last patient visits in the double blind, or
efficacy, portion of the studies in the third quarter of calendar
2016. Topline results are projected early fourth quarter of
calendar 2016. The open-label safety extension portion of the
RECONNECT STUDY is continuing. We cannot assure you that the Phase
3 efficacy data will support approval of bremelanotide for HSDD or
that the U.S. Food and Drug Administration, or FDA, will approve a
new drug application, or NDA, for bremelanotide.
Phase 3 Clinical Program.
Prior to
initiating our Phase 3 RECONNECT STUDY
clinical program, we reached
preliminary agreement with the FDA on key aspects of the
bremelanotide efficacy Phase 3 pivotal registration studies,
including HSDD patient population, primary and key secondary
efficacy endpoints, general study design, dose selection and safety
monitoring. In addition, the FDA agreed that the Phase 2 data
adequately characterized blood pressure and heart rate signals of
bremelanotide. The FDA also agreed that the intranasal Definitive
QTc study (an electrocardiographic evaluation), the carcinogenicity
studies and the reproductive toxicity studies we conducted were
acceptable for NDA submission.
The
RECONNECT STUDY is being conducted in premenopausal women diagnosed
with HSDD, either with or without arousal difficulties. HSDD is the
single largest specific diagnosis in FSD. We enrolled a combined
total of approximately 1,250 randomized subjects in the two pivotal
efficacy studies, which are double blind placebo-controlled,
randomized parallel group studies. Each study had two arms, one a
1.75 mg bremelanotide dose and one a placebo. The double blind or
efficacy portion of each study consisted of a 24-week treatment
evaluation period, with primary and key secondary endpoints of
satisfying sexual events, or SSEs, the Female Sexual Function
Index, or FSFI, desire subdomain (a 28 day recall), and question 13
of the Female Sexual Distress Scale-Desire/Arousal/Orgasm, or
FSDS-DAO, questionnaire.
The
last patient visits for efficacy portion of the RECONNECT STUDY
were completed in the third quarter of calendar 2016. Patients in
the efficacy portion of the RECONNECT STUDY had the option, after
completion of the randomized portion of the study, to continue in
an open-label safety extension study, in which all patients receive
the 1.75 mg bremelanotide dose. The open-label safety extension
study has enrolled approximately 680 patients. The open-label
safety extension study will continue through the third quarter of
calendar 2017, and the purpose of the extension study is to gather
additional data on the safety of long-term and repeated use of
bremelanotide.
The
analysis of Phase 3 efficacy data is anticipated to be completed in
the fourth quarter of calendar 2016. Assuming we believe that the
Phase 3 data will support approval of bremelanotide for HSDD by
FDA, we will conduct drug interaction and other ancillary studies,
and certain chemistry, manufacturing and controls activities,
required for FDA approval in the fourth quarter of calendar 2016
and first half of calendar 2017. We anticipate submitting an NDA to
FDA for approval of bremelanotide for HSDD in mid-calendar 2017. We
cannot assure you that the Phase 3 data will support approval of
bremelanotide for HSDD or that the FDA will approve an NDA for
bremelanotide.
In the
RECONNECT STUDY patients self-administer bremelanotide with a
single-use autoinjector pen. The bremelanotide single-use
autoinjector pen, intended to be the commercial drug product, does
not have a visible needle, is stored at room temperature and is
easy to use. Women administer bremelanotide by pressing the
autoinjector pen collar against either their thigh or abdomen, and
the autoinjector pen automatically introduces the needle,
administers the dose of bremelanotide under the skin and audibly
signals when the drug has been delivered and the needle is
retracted.
2
Phase 2B Clinical Study Results.
The
bremelanotide RECONNECT STUDY was predicated on the results of a
Phase 2B clinical study of bremelanotide. The Phase 2B clinical
study was a multicenter, placebo-controlled, randomized, parallel
group, dose-finding trial testing three dose levels, 0.75 mg, 1.25
mg and 1.75 mg, of subcutaneously administered bremelanotide
against placebo in premenopausal women diagnosed with hypoactive
sexual desire disorder, female sexual arousal disorder or both. The
1.75 mg dose demonstrated clinically meaningful and statistically
significant results for all predefined endpoints and was
well-tolerated. Full data on the Phase 2B clinical study was
presented at the March 2013 annual meeting of the International
Society for the Study of Women’s Sexual Health, and was
published in
Women’s
Health
, 12:3425-337 (2016).
The
Phase 2B clinical study enrolled 395 premenopausal women across 66
sites within the United States and Canada, with patients randomized
to one of three bremelanotide treatment arms and a placebo arm for
16 weeks of treatment. The objective of the Phase 2B study was to
measure safety and efficacy in premenopausal women with hypoactive
sexual desire disorder, female sexual arousal disorder or both of
bremelanotide compared to placebo. In the Phase 2B study,
subcutaneous doses of bremelanotide and placebo were
self-administered by the patient prior to a sexual encounter. The
primary efficacy endpoint was change from baseline to end of study
in the number of SSEs, with pre-specified analysis of pooled 1.25
and 1.75 mg doses compared to placebo.
In the
Phase 2B clinical study, the primary endpoint data analysis of 327
premenopausal women with hypoactive sexual desire disorder, female
sexual arousal disorder or both showed statistically significant
and clinically meaningful increases in the number of SSEs, and
statistically significant and clinically meaningful improvement in
secondary endpoint measures of overall sexual functioning and
distress related to sexual dysfunction, for women taking
bremelanotide compared to placebo. Satisfying sexual events were
measured with an event log and overall sexual functioning and
distress related to sexual dysfunction were measured using
validated patient reported outcome measurement tools. Bremelanotide
showed a statistically significant increase from baseline in the
number of SSEs compared against placebo at both the 1.75 mg dose
and pooled results of the 1.75 and 1.25 mg doses. The mean increase
in SSEs at 1.75 mg dose levels was 0.8 SSEs per month, from 1.8 to
2.6, with a p value of 0.021 against placebo. For the pooled doses,
the mean increase in SSEs was 0.7 SSEs per month, from 1.6 to 2.4
(a 50% increase), with a p value of 0.018 against placebo. By
contrast, with placebo, the mean change from baseline was from 1.7
to 1.9 (a 12% increase) in SSEs. The 0.75 mg dose demonstrated a
response that was not significant different from
placebo.
The
mean change from baseline in a validated measurement tool of
overall sexual functioning, the FSFI total score, was 4.4 at the
1.75 mg dose level, compared to 1.88 for placebo, with a p value of
0.0021 against placebo. For the pooled doses, the FSFI total score
mean change from baseline was 3.55, compared to 1.88 for placebo,
with a p value of 0.0017 against placebo. The FSFI is a 19-item
questionnaire measuring improvement in arousal, desire and overall
sexual function.
The
mean change from baseline in a validated measurement tool of
distress related to sexual dysfunction, the FSDS-DAO total score,
was -13.1 at the 1.75 mg dose level, compared to -6.8 for placebo,
with a p value of 0.0005 against placebo. For the pooled doses, the
FSDS-DAO total score mean change from baseline was -11.1, compared
to -6.8 for placebo, with a p value of 0.036 against placebo. The
FSDS-DAO is a 15-item questionnaire that measures personal distress
associated with HSDD.
A
significantly higher percentage of women receiving the 1.75 mg
bremelanotide dose – 55% – achieved a clinically
meaningful change from baseline of at least one satisfying sexual
event, compared to 37% of women receiving placebo. In addition,
compared against placebo a significantly higher percentage of women
also achieved a clinically meaningful improvement in sexual
function, as measured by the FSFI (53% vs. 29%), and a clinically
meaningful decrease in distress associated with sexual dysfunction
as measured by the FSDS-DAO (69% vs. 45%).
Using a
validated self-assessment questionnaire of treatment benefit, 79.5%
of blinded patients receiving the 1.75 mg dose of bremelanotide
reported they benefited from taking the drug, compared to 48.4% of
blinded patients receiving placebo.
Bremelanotide was
well-tolerated during the Phase 2B clinical study. The most common
types of treatment-emergent adverse events reported more frequently
in the bremelanotide arms were facial flushing, nausea, emesis and
headache, which were mainly mild-to-moderate in severity. Adverse
events that most commonly led to discontinuation were nausea and
emesis, with less than 3% discontinuation due to an adverse event.
Twenty-six patients, evenly distributed among placebo and active
arms of the Phase 2B clinical study, met the predefined blood
pressure withdrawal criteria. Drug treated patients had
approximately a 2 mm Hg change in blood pressure, predominately
during the first four hours following dosing. No serious adverse
events were attributable to bremelanotide during the
trial.
3
Medical Need — HSDD.
Hypoactive
sexual desire disorder, either with or without arousal
difficulties, is the largest single category of FSD. Female sexual
dysfunction is a multifactorial condition that has anatomical,
physiological, medical, psychological and social components, and is
defined as persistent or recurring problems during one or more of
the stages of sexual response with associated distress. HSDD has a
significant impact on a patient’s self-image, relationships
and general well-being. The 2006 PRESIDE (Prevalence of Female
Sexual Problems Associated with Distress and Determinants of
Treatment Seeking) study, a cross-sectional, population-based
survey of 31,581 female adult respondents in the United States
published in 2008 in the journal
Obstetrics & Gynecology
, found that
approximately 22% of women reported a sexual problem and 11% were
women with HSDD. Based on the number of premenopausal women in the
United States according to the U.S. Census, the presenting market
size of premenopausal women with primary HSDD is at least 5.1
million women.
Subcutaneous Bremelanotide.
Bremelanotide, which is believed to act through activation of
melanocortin receptors in the central nervous system, is a
first-in-class pharmaceutical agent in development as a treatment
of HSDD. Bremelanotide is intended for as needed use and is
self-administered by the patient thirty minutes to one hour prior
to anticipated sexual activity. We selected a simple and
patient-friendly single-use autoinjector pen used in the RECONNECT
STUDY and intended for commercialization of the bremelanotide drug
product.
Partnering.
In August 2014, we entered
into a license agreement with Gedeon Richter to co-develop and
commercialize bremelanotide for FSD in the European Union, other
European countries and additional selected countries. We received
€7.5 million ($9.8 million) in total upfront payments from
Gedeon Richter, and a milestone payment of €2.5 million ($3.1
million) upon the initiation of our Phase 3 clinical trial program
in the United States. On September 16, 2015, we entered into a
termination agreement pursuant to which we and Gedeon Richter
agreed to mutually and amicably terminate the license agreement. In
connection with this termination, all rights and licenses to
co-develop and commercialize bremelanotide for FSD indications held
by Gedeon Richter terminated and reverted back to us. Neither we
nor Gedeon Richter have any future material obligations under the
license agreement.
We have
worldwide rights for bremelanotide for FSD, HSDD and all other
indications. We are in active discussions with potential partners
for U.S. marketing and commercialization rights for bremelanotide
for HSDD. We may not be able to enter into suitable agreements with
potential partners on acceptable terms, if at all.
Prior Clinical Trials.
We have
completed several Phase 1 clinical studies in which various safety
parameters, including blood pressure effects of subcutaneously
administered bremelanotide, were studied. Based in part on these
studies, our Phase 2B clinical trial assessed the magnitude and
duration of blood pressure effect, and determined that subcutaneous
administration of selected doses of bremelanotide for treatment of
HSDD in premenopausal women provides acceptable control of blood
pressure effects. We have also completed clinical studies involving
an alternative route of administration. Bremelanotide has been
administered in 34 clinical studies involving about 3,000 subjects,
including studies of premenopausal and postmenopausal women with
HSDD and other forms of FSD and men with ED.
MC1r Peptide Agonists.
We have conducted
preclinical animal studies with MC1r peptide drug candidates for
inflammatory disease and autoimmune indications. The MC1r is
upregulated in a number of diseases, including inflammatory bowel
disease, nephritis, which is inflammation of the kidneys, and
rheumatoid arthritis, and ocular indications such as uveitis and
dry eye. We believe that MC1r peptides have broad anti-inflammatory
effects and appear to utilize mechanisms engaged by the endogenous
melanocortin system in regulation of the immune system and
resolution of pro-inflammatory responses. MC1r peptides also have
potential application in a number of dermatologic indications,
including vitiligo and erythropoietic protoporphyria.
Our
MC1r peptide drug candidates are highly specific, with
substantially greater binding and efficacy at MC1r than at other
melanocortin receptors. In vitro safety studies have shown that our
MC1r peptide drug candidates have no activity in a wide range of
various receptors, ion channels and kinases. We have selected one
of our MC1r peptide drug candidates, designated PL-8177, as a
clinical trial candidate.
Animal
studies that we have conducted with our MC1r peptide drug
candidates have shown positive results in experimental models of
inflammatory bowel disease, uveitis and nephritis. We are
continuing to conduct studies on a number of different indications.
We have completed preclinical toxicology testing on PL-8177 and
chemistry, controls and manufacturing activities to support Phase 1
studies, and anticipate filing an IND application on
PL-8177.
Next Generation MC4r Peptide and Small Molecule
Agonists.
We have developed a series of highly selective
MC4r peptides and are developing orally active small molecules. In
developing these compounds, we examined effectiveness in animal
models of sexual response, obesity and related metabolic signals,
and also determined cardiovascular effects, primarily looking at
changes in blood pressure. Results of these studies suggest that
certain of these compounds may have significant commercial
potential for treatment of conditions responsive to MC4r
activation, including HSDD, FSD, ED, obesity and diabetes. We are
engaged in preclinical activities with these compounds, and are
evaluating potential pharmaceutical applications.
4
We have
selected an internal lead compound for obesity, designated PL-8905,
which has over 100-fold functional selectivity for MC4r over MC1r
with minimal effect on blood pressure and limited central nervous
system penetration. PL-8905 exhibits significant chemical and
metabolic stability.
Obesity.
Obesity is a multifactorial
condition with numerous biochemical components relating to satiety
(feeling full), energy utilization and homeostasis. A number of
different metabolic and hormonal pathways are being evaluated by
companies around the world in efforts to develop better treatments
for obesity. Scientific research has established that melanocortin
receptors have a role in eating behavior and energy homeostasis,
and that melanocortin receptor agonists can decrease food intake
and induce weight loss. With a previous partner, we completed
clinical proof-of-concept studies for the MC4r mechanism in
obesity, which met the primary objectives of significant decrease
in food intake and weight loss.
Other Melanocortin Receptor-Specific
Programs.
We are continuing drug discovery efforts in the
melanocortin receptor field, primarily developing peptide
compounds, including highly selective MC1r agonists and peptides
specific for MC4r, including both agonists and
antagonists.
Our
Natriuretic Peptide Receptor-Specific Programs
The
natriuretic peptide receptor system has numerous cardiovascular
functions, and therapeutic agents modulating this system may be
useful in treatment of heart failure, acute asthma, other pulmonary
diseases and hypertension. While the therapeutic potential of
modulating this system is well appreciated, development of
therapeutic agents has been difficult due, in part, to the short
biological half-life of native peptide agonists.
We have
designed and are developing candidate drugs that are selective for
different natriuretic peptide receptors, including NPR-A,
natriuretic peptide receptor B, or NPR-B, natriuretic peptide
receptor C, or NPRC, and both NPR-A and NPR-B.
We are
in active discussions with potential partners for marketing and
commercialization rights in the United States and the rest of the
world for PL-3994 and our related candidate drugs. We may not be
able to enter into suitable agreements on acceptable terms with
potential partners, if at all.
PL-3994.
PL-3994 is our lead natriuretic
peptide receptor product candidate, and is a synthetic mimetic of
the neuropeptide hormone ANP and an NPR-A agonist. PL-3994 is in
development for treatment of heart failure, acute exacerbations of
asthma and refractory hypertension. PL-3994 activates NPR-A, a
receptor known to play a role in cardiovascular homeostasis.
Consistent with being an NPR-A agonist, PL-3994 increases plasma
cyclic guanosine monophosphate, or cGMP, levels, a pharmacological
response consistent with the effects of endogenous (naturally
produced) natriuretic peptides on cardiovascular function and
smooth muscle relaxation. PL-3994 also decreases activity of the
renin-angiotensin-aldosterone system, or RAAS, a hormone system
that regulates blood pressure and fluid balance. The RAAS system is
frequently over-activated in heart failure patients, leading to
worsening of cardiovascular function.
PL-3994, our lead
product development candidate which is ready for Phase 2 safety and
efficacy studies, is one of a number of natriuretic peptide
receptor agonist compounds we have developed. PL-3994 is a
synthetic molecule incorporating a novel and proprietary amino acid
mimetic structure, and has an extended circulation half-life and
metabolic stability compared to endogenous ANP. Based on the
half-life and pharmacokinetics, we believe that PL-3994 is amenable
to once daily chronic use subcutaneous administration.
PL-3994 for Heart Failure.
Heart
failure is an illness in which the heart is unable to pump blood
efficiently, and includes acutely decompensated heart failure with
dyspnea (shortness of breath) at rest or with minimal activity.
Endogenous natriuretic peptides have a number of beneficial
effects, including vasodilation (relaxation of blood vessels),
natriuresis (excretion of sodium) and diuresis (excretion of
fluids).
Patients who have
been admitted to the hospital with an episode of worsening heart
failure have an increased risk of either death or hospital
readmission in the three months following discharge. Up to 15% of
patients die in this period and as many as 30% need to be
readmitted to the hospital. We believe that decreasing mortality
and hospital readmission in patients discharged following
hospitalization for worsening heart failure is a large unmet
medical need for which PL-3994 may be effective. PL-3994 could
potentially be utilized as an adjunct to existing heart failure
medications, and may, if successfully developed, be
self-administered by patients as a subcutaneous injection following
hospital discharge. We believe that PL-3994, through activation of
NPR-A, may, if successful, reduce cardiac hypertrophy (increase in
heart size due to disease), which is an independent risk factor for
cardiovascular morbidity and mortality.
5
According to a
report from the American Heart Association published in 2014 in the
journal
Circulation
, an
estimated 5.7 million Americans suffer from heart failure, with
870,000 new cases of heart failure diagnosed each year, with
disease incidence expected to increase with the aging of the
American population. Heart failure has tremendous human and
financial costs. The same report estimated that the 2012 total
costs in the United States for heart failure were $30.7 billion,
with heart failure constituting the leading cause of
hospitalization in people over 65 years of age and with over 1
million hospital discharges for heart failure in 2010. Heart
failure is a high mortality disease, with approximately one-half of
heart failure patients dying within five years of initial
diagnosis.
Patient
populations have been identified which have reduced levels of
endogenous active natriuretic peptides, including endogenous active
ANP. The reduced levels have a variety of causes, including
mutations in endogenous natriuretic peptides and in enzymes
necessary to convert natriuretic peptide sequences to their active
form. Patients with reduced levels of endogenous active natriuretic
peptides are reported to have a poor response to current drug
therapies and to have increased rates of cardiac remodeling and
cardiac events.
We
believe that PL-3994 has the potential to treat heart failure with
preserved ejection fraction, or HFpEF, which is a high unmet
medical need with no approved treatment options, heart failure with
reduced ejection fraction, or HFrEF, and patients with reduced
levels of endogenous active natriuretic peptides, such as corin
deficiencies, which is a high unmet medical need in patients with a
poor response to current therapies, with the objective to restore
normal natriuretic peptide function.
We have
planned a repeat dose Phase 2 clinical trial in patients with
HFpEF, HFrEF and corin deficiency to evaluate safety profiles and
symptom relief as well as pharmacokinetic (period to metabolize or
excrete the drug) and pharmacodynamic (period of action or effect
of the drug) endpoints. Analysis will include cardiac imaging and
measurement of left ventricular ejection fraction. Contingent on
adequate available funds, we intend to initiate this trial in the
first half of calendar 2017. Assuming favorable results from this
trial, we have planned a repeat dose Phase 2 proof-of-principle
clinical trial in patients with heart failure, which would involve
treatment for a three- to six-month period, and would evaluate
safety, cardiac function, effects on remodeling, symptom
improvement and hospitalization admission rates. Contingent on
adequate available funds, the proof-of-principle Phase 2 trial will
be initiated following completion of the first repeat dose Phase 2
clinical trial.
PL-3994 for Acute Exacerbations of
Asthma.
Research over the past two decades has demonstrated
potent bronchodilator effects with both systemic and inhalation
administration of natriuretic peptides. NPR-A agonism is known to
relax smooth muscles in airways and works through a pathway
independent of the beta-2 adrenergic receptor. Preclinical testing
demonstrated potent airway smooth muscle relaxation in guinea pig
and human tissues using PL-3994, and animal studies in sensitized
guinea pigs have demonstrated a bronchodilator effect with PL-3994
using both subcutaneous and inhalation administration.
Acute
exacerbations of asthma, also called acute severe asthma, is an
ongoing, unremitting asthma episode in which asthma symptoms do not
adequately respond to initial bronchodilator therapy. Inhaled
beta-2 adrenergic receptor agonists, such as albuterol, inhaled
anticholinergic drugs, such as ipratropium, and systemic
corticosteroids are primary treatments for episodes of acute
exacerbations of asthma. Some patients with acute exacerbations of
asthma become unresponsive to beta-2 adrenergic receptor agonists,
significantly limiting treatment options and increasing risk.
Patients who do not respond to initial therapy are at risk of
severe complications. We intend to initially target PL-3994 as a
treatment for those at-risk unresponsive patients.
According to a 2014
report from the National Center for Environmental Health, Asthma
Prevalence in the United States, in 2010 there were 1.8 million
emergency room visits and 439,000 hospitalizations attributed to
asthma. Approximately 25.7 million Americans have
asthma.
Endogenous
natriuretic peptides have a very short half-life, due primarily to
degradation by neutral endopeptidase and clearance through the
natriuretic peptide clearance receptor. PL-3994 is resistant to
neutral endopeptidase and clears from the body much more slowly
than endogenous natriuretic peptides. PL-3994 has a blood-plasma
half-life of at least three hours in humans when administered by
subcutaneous injection, with biological effects seen for over eight
hours post-administration.
Clinical Studies with PL-3994.
Human
clinical studies of PL-3994 commenced with a Phase 1 trial, which
concluded in 2008. This was a randomized, double-blind,
placebo-controlled study in 26 healthy volunteers who received
either PL-3994 or a placebo subcutaneously. The evaluations
included safety, tolerability, pharmacokinetics and several
pharmacodynamic endpoints, including levels of cGMP. Dosing
concluded with the successful achievement of the primary endpoint
of the study, a pre-specified reduction in systemic blood pressure.
No volunteer experienced a serious or severe adverse event.
Elevations in plasma cGMP levels, increased diuresis and increased
natriuresis were all observed for several hours after single
subcutaneous doses.
6
Later
in 2008, we conducted a Phase 2A trial in volunteers with
controlled hypertension who were receiving one or more conventional
antihypertensive medications. In this trial, which was a
randomized, double-blind, placebo-controlled, single ascending dose
study in 21 volunteers, the objective was to demonstrate that
PL-3994 can be given safely to patients taking antihypertensive
medications commonly used in heart failure and hypertension
patients. Dosing concluded with the successful achievement of the
primary endpoint of the study, a pre-specified reduction in
systemic blood pressure. No volunteer experienced a serious or
severe adverse event. Elevations in plasma cGMP levels were
observed for several hours after single subcutaneous doses. Based
on the studies to date, PL-3994 is ready for Phase 2 safety and
efficacy studies.
Administration of PL-3994.
For heart
failure and refractory hypertension indications we believe that
subcutaneous administration of PL-3994 may be preferable. PL-3994
is well absorbed through the subcutaneous route of administration.
In human studies, the pharmacokinetic and pharmacodynamic
half-lives were on the order of hours, significantly longer than
the comparable half-lives of endogenous natriuretic peptides. We
believe that subcutaneous PL-3994, if successful, will be
appropriate for self-administration by patients, similar to insulin
and other self-administered drugs. For asthma indications we
believe that inhalation administration of PL-3994 may be preferable
to subcutaneous or other systemic administration.
Technologies
We Use
We used
a rational drug design approach to discover and develop proprietary
peptide, peptide mimetic and small molecule agonist compounds,
focusing on melanocortin and natriuretic peptide receptor systems.
Computer-aided drug design models of receptors are optimized based
on experimental results obtained with peptides and small molecules
that we develop. With our approach, we believe we are developing an
advanced understanding of the factors which drive
agonism.
We have
developed a series of proprietary technologies used in our drug
development programs. One technology employs novel amino acid
mimetics in place of selected amino acids. These mimetics provide
the receptor-binding functions of conventional amino acids while
providing structural, functional and physiochemical advantages. The
amino acid mimetic technology is employed in PL-3994, our compound
in development for treatment of heart failure, acute exacerbations
of asthma and refractory hypertension.
Some
compound series have been derived using our proprietary and
patented platform technology, called MIDAS™, or
M
etal
I
on-induced
D
istinctive
A
rray of
S
tructures. This technology employs
metal ions to fix the three-dimensional configuration of peptides,
forming conformationally rigid molecules that remain folded
specifically in their active state. These MIDAS molecules are
generally simple to synthesize, are chemically and proteolytically
stable, and have the potential to be orally bioavailable. In
addition, MIDAS molecules are information-rich and provide data on
structure-activity relationships that may be used to design small
molecule, non-peptide drugs.
Amount
Spent on Research and Development Activities
Research and
development expenses were approximately $43.1 million for the
fiscal year ended June 30, 2016, or fiscal 2016, $24.6 million for
the fiscal year ended June 30, 2015, or fiscal 2015, and $10.8
million for the fiscal year ended June 30, 2014, or fiscal
2014.
Competition
General.
Our products under development
will compete on the basis of quality, performance, cost
effectiveness and application suitability with numerous established
products and technologies. We have many competitors, including
pharmaceutical, biopharmaceutical and biotechnology companies.
Furthermore, there are several well-established products in our
target markets that we will have to compete against. Products using
new technologies which may be competitive with our proposed
products may also be introduced by others. Most of the companies
selling or developing competitive products have financial,
technological, manufacturing and distribution resources
significantly greater than ours and may represent significant
competition for us. In addition, if any of our product candidates
are approved by FDA, they will eventually face competition from
generic versions that will sell at significantly reduced prices, be
preferred by managed care and health insurance payers, and be
eligible for automatic pharmacy substitution even when a prescriber
writes a prescription for our product. The timing and extent of
future generic competition is dependent upon both our intellectual
property rights and the FDA regulatory process, but cannot be
accurately predicted.
The
pharmaceutical and biotechnology industries are characterized by
extensive research efforts and rapid technological change. Many
biopharmaceutical companies have developed or are working to
develop products similar to ours or that address the same markets.
Such companies may succeed in developing technologies and products
that are more effective or less costly than any of those that we
may develop. Such companies may be more successful than us in
developing, manufacturing and marketing products.
7
We
cannot guarantee that we will be able to compete successfully in
the future or that developments by others will not render our
proposed products under development or any future product
candidates obsolete or noncompetitive or that our collaborators or
customers will not choose to use competing technologies or
products.
Bremelanotide for Treatment of HSDD.
There is competition and financial incentive to develop, market and
sell drugs for the treatment of HSDD and other forms of FSD.
Flibanserin, sold under the trade name Addyi®, is the only
drug currently approved in the United States for treatment of HSDD.
Flibanserin, a non-hormonal oral serotonin 5-HT1A agonist, 5-HT2A
antagonist, which requires chronic dosing, was approved by the FDA
on August 18, 2015 for treatment of premenopausal women with HSDD.
The FDA approval included a risk evaluation and mitigation
strategy, or REMS, because of the increased risk of severe
hypotension and syncope due to the interaction between flibanserin
and alcohol, and a Boxed Warning to highlight the risks of severe
hypotension and syncope in patients who drink alcohol during
treatment with flibanserin, in those who also use moderate or
strong CYP3A4 inhibitors, and in those who have liver impairment.
Approval by the FDA followed a positive FDA advisory committee
recommendation in June 2015. We are aware of several other drugs at
various stages of development, most of which are taken on a
chronic, typically once-daily, basis. An oral fixed-dose
combination of two antidepressants, bupropion and trazodone, is
reported to be entering Phase 2 studies in premenopausal women with
HSDD. Another company is developing two different oral fixed-dose
combination drugs, one a combination of sildenafil and testosterone
and the other a combination of testosterone and buspirone
hydrochloride, and has conducted Phase 2 studies. Libigel®, a
testosterone gel, completed two Phase 3 efficacy trials for
treatment of FSD in surgically post-menopausal women, but did not
show statistical separation from placebo in those trials. Intrinsa,
a transdermal testosterone patch, successfully completed a Phase 3
clinical program, but was not approved in the United States based
on potential long-term use safety risks of cancer and
cardiovascular adverse events. There are other companies reported
to be developing new drugs for FSD indications, some of which may
be in clinical trials in the United States or elsewhere. We are not
aware of any company actively developing a melanocortin receptor
agonist drug for HSDD.
PL-3994 for Heart Failure Indications.
Nesiritide (sold under the trade name Natrecor®), a
recombinant human B-type natriuretic peptide drug, is marketed in
the United States by Scios Inc., a Johnson & Johnson company.
Nesiritide is approved for treatment of acutely decompensated
congestive heart failure patients who have dyspnea at rest or with
minimal activity. Other peptide drugs, including carperitide, a
recombinant human atrial natriuretic peptide drug, and ularitide, a
synthetic form of urodilatin, a naturally occurring human
natriuretic peptide related to atrial natriuretic peptide, have
been investigated for treatment of congestive heart failure, but we
are not aware of any active development in the United States. We
are aware of other companies developing intravenously administered
natriuretic peptide drugs, with at least one reported to have
completed Phase 2 clinical trials for acute heart failure. A
combination drug comprised of sacubitril and valsartan developed by
Novartis AG, sold under the trade name Entresto®, inhibits
both the angiotensin II receptor and neprilysin (an enzyme which
inactivates endogenous active natriuretic peptides). This
combination drug, which was approved by the FDA in July 2015,
results in increases of endogenous active ANP levels, and thus has
a mechanism of action with similarities to PL-3994. In a Phase 3
trial, the combination drug was compared to an
angiotensin-converting-enzyme inhibitor, enalapril, in heart
failure patients with reduced ejection fraction. It significantly
improved the rate of death from cardiovascular causes,
significantly reduced hospitalization for heart failure and
significantly improved heart failure symptoms. This combination
drug demonstrated that upregulation of the natriuretic peptide
system in combination with angiotensin-converting-enzyme inhibition
is superior to angiotensin-converting-enzyme inhibition alone, and
thus provides validation of the natriuretic peptide system as a
target for improving outcomes in treating heart failure patients.
In addition, there are a number of approved drugs and drugs in
development for treatment of heart failure through mechanisms or
pathways other than agonism of NPR-A.
PL-3994 for Acute Exacerbations of Asthma
Indications.
The asthma market is intensively competitive,
with substantial competition and financial incentive to develop,
market and sell drugs for treatment of asthma, with projected costs
of prescription drugs of $5.9 billion in the United States in 2010.
We are aware of companies developing drugs for the specific
indications of either acute exacerbations of asthma or acute severe
asthma, including at least one company with a drug reported to be
currently in clinical trials. Certain of these drugs under
development work by mechanisms of action different from the
mechanisms of action of currently approved products. In addition, a
number of clinical trials are conducted by hospitals, research
institutes and others exploring various methods and combinations of
drugs to treat acute exacerbations of asthma. There are a number of
drugs and therapies currently used to treat acute exacerbations of
asthma, including administration of oral or intravenous systemic
steroids, use of oxygen or heliox, a mixture of helium and oxygen,
nebulized short-acting beta-2 adrenergic receptor agonists,
intravenous or nebulized anticholinergic agents and, for patients
in or approaching respiratory arrest, intubation and mechanical
ventilation. However, each of these drugs or therapies has
recognized limitations or liabilities, and we believe that there
remains an unmet medical need for a safe and effective treatment
for acute exacerbations of asthma. We are not aware of any other
company actively developing a drug to treat asthma using a
natriuretic peptide receptor pathway.
8
MC4r Peptides for Erectile Dysfunction.
Leading drugs approved for erectile dysfunction, or ED, indications
are PDE-5 inhibitors which target the vascular system, such as
sildenafil (sold under the trade name Viagra®), vardenafil
(sold under the trade name Levitra®) and tadalafil (sold under
the trade name Cialis®). Other drugs approved for ED
indications include alprostadil for injection (sold under the trade
name Caverject Impulse® among others), which is injected
directly into the penis, and alprostadil in urethral suppository
format (sold under the trade name MUSE®). In addition, a
variety of devices, including vacuum devices and surgical penile
implants, have been approved for ED indications. We are aware of a
number of companies developing new drugs for ED indications, some
of which are in clinical trials in the United States and elsewhere.
We are not aware of any company actively developing a melanocortin
receptor agonist drug for ED.
Obesity.
There are a number of
FDA-approved drugs and medical devices for the treatment of
obesity, and a large number of products in clinical development by
other companies, including products which target melanocortin
receptors. At least one Phase 2 study has been reported on use of
an MC4r agonist for obesity indications.
MC1r Peptides for Dermatologic and
Inflammatory Disease-Related Indications.
Many dermatologic
and inflammatory disease-related indications are treated using
systemic steroids or immunosuppressant drugs, both of which have
side effects which can be dose limiting. There are a large number
of approved biological drugs and biological drugs under development
for treatment of dermatologic and inflammatory disease-related
indications.
Patents
and Proprietary Information
Patent Protection.
Our success will
depend in substantial part on our ability to obtain, defend and
enforce patents, maintain trade secrets and operate without
infringing upon the proprietary rights of others, both in the
United States and abroad. We own a number of issued United States
patents and have pending United States patent applications, many
with issued or pending counterpart patents in selected foreign
countries. We seek patent protection for our technologies and
products in the United States and those foreign countries where we
believe patent protection is commercially important.
We own
two issued United States patents claiming the bremelanotide
substance and an issued patent claiming the bremelanotide substance
in each of Australia, Austria, Belgium, Brazil, Canada, Cyprus,
Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland,
Italy, Japan, Korea, Luxembourg, Mexico, Monaco, Netherlands, New
Zealand, Portugal, Spain, Sweden, Switzerland, and the United
Kingdom. The issued United States patents have a term until 2020,
which term may be subject to extension for a maximum period of up
to five years as compensation for patent term lost during drug
development and the FDA regulatory review process, pursuant to the
Drug Price Competition and Patent Term Restoration Act of 1984, or
the Hatch-Waxman Amendments. Whether we will be able to obtain
patent term extensions under the Hatch-Waxman Amendments and the
length of any such extension cannot be determined until the FDA
approves for marketing, if ever, a product in which bremelanotide
is the active ingredient. In addition, the claims of issued patents
covering bremelanotide may not provide meaningful protection.
Further, third parties may challenge the validity or scope of any
issued patent, and under the Hatch-Waxman Amendments, potentially
receive approval of a competing generic version of our product or
products even before a court rules on the validity or infringement
of our patents.
We own
an issued United States patent and pending patent applications in
the United States for methods of treating FSD with bremelanotide,
and related patent applications are pending in Australia, Brazil,
Canada, China, Colombia, Georgia, Hong Kong, India, Indonesia,
Israel, Japan, Korea, Malaysia, Mexico, New Zealand, Philippines,
Singapore, South Africa, Ukraine, Vietnam and before the European
and Eurasian patent offices. The issued United States patent has a
term until 2033. Whether we will be able to obtain a patent term
extension in the United States under the Hatch-Waxman Amendments,
assuming that a relevant patent issues in the United States, and
the length of any such extension, cannot be determined until the
FDA approves for marketing, if ever, a product utilizing
bremelanotide by methods claimed in the patent. Pending
applications in the United States and elsewhere in the world have a
presumptive term, if a patent is issued, until 2033.
We have
patents and patent applications on an alternative class of
melanocortin receptor-specific peptides for treatment of sexual
dysfunction and other indications, including obesity, consisting of
two issued patents in the United States, an issued patent in each
of Australia, Canada, China, Israel, Mexico, New Zealand, Japan and
Russia, and pending patent applications on the same class in
Brazil, India, Korea, and South Africa and before the European
patent office. The presumptive term of the issued patents and
pending patent applications is until 2029. We also have patents and
pending patent applications for a second class of alternative
melanocortin receptor-specific peptides for treatment of sexual
dysfunction and other indications, including obesity, consisting of
issued patents in the United States, Australia, China, Japan,
Mexico, New Zealand, Russia, and South Africa and pending patent
applications on the same class in Brazil, Canada, China, India,
Israel, Korea, and before the European patent office. The
presumptive term of the issued patents and pending patent
applications is until 2030. Until one or more product candidates
covered by a claim of one of these patents and patent applications
are developed for commercialization, which may never occur, we
cannot evaluate the duration of any potential patent term extension
under the Hatch-Waxman Amendments.
9
We own
issued patents in the United States, Mexico, New Zealand, South
Africa and Russia claiming highly selective MC1r agonist peptides
for treatment of inflammation-related diseases and disorders and
related indications, and pending patent applications on two broad
classes of highly selective MC1r agonist peptides in the United
States, Australia, Brazil, Canada, China, India, Israel, Japan,
Korea, and Mexico and before the European patent office. The
presumptive term of the issued patents and pending patent
applications is until 2030. Until one or more product candidates
covered by a claim of one of these patent applications are
developed for commercialization, which may never occur, we cannot
evaluate the duration of any potential patent term extension under
the Hatch-Waxman Amendments.
We own
two issued United States patents claiming the PL-3994 substance and
other natriuretic peptide receptor agonist compounds that we have
developed and an issued United States patent claiming a precursor
molecule to the PL-3994 substance, both of which expire in 2027.
Corresponding patents on the PL-3994 substance and other
natriuretic peptide receptor agonist compounds were issued in
Australia, Austria, Belgium, China, Colombia, Denmark, Finland,
France, Germany, Hong Kong, Hungary, India, Ireland, Israel, Italy,
Japan, Korea, Mexico, Netherlands, Philippines, Russia, South
Africa, Spain, Sweden, Switzerland, and the United Kingdom, with
terms until 2027. Patent applications on the PL-3994 substance and
other natriuretic peptide receptor agonist compounds are pending in
Brazil and Canada, with presumptive terms until 2027. Applications
claiming precursor molecules for the PL-3994 substance and other
compounds have issued in the United States, Australia, China,
France, Germany, Hong Kong, India, Ireland, Israel, Japan, Mexico,
Netherlands, Philippines, Korea, South Africa, Sweden, Switzerland
and the United Kingdom, and expire in 2027. Patent applications on
the precursor molecules are pending in Brazil, Canada, and before
the Eurasian Patent Office, with presumptive terms until 2027. We
also own an issued United States patent claiming use of the PL-3994
substance for treatment of acute asthma and chronic obstructive
pulmonary disease, which expires in 2031. We do not know the full
scope of patent coverage we will obtain, or whether any patents
will issue other than the patents already issued. Until one or more
product candidates covered by a claim of the issued patents or one
of these patent applications are developed for commercialization,
which may never occur, we cannot evaluate the duration of any
potential patent term extension under the Hatch-Waxman
Amendments.
We
additionally have 31 issued United States patents on melanocortin
receptor specific peptides and small molecules, and three issued
United States patents on natriuretic peptide receptor agonist
compounds, but we are not actively developing any product candidate
covered by a claim of any of these patents.
In the
event that a third party has also filed a patent application
relating to an invention we claimed in a patent application, we may
be required to participate in an interference proceeding
adjudicated by the United States Patent and Trademark Office to
determine priority of invention. The possibility of an interference
proceeding could result in substantial uncertainties and cost, even
if the eventual outcome is favorable to us. An adverse outcome
could result in the loss of patent protection for the subject of
the interference, subjecting us to significant liabilities to third
parties, the need to obtain licenses from third parties at
undetermined cost, or requiring us to cease using the
technology.
Future Patent Infringement.
We do not
know for certain that our commercial activities will not infringe
upon patents or patent applications of third parties, some of which
may not even have been issued. Although we are not aware of any
valid United States patents which are infringed by bremelanotide or
PL-3994, we cannot exclude the possibility that such patents might
exist or arise in the future. We may be unable to avoid
infringement of any such patents and may have to seek a license,
defend an infringement action, or challenge the validity of such
patents in court. Patent litigation is costly and time consuming.
If such patents are valid and we do not obtain a license under any
such patents, or we are found liable for infringement, we may be
liable for significant monetary damages, may encounter significant
delays in bringing products to market, or may be precluded from
participating in the manufacture, use or sale of products or
methods of treatment covered by such patents.
Proprietary Information.
We rely on
proprietary information, such as trade secrets and know-how, which
is not patented. We have taken steps to protect our unpatented
trade secrets and know-how, in part through the use of
confidentiality and intellectual property agreements with our
employees, consultants and certain contractors. If our employees,
scientific consultants, collaborators or licensees develop
inventions or processes independently that may be applicable to our
product candidates, disputes may arise about the ownership of
proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become our property,
but may remain the property of those persons or their employers.
Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights.
10
If
trade secrets are breached, our recourse will be solely against the
person who caused the secrecy breach. This might not be an adequate
remedy to us because third parties other than the person who causes
the breach will be free to use the information without
accountability to us. This is an inherent limitation of the law of
trade secret protection.
U.S.
Governmental Regulation of Pharmaceutical Products
General
Regulation by
governmental authorities in the United States and other countries
will continue to significantly impact our research, product
development, manufacturing and marketing of any pharmaceutical
products. The nature and the extent to which regulations apply to
us will vary depending on the nature of any such products. Our
potential pharmaceutical products will require regulatory approval
by governmental agencies prior to commercialization. The products
we are developing are subject to federal regulation in the United
States, principally by the FDA under the Federal Food, Drug, and
Cosmetic Act, or FFDCA, and by state and local governments, as well
as regulatory and other authorities in foreign governments that
include rigorous preclinical and clinical testing and other
approval procedures. Such regulations govern or influence, among
other things, the research, development, testing, manufacture,
safety and efficacy requirements, labeling, storage, recordkeeping,
licensing, advertising, promotion, distribution and export of
products, manufacturing and the manufacturing process. In many
foreign countries, such regulations also govern the prices charged
for products under their respective national social security
systems and availability to consumers.
All
drugs intended for human use are subject to rigorous regulation by
the FDA in the United States and similar regulatory bodies in other
countries. The steps ordinarily required by the FDA before an
innovative new drug product may be marketed in the United States
are similar to steps required in most other countries and include,
but are not limited to:
●
completion of
preclinical laboratory tests, preclinical animal testing and
formulation studies;
●
submission to the
FDA of an IND, which must be in effect before clinical trials may
commence;
●
submission to the
FDA of an NDA that includes preclinical data, clinical trial data
and manufacturing information;
●
payment of
substantial user fees for filing the NDA and other recurring user
fees;
●
FDA review of the
NDA;
●
satisfactory
completion of an FDA pre-approval inspection of the manufacturing
facilities; and
●
FDA approval of the
NDA, including approval of all product labeling.
For
combination products deemed to have a
‘‘drug’’ primary mode of action, primary
review of the product will be conducted by the appropriate division
within the Center for Drug Evaluation and Research, or CDER, but
CDER will consult with the Center for Devices and Radiological
Health, or CDRH, to ensure that the device components of the
product meet all applicable device requirements.
The
research, development and approval process requires substantial
time, effort and financial resources, and approvals may not be
granted on a timely or commercially viable basis, if at
all.
Preclinical testing
includes laboratory evaluations to characterize the product’s
composition, impurities, stability, and mechanism of its
pharmacologic effect, as well as animal studies to assess the
potential safety and efficacy of each product. Preclinical safety
tests must be conducted by laboratories that comply with FDA
regulations regarding Good Laboratory Practices, or GLP, and the
U.S. Department of Agriculture’s Animal Welfare Act.
Violations of these laws and regulations can, in some cases, lead
to invalidation of the tests, requiring such tests to be repeated
and delaying approval of the NDA. The results of the preclinical
tests, together with manufacturing information and analytical data,
are submitted to the FDA as part of an IND and are reviewed by the
FDA before the commencement of human clinical trials. Unless the
FDA objects to an IND by placing the study on clinical hold, the
IND will go into effect 30 days following its receipt by the FDA.
The FDA may authorize trials only on specified terms and may
suspend ongoing clinical trials at any time on various grounds,
including a finding that patients are being exposed to unacceptable
health risks. If the FDA places a study on clinical hold, the
sponsor must resolve all of the FDA’s concerns before the
study may begin or continue. The IND application process may become
extremely costly and substantially delay development of products.
Similar restrictive requirements also apply in other countries.
Additionally, positive results of preclinical tests will not
necessarily indicate positive results in clinical
trials.
Clinical trials
involve the administration of the investigational product to humans
under the supervision of qualified principal investigators. Our
clinical trials must be conducted in accordance with Good Clinical
Practice, or GCP, regulations under protocols submitted to the FDA
as part of an IND. In addition, each clinical trial is approved and
conducted under the auspices of an institutional review board, or
IRB, and requires the patients’ informed consent. An IRB
considers, among other things, ethical factors, the safety of human
subjects, and the possibility of liability of the institutions
conducting the trial. The IRB at each institution at which a
clinical trial is being performed may suspend a clinical trial at
any time for a variety of reasons, including a belief that the test
subjects are being exposed to an unacceptable health risk. As the
sponsor, we can also suspend or terminate a clinical trial at any
time.
11
Clinical trials are
typically conducted in three sequential phases, Phases 1, 2, and 3,
involving an increasing number of human subjects. These phases may
sometimes overlap or be combined. Phase 1 trials are performed in a
small number of healthy human subjects or subjects with the
targeted condition, and involve testing for safety, dosage
tolerance, absorption, distribution, metabolism and excretion.
Phase 2 studies, which may involve up to hundreds of subjects, seek
to identify possible adverse effects and safety risks, preliminary
information related to the efficacy of the product for specific
targeted diseases, dosage tolerance, and optimal dosage. Finally,
Phase 3 trials may involve up to thousands of individuals often at
geographically dispersed clinical trial sites, and are intended to
provide the documentation of effectiveness and important additional
safety data required for approval. Prior to commencing Phase 3
clinical trials many sponsors elect to meet with FDA officials to
discuss the conduct and design of the proposed trial or
trials.
In
addition, federal law requires the listing, on a publicly-available
website, of detailed information on clinical trials for
investigational drugs. Some states have similar or supplemental
clinical trial reporting laws.
Success
in early-stage animal studies and clinical trials does not
necessarily assure success in later-stage clinical trials. Data
obtained from animal studies and clinical activities are not always
conclusive and may be subject to alternative interpretations that
could delay, limit or even prevent regulatory
approval.
All
data obtained from the preclinical studies and clinical trials, in
addition to detailed information on the manufacture and composition
of the product, would be submitted in an NDA to the FDA for review
and approval for the manufacture, marketing and commercial
shipments of any of our products. FDA approval of the NDA is
required before commercial marketing or non-investigational
interstate shipment may begin in the United States. The FDA may
also conduct an audit of the clinical trial data used to support
the NDA.
The FDA
may deny or delay approval of an NDA that does not meet applicable
regulatory criteria. For example the FDA may determine that the
preclinical or clinical data or the manufacturing information does
not adequately establish the safety and efficacy of the drug. The
FDA has substantial discretion in the approval process and may
disagree with an applicant’s interpretation of the data
submitted in its NDA. The FDA can request additional information,
seek clarification regarding information already provided in the
submission or ask that new additional clinical trials be conducted,
all of which can delay approval. Similar types of regulatory
processes will be encountered as efforts are made to market any
drug internationally. We will be required to assure product
performance and manufacturing processes from one country to
another.
Even if
the FDA approves a product, it may limit the approved uses for the
product as described in the product labeling, require that
contraindications, warning statements or precautions be included in
the product labeling, require that additional studies be conducted
following approval as a condition of the approval, impose
restrictions and conditions on product distribution, prescribing or
dispensing in the form of a REMS, or otherwise limit the scope of
any approval or limit labeling. Once it approves an NDA, the FDA
may revoke or suspend the product approval if compliance with
post-market regulatory standards is not maintained or if problems
occur after the product reaches the marketplace. In addition, the
FDA may require post-marketing studies to monitor the effect of
approved products, and may limit further marketing of the product
based on the results of these post-market studies. The FDA and
other government agencies have broad post-market regulatory and
enforcement powers, including the ability to levy civil and
criminal penalties, suspend or delay issuance of approvals, seize
or recall products and revoke approvals.
Pharmaceutical
manufacturers, distributors and their subcontractors are required
to register their facilities with the FDA and state agencies.
Manufacturers are required to list their marketed drugs with the
FDA, are subject to periodic inspection by the FDA and other
authorities, where applicable, and must comply with the FDA’s
current Good Manufacturing Practices, or GMP, regulations, and the
product specifications set forth in the approved NDA. The GMP
requirements for pharmaceutical products are extensive and
compliance with them requires considerable time, resources and
ongoing investment. The regulations require manufacturers and
suppliers of raw materials and components to establish validated
systems and to employ and train qualified employees to ensure that
products meet high standards of safety, efficacy, stability,
sterility (where applicable), purity, and potency. The requirements
apply to all stages of the manufacturing process, including the
synthesis, processing, sterilization, packaging, labeling, storage
and shipment of the drug product. For all drug products, the
regulations require investigation and correction of any deviations
from GMP requirements and impose documentation requirements upon us
and any third-party manufacturers that we may decide to use.
Manufacturing establishments are subject to mandatory user fees,
and to periodic unannounced inspections by the FDA and state
agencies for compliance with all GMP requirements. The FDA is
authorized to inspect manufacturing facilities without a warrant at
reasonable times and in a reasonable manner.
12
We or
our present or future suppliers may not be able to comply with GMP
and other FDA regulatory requirements. Failure to comply with the
statutory and regulatory requirements subjects the manufacturer
and/or the NDA sponsor or distributor to possible legal or
regulatory action, such as a delay or refusal to approve an NDA,
suspension of manufacturing, seizure or recall of a product, or
civil or criminal prosecution of the company or individual officers
or employees.
Post-Marketing Regulation
Any
drug products manufactured or distributed by us pursuant to FDA
approvals, as well as the materials and components used in our
products, are subject to pervasive and continuing regulation by the
FDA, including:
●
recordkeeping
requirements;
●
periodic reporting
requirements;
●
GMP requirements
related to all stages of manufacturing, testing, storage,
packaging, labeling and distribution of finished dosage forms of
the product;
●
monitoring and
reporting of adverse experiences with the product; and
●
advertising and
promotional reporting requirements and restrictions.
Adverse
experiences with the product must be reported to the FDA and could
result in the imposition of market restriction through labeling
changes or product removal. Product approvals may be revoked if
compliance with regulatory requirements is not maintained or if
problems concerning safety or effectiveness of the product occur
following approval. The FDA is developing a national electronic
drug safety tracking system known as SENTINEL that may impose
additional safety monitoring burdens, and enhanced FDA enforcement
authority, beyond the extensive requirements already in effect. As
a condition of NDA approval, the FDA may require post-approval
testing and surveillance to monitor a product’s safety or
efficacy. The FDA also may impose other conditions, including
labeling restrictions which can materially impact the potential
market and profitability of a product.
With
respect to post-market product advertising and promotion, the FDA
and other government agencies including the Department of Health
and Human Services and the Department of Justice, and individual
States, impose a number of complex regulations on entities that
advertise and promote pharmaceuticals, including, among others,
standards and restrictions on direct-to-consumer advertising,
off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the Internet. The
FDA has very broad enforcement authority under the FFDCA, and
failure to abide by these regulations can result in administrative
and judicial enforcement actions, including the issuance of a
Warning Letter directing correction of deviations from FDA
standards, a requirement that future advertising and promotional
materials be pre-cleared by the FDA, False Claims Act prosecution
based on alleged off-label marketing seeking monetary and other
penalties, including potential exclusion of the drug and/or the
company from participation in government health care programs, and
state and federal civil and criminal investigations and
prosecutions. Foreign regulatory bodies also strictly enforce these
and other regulatory requirements and drug marketing may be
prohibited in whole or in part in other countries.
We, our
collaborators or our third-party contract manufacturers may not be
able to comply with the applicable regulations. After regulatory
approvals are obtained, the subsequent discovery of previously
unknown problems, or the failure to maintain compliance with
existing or new regulatory requirements, may result
in:
●
restrictions on the
marketing or manufacturing of a product;
●
Warning Letters or
Untitled Letters from the FDA asking us, our collaborators or
third-party contractors to take or refrain from taking certain
actions;
●
withdrawal of the
product from the market;
●
the FDA’s
refusal to approve pending applications or supplements to approved
applications;
●
voluntary or
mandatory product recall;
●
fines or
disgorgement of profits or revenue;
●
suspension or
withdrawal of regulatory approvals;
●
refusals to permit
the import or export of products;
●
product seizure;
and
13
●
injunctions or the
imposition of civil or criminal penalties.
We may
also be subject to healthcare laws, regulations and enforcement and
our failure to comply with any such laws, regulations or
enforcement could adversely affect our business, operations and
financial condition. 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 are subject
to regulation by both the federal government and the states in
which we or our partners conduct our business. The laws and
regulations that may affect our ability to operate
include:
●
the federal
Anti-Kickback Statute, which prohibits, among other things, any
person or entity from knowingly and willfully offering, soliciting,
receiving or providing any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in
cash or in kind, to induce either the referral of an individual or
in return for the purchase, lease, or order of any good, facility
item or service, for which payment may be made, in whole or in
part, under federal healthcare programs such as the Medicare and
Medicaid programs;
●
federal civil and
criminal false claims laws and civil monetary penalty laws,
including, for example, the federal civil False Claims Act, which
impose criminal and civil penalties, including civil whistleblower
or qui tam actions, against individuals or entities for, among
other things, knowingly presenting, or causing to be presented, to
the federal government, including the Medicare and Medicaid
programs, claims for payment that are false or fraudulent or making
a false statement to avoid, decrease or conceal an obligation to
pay money to the federal government;
●
the federal Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
which created new federal criminal statutes that prohibit knowingly
and willfully executing, or attempting to execute, a scheme to
defraud any healthcare benefit program or obtain, by means of false
or fraudulent pretenses, representations or promises, any of the
money or property owned by, or under the custody or control of, any
healthcare benefit program, regardless of the payer (e.g., public
or private), knowingly and willfully embezzling or stealing from a
health care benefit program, willfully obstructing a criminal
investigation of a health care offense and knowingly and willfully
falsifying, concealing or covering up by any trick or device a
material fact or making any materially false statements in
connection with the delivery of, or payment for, healthcare
benefits, items or services relating to healthcare
matters;
●
HIPAA, as amended
by the Health Information Technology for Economic and Clinical
Health Act, and their implementing regulations, which impose
obligations on covered entities, including healthcare providers,
health plans, and healthcare clearinghouses, as well as their
respective business associates that create, receive, maintain or
transmit individually identifiable health information for or on
behalf of a covered entity, with respect to safeguarding the
privacy, security and transmission of individually identifiable
health information;
●
the federal
physician sunshine requirements under the Patient Protection and
Affordable Care Act, or Affordable Care Act, which require
manufacturers of drugs, devices, biologics and medical supplies to
report annually to the Centers for Medicare & Medicaid Services
information related to payments and other transfers of value
provided to physicians and teaching hospitals, and ownership and
investment interests held by physicians and their immediate family
members; and
●
state law
equivalents of each of the above federal laws, such as
anti-kickback and false claims laws, which may apply to items or
services reimbursed by any third-party payer, including commercial
insurers; state laws that require pharmaceutical companies to
comply with the pharmaceutical industry’s voluntary
compliance guidelines and the applicable compliance guidance
promulgated by the federal government, or otherwise restrict
payments that may be provided to healthcare providers and other
potential referral sources; state laws that require drug
manufacturers to report information related to payments and other
transfers of value to healthcare providers or marketing
expenditures; and state laws governing the privacy and security of
health information in certain circumstances, many of which differ
from each other in significant ways and may not have the same
effect, thus complicating compliance efforts.
Because
of the breadth of these laws and the narrowness of the statutory
exceptions and safe harbors available, it is possible that some of
our business activities could be subject to challenge under one or
more of such laws. In addition, recent health care reform
legislation has strengthened these laws. For example, the
Affordable Care Act, among other things, amended the intent
requirement of the federal Anti-Kickback Statute and certain
criminal healthcare fraud statutes. A person or entity no longer
needs to have actual knowledge of the statute or specific intent to
violate it. In addition, the Affordable Care Act provided that the
government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the federal
civil False Claims Act.
14
Achieving and
sustaining compliance with these laws may prove costly. In
addition, 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 management’s
attention from the operation of our business. If our operations are
found to be in violation of any of the laws described above or any
other governmental laws or regulations that apply to us, we may be
subject to penalties, including administrative, civil and criminal
penalties, damages, fines, disgorgement, the exclusion from
participation in federal and state healthcare programs, individual
imprisonment or the curtailment or restructuring of our operations,
any of which could adversely affect our ability to operate our
business and our financial results.
Generic Competition
Orange Book Listing.
In seeking
approval for a drug through an NDA, applicants are required to list
with the FDA each patent whose claims cover the applicant’s
product. Upon approval of a drug, the applicant identifies all
patents that claim the approved product’s active
ingredient(s), the drug product’s approved formulation, or an
approved method of use of the drug. Each of the identified patents
are then published in the FDA’s Approved Drug Products with
Therapeutic Equivalence Evaluations, commonly known as the Orange
Book. Drugs listed in the Orange Book can, in turn, be cited by
potential generic competitors in support of approval of an
abbreviated new drug application, or ANDA. An ANDA provides for
marketing of a drug product that has the same active ingredients in
the same strengths and dosage form as the listed drug and has been
shown through bioequivalence testing, unless such testing is waived
by the FDA, as is the case with some injectable drug products, to
be therapeutically equivalent to the listed drug. Other than
bioequivalence testing, ANDA applicants are not required to
conduct, or submit results of, preclinical or clinical tests to
prove the safety or effectiveness of their drug product. Drugs
approved in this way are commonly referred to as
‘‘generic equivalents’’ to the listed drug,
and can usually be substituted by pharmacists under prescriptions
written for the original listed drug.
The
ANDA applicant is required to certify to the FDA concerning any
patents listed for the approved product in the FDA’s Orange
Book. Specifically, the applicant must certify either that: (1) the
required patent information has not been filed (a Paragraph I
Certification); (2) the listed patent has expired (a Paragraph II
Certification); (3) the listed patent has not expired, but will
expire on a particular date and the generic approval is being
sought only after patent expiration (a Paragraph III
Certification); or (4) the listed patent is invalid, unenforceable,
or will not be infringed by the proposed generic product (a
Paragraph IV Certification). In certain circumstances, the ANDA
applicant may also elect to submit a ‘‘section
(viii)’’ statement instead of a Paragraph IV
Certification, certifying that its proposed ANDA label does not
contain (or carves out) any language regarding the patented
method-of-use rather than certify to a listed method-of-use patent.
If the application contains only Paragraph I or Paragraph II
Certifications, the ANDA may be approved as soon as FDA completes
its review and concludes that all approval requirements have been
met. If the ANDA contains one or more Paragraph III Certifications,
the ANDA cannot not be approved until each listed patent for which
a Paragraph III Certification was filed have expired.
If the
ANDA applicant has provided a Paragraph IV certification to the
FDA, the applicant must also send notice of the Paragraph IV
certification to the NDA holder and patent owner once the ANDA has
been accepted for filing by the FDA. The patent owner or NDA holder
may then commence a patent infringement lawsuit in response to the
notice of the Paragraph IV certification. The filing of a patent
infringement lawsuit within 45 days of the receipt of a Paragraph
IV certification automatically prevents the FDA from approving the
ANDA until the earlier of 30 months (the ‘‘30-month
stay’’), expiration of the patent, settlement of the
lawsuit in which the patent owner admits that the patent is invalid
or not infringed by the ANDA product, or a decision in the
infringement case that holds the patent to be invalid or not
infringed, or an order by the court shortening the 30-month stay
due to actions by the patent holder to delay the litigation. In
most circumstances, NDA holder is only eligible for one 30-month
stay against an ANDA.
If a
patent infringement action is filed against an ANDA applicant, any
settlement of the litigation must be submitted to the Federal Trade
Commission, or the FTC. If the FTC believes the terms or effects of
the settlement are anticompetitive, FTC may bring an antitrust
enforcement action against the parties. Private parties may also
bring antitrust lawsuits against drug companies based on such
patent litigation settlements.
The
ANDA also will not be approved until any applicable non-patent
regulatory exclusivity listed in the Orange Book for the referenced
product has expired.
Regulatory Exclusivity.
Upon NDA
approval of a new chemical entity or NCE, which is a drug that
contains no active moiety that has been approved by the FDA in any
other NDA, that drug receives five years of marketing exclusivity
during which the FDA cannot receive for review any ANDA seeking
approval of a generic version of that drug. An ANDA containing a
Paragraph IV Certification may be received by FDA 4 years after the
NCE drug’s approval, but any 30-month stay that ensues would
be extended so that it expires seven and one half years after the
NCE approval date, subject to early termination by reason of a
court decision or settlement as described above.
15
Certain
changes to an NDA drug, such as the addition of a new indication to
the package insert, for which new clinical trials, conducted or
sponsored by the applicant are deemed by FDA to be essential to the
approval of the change, can be eligible for a three-year period of
exclusivity during which the FDA cannot approve an ANDA for a
generic drug that includes the change. An ANDA that contains a
section (viii) statement to a method of use patent may be approved
with labeling that omits the patented use before the use patent
expires. Generic drugs approved with such a labeling carve out may
be substituted by pharmacists for the original branded drug before
the method of use patent expires.
Section 505(b)(2) New Drug
Applications.
Most drug products obtain FDA marketing
approval pursuant to an NDA or an ANDA. A third alternative is a
special type of NDA, commonly referred to as a 505(b)(2) NDA, which
enables the applicant to rely, in part, on the FDA’s previous
approval of a similar product, or published literature, in support
of its application.
505(b)(2) NDAs
often provide an alternate path to FDA approval for new or improved
formulations or new uses of previously approved products. A
505(b)(2) NDA may be used where at least some of the information
required for approval comes from studies not conducted by, or for,
the applicant and for which the applicant has not obtained a right
of reference. If the 505(b)(2) applicant can establish that
reliance on the FDA’s previous approval is scientifically
appropriate, it may eliminate the need to conduct certain
preclinical or clinical studies of the new product. The FDA may
also require companies to perform additional studies or
measurements to support the change from the approved product. The
FDA may then approve the new product candidate for all, or some, of
the label indications for which the referenced product has been
approved, as well as for any new indication or conditions of use
sought by the Section 505(b)(2) applicant.
To the
extent that the Section 505(b)(2) applicant is relying on studies
conducted for an already approved product, the applicant is
required to certify to the FDA concerning any patents listed for
the approved product in the Orange Book to the same extent that an
ANDA applicant would. As a result, approval of a 505(b)(2) NDA can
be stalled until all the listed patents claiming the referenced
product have expired, until any non-patent exclusivity, such as
exclusivity for obtaining approval of a new chemical entity, listed
in the Orange Book for the referenced product has expired, and, in
the case of a Paragraph IV certification and subsequent patent
infringement suit, until the expiration of any 30-month stay,
subject to early termination of the stay as described
above.
Changing Legal and Regulatory Landscape
Periodically,
legislation is introduced in the U.S. Congress that could change
the statutory and regulatory provisions governing the approval,
manufacturing and marketing of our drugs. In addition, the FDCA,
FDA regulations and guidance are often revised or reinterpreted by
the FDA or the courts in ways that may significantly affect our
business and products. We cannot predict whether or when
legislation or court decisions impacting our business will be
enacted or issued, what FDA regulations, guidance or
interpretations may change, or what the impact of such changes, if
any, may be in the future.
Third-Party
Reimbursements
Successful sales of
our proposed products in the United States and other countries
depend, in large part, on the availability of adequate
reimbursement from third-party payers such as governmental
entities, managed care organizations, health maintenance
organizations, or HMOs, and private insurance plans. Reimbursement
by a third-party payer depends on a number of factors, including
the payer’s determination that the product has been approved
by the FDA for the indication for which the claim is being made,
that it is neither experimental nor investigational, and that the
use of the product is safe and efficacious, medically necessary,
appropriate for the specific patient and cost
effective.
Since
reimbursement by one payer does not guarantee reimbursement by
another, we or our licensees may be required to seek approval from
each payer individually. Seeking such approvals is a time-consuming
and costly process. Third-party payers routinely limit the products
that they will cover and the amount of money that they will pay
and, in many instances, are exerting significant pressure on
medical suppliers to lower their prices.
Payers
frequently employ a tiered system in reimbursing end users for
pharmaceutical products, with tier designation affecting copay or
deductible amounts. The only approved product for treating HSDD is
flibanserin, sold under the trade name Addyi®. There is
significant uncertainty concerning the extent and scope of
third-party reimbursement for products treating HSDD. Based on
third-party reimbursement for approved products treating ED, we
believe bremelanotide will be classified as a Tier 3 drug, so that
reimbursement will be limited for bremelanotide for treatment of
premenopausal women with HSDD, assuming the product is approved by
the FDA. Less than full reimbursement by governmental and other
third-party payers may adversely affect the market acceptance of
bremelanotide. Further, healthcare reimbursement systems vary from
country to country, and third-party reimbursement might not be made
available for bremelanotide for HSDD under any other reimbursement
system.
16
Manufacturing
and Marketing
To be
successful, our proposed products will need to be manufactured in
commercial quantities under GMP prescribed by the FDA and at
acceptable costs. We do not have the facilities to manufacture any
of our proposed products under GMP. We intend to rely on
collaborators, licensees or contract manufacturers for the
commercial manufacture of our proposed products.
Our
bremelanotide product candidate is a synthetic peptide. While the
production process involves well-established technology, there are
few manufacturers capable of scaling up to commercial quantities
under GMP at acceptable costs. We have identified one third-party
manufacturer for the production of bremelanotide, Lonza Ltd., and
have validated manufacturing of the bremelanotide drug substance
under GMP with that manufacturer. We are in the process of
negotiating a long-term supply agreement with Lonza, and may not be
able to enter into a supply agreement on acceptable terms, if at
all.
Our
bremelanotide product candidate will be a combination product,
incorporating both the bremelanotide drug substance and a delivery
device. We will rely on a third-party manufacturer, Ypsomed AG, to
make the delivery device and to ensure its and the device’s
continued compliance with all FDA medical device regulations. We
have selected an autoinjector pen delivery device, and are
negotiating a long-term supply and manufacturing agreement, but may
not be able to enter into such an agreement on acceptable terms, if
at all. A third-party contract manufacturer, Catalent Belgium S.A.,
performs fill, finish and packaging of our bremelanotide product
candidate. We have negotiated a long-term commercial supply
agreement with Catalent Belgium S.A.
Our
PL-3994 product candidate is a peptide mimetic molecule,
incorporating a proprietary amino acid mimetic structure and amino
acids. We identified a manufacturer that made the product in
quantities sufficient for Phase 1, and are evaluating
commercial-scale manufacturers. Scaling up to commercial quantities
may involve production, purification, formulation and other
problems not present in the scale of manufacturing done to
date.
Our
MC1r and MC4r agonist product candidates are synthetic peptides,
which we have manufactured only at laboratory scale. We have not
contracted with a third-party manufacturer to produce these
synthetic peptides for either clinical trials or commercial
purposes. While the production process involves well-established
technology, there are few manufacturers capable of scaling up to
commercial quantities under GMP at acceptable costs. Additionally,
scaling up to commercial quantities may involve production,
purification, formulation and other problems not present in the
scale of manufacturing done to date.
The
failure of any manufacturer or supplier to comply with FDA
regulations, including GMP or medical device quality systems
regulations, or QSR, or to supply the device component or drug
substance and services as agreed, would force us to seek
alternative sources of supply and could interfere with our ability
to deliver product on a timely and cost effective basis or at all.
Establishing relationships with new manufacturers or suppliers, any
of whom must be FDA-approved, is a time-consuming and costly
process.
Product
Liability and Insurance
Our
business may be affected by potential product liability risks that
are inherent in the testing, manufacturing, marketing and use of
our proposed products. We have liability insurance providing $10
million coverage in the aggregate as to certain clinical trial
risks.
Employees
As of
September 16, 2016, we employed 22 people full time, of whom 16 are
engaged in research and development activities and 6 are engaged in
administration and management, and had no part-time employees.
While we have been successful in attracting skilled and experienced
scientific personnel, competition for personnel in our industry is
intense. None of our employees are covered by a collective
bargaining agreement. All of our employees have executed
confidentiality and intellectual property agreements. We consider
relations with our employees to be good.
We rely
on contractors and scientific consultants to work on specific
research and development programs. We also rely on independent
organizations, advisors and consultants to provide services,
including aspects of manufacturing, testing, preclinical
evaluation, clinical management, regulatory strategy and market
research. Our independent advisors, contractors and consultants
sign agreements that provide for confidentiality of our proprietary
information and that we have the rights to any intellectual
property developed while working for us.
Corporate
Information
We were
incorporated under the laws of the State of Delaware on November
21, 1986 and commenced operations in the biopharmaceutical area in
1996. Our corporate offices are located at 4B Cedar Brook Drive,
Cranbury, New Jersey 08512 and our telephone number is (609)
495-2200. We maintain an Internet site at
www.palatin.com
, where among other
things, we make available free of charge on and through this
website our Forms 3, 4 and 5, annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) and Section 16 of the Exchange Act as soon as
reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. Our website and the information
contained in it or connected to it are not incorporated into this
prospectus. The reference to our website is an inactive textual
reference only.
17
Risks
Related to Our Financial Results and Need for
Financing
Our auditors have expressed substantial doubt about our ability to
continue as a going concern. If we do not have sufficient funding,
we may have to suspend or cease operations within twelve
months.
Our
audited financial statements for the year ended June 30, 2016 were
prepared using the assumption that we will continue our operations
as a going concern. As of June 30, 2016, we had an accumulated
deficit of $343,412,252 and stockholders’ deficiency of
$17,585,967. As a result, our independent registered public
accounting firm, in their audit report, has expressed substantial
doubt about our ability to continue as a going concern. Continued
operations are dependent on our ability to complete equity or debt
financing activities or collaboration arrangements or to generate
positive cash flow from operations, neither of which is certain. We
believe that if we do not have sufficient funding, we may have to
curtail or cease certain programs or operations within twelve
months. Therefore, we may be unable to continue operations in the
future as a going concern. If we cannot continue as a viable
entity, our stockholders may lose some or all of their investment
in the Company. Investors in our securities should review carefully
the report of our independent registered public accounting firm
included in this Annual Report.
We have a history of substantial net losses and expect to continue
to incur substantial net losses over the next few years; we may
never achieve or maintain profitability.
We have
never been profitable and we may never become profitable. As of
June 30, 2016, we had an accumulated deficit of $343,412,252. We
expect to incur additional losses as we continue our development of
bremelanotide, PL-3994 and other product candidates. These losses,
among other things, have had and will continue to have an adverse
effect on our stockholders’ equity, total assets and working
capital.
Since
2005 we have not had any products available for commercial sale and
have received no revenues from the sale of our product candidates.
For the foreseeable future, we will have to fund all of our
operations and capital expenditures from license and contract
revenue under collaborative development agreements, existing cash
balances and outside sources of financing, which may not be
available on acceptable terms, if at all. Unless and until we
receive approval from the FDA or other equivalent regulatory
authorities outside the United States, we cannot sell our products
and will not have product revenues from them. We have devoted
substantially all of our efforts to research and development,
including preclinical and clinical trials. Because of the numerous
risks associated with developing drugs, we are unable to predict
the extent of future losses, whether or when any of our product
candidates will become commercially available, or when we will
become profitable, if at all.
We will need additional financing, including financing to submit
required regulatory applications to the FDA for bremelanotide for
HSDD and to complete clinical trials for our other product
candidates, which may be difficult to obtain.
As of
June 30, 2016, we had cash, cash equivalents and investments of
$9,383,224, with current liabilities of $13,994,439. On August 4,
2016, we closed on an equity private placement, with net proceeds
of approximately $8,500,000. We believe we currently have
sufficient existing capital resources to fund our planned
operations through the anticipated release date of topline data
from the double blind efficacy portion of our Phase 3 trial and
through the quarter ending December 31, 2016. We will need
additional funding to complete development of our bremelanotide for
HSDD program, including completing ancillary studies and clinical
trials, completing certain chemistry, manufacturing and controls
activities, preparing and submitting regulatory filings for product
approval, and launch readiness commercialization efforts. We will
also need additional funding to conduct and complete required
clinical trials for our other product candidates and, assuming
those clinical trials are successful, as to which there can be no
assurance, to complete submission of required regulatory
applications to the FDA.
We have
completed the last patient visits in the double blind portion of
our Phase 3 clinical trial of bremelanotide for HSDD, and have
adequate funds to analyze the efficacy data and disclose results.
However, we do not have adequate funds to complete the open-label
safety extension study, all ancillary studies and clinical trials
required for submission of an NDA to FDA for approval of
bremelanotide for HSDD, or to prepare and submit the NDA to FDA. We
may be required to curtail or delay our bremelanotide for HSDD
program unless we have adequate funds to complete the program. We
estimate that the bremelanotide for HSDD program, including
regulatory filings for product approval, will cost at least
$87,000,000, of which approximately $57,000,000 has been expensed
to date. We will seek funds to support the program through
collaborative arrangements on bremelanotide, including marketing
and distribution partnering agreements, public or private equity or
debt financings, and other sources, but such additional funding may
not be available on acceptable terms, or at all.
18
We do
not have any source of significant recurring revenue and must
depend on financing or partnering to sustain our operations. We may
raise additional funds through public or private equity or debt
financings, collaborative arrangements on our product candidates,
or other sources. However, additional funding may not be available
on acceptable terms, or at all. To obtain additional funding, we
may need to enter into arrangements that require us to develop only
certain of our product candidates or relinquish rights to certain
technologies, product candidates and/or potential
markets.
If we
are unable to raise sufficient additional funds when needed, we may
be required to curtail operations significantly, cease clinical
trials and decrease staffing levels. We may seek to license, sell
or otherwise dispose of our product candidates, technologies and
contractual rights on the best possible terms available. Even if we
are able to license, sell or otherwise dispose of our product
candidates, technologies and contractual rights, it is likely to be
on unfavorable terms and for less value than if we had the
financial resources to develop or otherwise advance our product
candidates, technologies and contractual rights
ourselves.
Our
future capital requirements depend on many factors,
including:
●
the results of our
Phase 3 clinical trials for bremelanotide for HSDD;
●
the timing of, and
the costs involved in, obtaining regulatory approvals for
bremelanotide for HSDD and our other product
candidates;
●
the number and
characteristics of any additional product candidates we develop or
acquire;
●
the scope,
progress, results and costs of researching and developing
bremelanotide for HSDD, PL-3994 or any future product candidates,
and conducting preclinical and clinical trials;
●
the cost of
commercialization activities if bremelanotide for HSDD, PL-3994 or
any future product candidates are approved for sale, including
marketing, sales and distribution costs;
●
the cost of
manufacturing bremelanotide for HSDD, PL-3994 or any future product
candidates and any products we successfully commercialize and
maintaining our related facilities;
●
our ability to
establish and maintain strategic collaborations, licensing or other
arrangements and the terms and timing of such
arrangements;
●
the degree and rate
of market acceptance of any future approved products;
●
the emergence,
approval, availability, perceived advantages, relative cost,
relative safety and relative efficacy of alternative and competing
products or treatments;
●
any product
liability or other lawsuits related to our products;
●
the expenses needed
to attract and retain skilled personnel;
●
the costs involved
in preparing, filing, prosecuting, maintaining, defending and
enforcing patent claims, including litigation costs and the outcome
of such litigation; and
●
the timing, receipt
and amount of sales of, or royalties on, future approved products,
if any.
We have a limited operating history upon which to base an
investment decision.
Our
operations are primarily focused on acquiring, developing and
securing our proprietary technology, conducting preclinical and
clinical studies and formulating and manufacturing on a small-scale
basis our principal product candidates. These operations provide a
limited basis for stockholders to assess our ability to
commercialize our product candidates.
We have
not yet demonstrated our ability to perform the functions necessary
for the successful commercialization of any of our current product
candidates. The successful commercialization of our product
candidates will require us to perform a variety of functions,
including:
●
continuing to
conduct preclinical development and clinical trials;
●
participating in
regulatory approval processes;
●
formulating and
manufacturing products, or having third parties formulate and
manufacture products;
●
post-approval
monitoring and surveillance of our products;
●
conducting sales
and marketing activities, either alone or with a partner;
and
●
obtaining
additional capital.
If we
are unable to obtain regulatory approval of any of our product
candidates, to successfully commercialize any products for which we
receive regulatory approval or to obtain additional capital, we may
not be able to recover our investment in our development
efforts.
19
The
clinical and commercial success of our product candidates will
depend on a number of factors, including the
following:
●
the ability to
raise additional capital on acceptable terms, or at
all;
●
timely completion
of our clinical trials, which may be significantly slower or cost
more than we currently anticipate and will depend substantially
upon the performance of third-party contractors;
●
whether we are
required by the FDA or similar foreign regulatory agencies to
conduct additional clinical trials beyond those planned to support
the approval and commercialization of our product candidates or any
future product candidates;
●
acceptance of our
proposed indications and primary endpoint assessments relating to
the proposed indications of our product candidates by the FDA and
similar foreign regulatory authorities;
●
our ability to
demonstrate to the satisfaction of the FDA and similar foreign
regulatory authorities, the safety and efficacy of our product
candidates or any future product candidates;
●
the prevalence,
duration and severity of potential side effects experienced with
our product candidates or future approved products, if
any;
●
the timely receipt
of necessary marketing approvals from the FDA and similar foreign
regulatory authorities;
●
achieving and
maintaining, and, where applicable, ensuring that our third-party
contractors achieve and maintain, compliance with our contractual
obligations and with all regulatory requirements applicable to our
product candidates or any future product candidates or approved
products, if any;
●
the ability of
third parties with whom we contract to manufacture clinical trial
and commercial supplies of our product candidates or any future
product candidates, remain in good standing with regulatory
agencies and develop, validate and maintain commercially viable
manufacturing processes that are compliant with GMP;
●
a continued
acceptable safety profile and efficacy during clinical development
and following approval of our product candidates or any future
product candidates;
●
our ability to
successfully commercialize our product candidates or any future
product candidates in the United States and internationally, if
approved for marketing, sale and distribution in such countries and
territories, whether alone or in collaboration with
others;
●
acceptance by
physicians and patients of the benefits, safety and efficacy of our
product candidates or any future product candidates, if approved,
including relative to alternative and competing
treatments;
●
our and our
partners’ ability to establish and enforce intellectual
property rights in and to our product candidates or any future
product candidates;
●
our and our
partners’ ability to avoid third-party patent interference or
intellectual property infringement claims; and
●
our ability to
in-license or acquire additional product candidates or
commercial-stage products that we believe can be successfully
developed and commercialized.
If we
do not achieve one or more of these factors, many of which are
beyond our control, in a timely manner or at all, we could
experience significant delays or an inability to obtain regulatory
approvals or commercialize our product candidates. Even if
regulatory approvals are obtained, we may never be able to
successfully commercialize any of our product candidates.
Accordingly, we cannot assure you that we will be able to generate
sufficient revenue through the sale of our product candidates or
any future product candidates to continue our
business.
Raising additional capital may cause dilution to existing
shareholders, restrict our operations or require us to relinquish
rights.
We may
seek the additional capital necessary to fund our operations
through public or private equity offerings, collaboration
agreements, debt financings or licensing arrangements. To the
extent that we raise additional capital through the sale of equity
or convertible debt securities, existing shareholders’
ownership interests will be diluted and the terms may include
liquidation or other preferences that adversely affect their rights
as a shareholder. Debt financing, if available, may involve
agreements that include covenants limiting or restricting our
ability to take specific actions such as incurring additional debt,
making capital expenditures or declaring dividends. If we raise
additional funds through collaborations and licensing arrangements
with third parties, we may have to relinquish valuable rights to
our technologies or product candidates, or grant licenses on terms
that are not favorable to us.
20
Risks
Related to Our Business, Strategy and Industry
We are substantially dependent on the clinical and commercial
success of our product candidates, primarily our lead product
candidate, bremelanotide for HSDD, which is in Phase 3 clinical
development. We cannot be certain that we will be able to obtain
regulatory approval for or successfully commercialize any of our
product candidates.
To
date, we have invested most of our efforts and financial resources
in the research and development of bremelanotide for HSDD, which is
currently our lead product candidate. We have completed the last
patient visit in the double blind efficacy portion of our Phase 3
RECONNECT STUDY for bremelanotide for HSDD. Our near-term
prospects, including our ability to finance our company and
generate revenue, will depend heavily on the successful
development, regulatory approval and commercialization of
bremelanotide for HSDD, as well as any future product candidates.
The clinical and commercial success of our product candidates will
depend on a number of factors, including the
following:
●
timely completion
of, or need to conduct additional, clinical trials, including for
bremelanotide for HSDD, which may be significantly slower or cost
more than we currently anticipate and will depend substantially
upon the accurate and satisfactory performance of third-party
contractors;
●
our ability to
demonstrate to the satisfaction of the FDA the safety and efficacy
of bremelanotide for HSDD or any future product candidates through
clinical trials;
●
whether we are
required by the FDA or other similar foreign regulatory agencies to
conduct additional clinical trials to support the approval of
bremelanotide for HSDD or any future product
candidates;
●
the acceptance of
parameters for regulatory approval, including our proposed
indication, primary endpoint assessment and primary endpoint
measurement, relating to our lead indications of bremelanotide for
HSDD;
●
our success in
educating physicians and patients about the benefits,
administration and use of bremelanotide for HSDD or any future
product candidates, if approved;
●
the prevalence and
severity of adverse events experienced with bremelanotide for HSDD
or any future product candidates or approved products;
●
the adequacy and
regulatory compliance of the autoinjector device, supplied by an
unaffiliated third party, to be used as part of our bremelanotide
combination product;
●
the timely receipt
of necessary marketing approvals from the FDA and similar foreign
regulatory authorities;
●
our ability to
raise additional capital on acceptable terms to achieve our
goals;
●
achieving and
maintaining compliance with all regulatory requirements applicable
to bremelanotide for HSDD or any future product candidates or
approved products;
●
the availability,
perceived advantages, relative cost, relative safety and relative
efficacy of alternative and competing treatments;
●
the effectiveness
of our own or our future potential strategic collaborators’
marketing, sales and distribution strategy and
operations;
●
our ability to
manufacture clinical trial supplies of bremelanotide for HSDD or
any future product candidates and to develop, validate and maintain
a commercially viable manufacturing process that is compliant with
current GMP;
●
our ability to
successfully commercialize bremelanotide for HSDD or any future
product candidates, if approved for marketing and sale, whether
alone or in collaboration with others;
●
our ability to
enforce our intellectual property rights in and to bremelanotide
for HSDD or any future product candidates;
●
our ability to
avoid third-party patent interference or intellectual property
infringement claims;
●
acceptance of
bremelanotide for HSDD or any future product candidates, if
approved, as safe and effective by patients and the medical
community; and
●
a continued
acceptable safety profile and efficacy of bremelanotide for HSDD or
any future product candidates following approval.
If we
do not achieve one or more of these factors, many of which are
beyond our control, in a timely manner or at all, we could
experience significant delays or an inability to successfully
commercialize our product candidates. Accordingly, we cannot assure
you that we will be able to generate sufficient revenue through the
sale of bremelanotide for HSDD or any future product candidate to
continue our business. In addition to preventing us from executing
our current business plan, any delays in our clinical trials, or
inability to successfully commercialize our products could impair
our reputation in the industry and the investment community, and
could hinder our ability to fulfill our existing contractual
commitments. As a result, our share price would likely decline
significantly, and we would have difficulty raising necessary
capital for future projects.
21
Most of our product candidates are still in the early stages of
development, and all of our product candidates remain subject to
clinical testing and regulatory approval. If we are unable to
successfully develop and test our product candidates, we will not
be successful.
Our
product candidates are at various stages of research and
development, will require regulatory approval, and may never be
successfully developed or commercialized. Our product candidates
will require significant further research, development and testing
before we can seek regulatory approval to market and sell them. We
must demonstrate that our product candidates are safe and effective
for use in patients in order to receive regulatory approval for
commercial sale. Preclinical studies in animals, using various
doses and formulations, must be performed before we can begin human
clinical trials. Even if we obtain favorable results in the
preclinical studies, the results in humans may be different.
Numerous small-scale human clinical trials may be necessary to
obtain initial data on a product candidate’s safety and
efficacy in humans before advancing to large scale human clinical
trials. We face the risk that the results of our trials in later
phases of clinical trials may be inconsistent with those obtained
in earlier phases. Adverse or inconclusive results could delay the
progress of our development programs and may prevent us from filing
for regulatory approval of our product candidates. Additional
factors that could inhibit the successful development of our
product candidates include:
●
lack of
effectiveness of any product candidate during clinical trials or
the failure of our product candidates to meet specified
endpoints;
●
failure to design
appropriate clinical trial protocols;
●
uncertainty
regarding proper dosing;
●
inability to
develop or obtain a supplier for an autoinjector device that meets
the FDA’s medical device requirements;
●
insufficient data
to support regulatory approval;
●
inability or
unwillingness of medical investigators to follow our clinical
protocols;
●
inability to add a
sufficient number of clinical trial sites; or
●
the availability of
sufficient capital to sustain operations and clinical
trials.
You
should evaluate us in light of these uncertainties, difficulties
and expenses commonly experienced by early stage biopharmaceutical
companies, as well as unanticipated problems and additional costs
relating to:
●
product approval or
clearance;
●
regulatory
compliance;
●
good manufacturing
practices;
●
intellectual
property rights;
●
product
introduction; and
●
marketing and
competition.
If clinical trials for our product candidates are prolonged or
delayed, we may be unable to commercialize our product candidates
on a timely basis, which would require us to incur additional costs
and delay our receipt of any revenue from potential product
sales.
We may
be unable to commercialize our product candidates on a timely basis
due to unexpected delays in our human clinical trials. Potential
delaying events include:
●
discovery of
serious or unexpected toxicities or side effects experienced by
study participants or other safety issues;
●
slower than
expected rates of subject recruitment and enrollment rates in
clinical trials resulting from numerous factors, including the
prevalence of other companies’ clinical trials for their
product candidates for the same indication, or clinical trials for
indications for which patients do not as commonly seek
treatment;
●
difficulty in
retaining subjects who have initiated a clinical trial but may
withdraw at any time due to adverse side effects from the therapy,
insufficient efficacy, fatigue with the clinical trial process or
for any other reason;
●
difficulty in
obtaining institutional review board, or IRB, approval for studies
to be conducted at each site;
●
delays in
manufacturing or obtaining, or inability to manufacture or obtain,
sufficient quantities of materials for use in clinical
trials;
●
inadequacy of or
changes in our manufacturing process or the product formulation or
method of delivery;
●
changes in
applicable laws, regulations and regulatory policies;
22
●
delays or failure
in reaching agreement on acceptable terms in clinical trial
contracts or protocols with prospective contract research
organizations, or CROs, clinical trial sites and other third-party
contractors;
●
failure of our CROs
or other third-party contractors to comply with contractual and
regulatory requirements or to perform their services in a timely or
acceptable manner;
●
failure by us, our
employees, our CROs or their employees or any partner with which we
may collaborate or their employees to comply with applicable FDA or
other regulatory requirements relating to the conduct of clinical
trials or the handling, storage, security and recordkeeping for
drug, medical device and biologic products;
●
delays in the
scheduling and performance by the FDA of required inspections of
us, our CROs, our suppliers, or our clinical trial sites, and
violations of law or regulations by discovered in the course of FDA
inspections;
●
scheduling
conflicts with participating clinicians and clinical institutions;
or
●
difficulty in
maintaining contact with subjects during or after treatment, which
may result in incomplete data.
Any of
these events or other delaying events, individually or in the
aggregate, could delay the commercialization of our product
candidates and have a material adverse effect on our business,
results of operations and financial condition.
We may not be able to secure and maintain research institutions to
conduct our clinical trials.
We rely
on research institutions to conduct our clinical trials, and we
therefore have limited control over the timing and cost of clinical
trials and our ability to recruit subjects. If we are unable to
reach agreements with suitable research institutions on acceptable
terms, or if any such agreement is terminated, we may be unable to
quickly replace the research institution with another qualified
institution on acceptable terms. We may not be able to secure and
maintain suitable research institutions to conduct our clinical
trials.
Even if our product candidates receive regulatory approval, they
may never achieve market acceptance, in which case our business,
financial condition and results of operation will be materially
adversely affected.
Regulatory approval
for the marketing and sale of any of our product candidates does
not assure the product’s commercial success. Any approved
product will compete with other products manufactured and marketed
by major pharmaceutical and other biotechnology companies. If any
of our product candidates are approved by the FDA and do not
achieve adequate market acceptance, our business, financial
condition and results of operations will be materially adversely
affected. The degree of market acceptance of any such product will
depend on a number of factors, including:
●
perceptions by
members of the healthcare community, including physicians, about
the safety and effectiveness of any such product;
●
cost-effectiveness
relative to competing products and technologies;
●
availability of
reimbursement for our products from third-party payers such as
health insurers, health maintenance organizations and government
programs such as Medicare and Medicaid; and
●
advantages over
alternative treatment methods.
There
is one FDA approved product for treatment of HSDD, flibanserin,
which is sold under the trade name Addyi®, and started
marketing in October 2015. The actual market size and market
dynamics for HSDD are unknown, and there is significant uncertainty
concerning the extent and scope of third-party reimbursement for
products treating HSDD. While we believe that an on-demand drug for
HSDD has competitive advantages compared to chronic or daily use
hormones and other drugs, we may not be able to realize this
perceived advantage in the market. Bremelanotide is administered by
subcutaneous injection. While the single-use, disposable
autoinjector pen format is designed to maximize market
acceptability, bremelanotide as a subcutaneous injectable drug for
HSDD may never achieve significant market acceptance. In addition,
we believe reimbursement of bremelanotide from third-party payers
such as health insurers, HMOs or other third-party payers of
healthcare costs will be similar to reimbursement for ED drugs, and
that the ultimate user may pay a substantial part of the cost of
bremelanotide for HSDD. If the market opportunity for bremelanotide
is smaller than we anticipate, it may also be difficult for us to
find marketing partners and, as a result, we may be unable to
generate revenue and business from bremelanotide. If bremelanotide
for HSDD does not achieve adequate market acceptance at an
acceptable price point, our business, financial condition and
results of operations will be materially adversely
affected.
23
Even if our product candidates receive regulatory approval in the
United States, we may never receive approval or commercialize our
products outside of the United States.
In
order to market any products outside of the United States, we must
establish and comply with numerous and varying regulatory
requirements of other countries regarding safety and efficacy.
Approval procedures vary among countries and can involve additional
product testing and additional administrative review periods. The
time required to obtain approval in other countries might differ
from that required to obtain FDA approval. The regulatory approval
process in other countries may include all of the risks detailed
above regarding FDA approval in the United States as well as other
risks. Regulatory approval in one country does not ensure
regulatory approval in another, but a failure or delay in obtaining
regulatory approval in one country may have a negative effect on
the regulatory process in others. Failure to obtain regulatory
approval in other countries or any delay or setbacks in obtaining
such approval would impair our ability to develop foreign markets
for our product candidates and may have a material adverse effect
on our results of operations and financial condition.
If side effects emerge that can be linked to our product candidates
(either while they are in development or after they are approved
and on the market), we may be required to perform lengthy
additional clinical trials, change the labeling of any such
products, or withdraw such products from the market, any of which
would hinder or preclude our ability to generate
revenues.
If we
identify side effects or other problems occur in future clinical
trials, we may be required to terminate or delay clinical
development of the product candidate. Furthermore, even if any of
our product candidates receive marketing approval, as greater
numbers of patients use a drug following its approval, if the
incidence of side effects increases or if other problems are
observed after approval that were not seen or anticipated during
pre-approval clinical trials, a number of potentially significant
negative consequences could result, including:
●
regulatory
authorities may withdraw their approval of the
product;
●
we may be required
to reformulate such products or change the way the product is
manufactured;
●
we may become the
target of lawsuits, including class action suits; and
●
our reputation in
the market place may suffer resulting in a significant drop in the
sales of such products.
Any of
these events could substantially increase the costs and expenses of
developing, commercializing and marketing any such product
candidates or could harm or prevent sales of any approved
products.
The number of subjects in our study pools in our clinical trials
may be deemed by regulators to be too small, which could cause
unanticipated delays or higher than anticipated costs.
Our
clinical trials have been conducted on a pool of subjects that is
structured for such research. Nevertheless, there is the
possibility that for statistical reasons, the pool of subjects may
be determined by the FDA or another regulatory body to be too small
to verify statistical significance. In such a case, the conclusions
from the previous trials will need to be established with at least
another set of clinical trials testing the relevant issue. Due to
the need to find new subjects for any additional clinical trials
and the limited pool from which such subjects can be selected, any
such determination by the FDA could result in a delay in obtaining
FDA approval or require additional financial
expenditures.
We may not be able to keep up with the rapid technological change
in the biotechnology and pharmaceutical industries, which could
make any future approved products obsolete and reduce our
revenue.
Biotechnology and
related pharmaceutical technologies have undergone and continue to
be subject to rapid and significant change. Our future will depend
in large part on our ability to maintain a competitive position
with respect to these technologies. Our competitors may render our
technologies obsolete by advances in existing technological
approaches or the development of new or different approaches,
potentially eliminating the advantages in our drug discovery
process that we believe we derive from our research approach and
proprietary technologies. In addition, any future products that we
develop, including our clinical product candidates, may become
obsolete before we recover expenses incurred in developing those
products, which may require that we raise additional funds to
continue our operations.
Competing products and technologies may make our proposed products
noncompetitive.
Flibanserin, a
daily-use oral drug sold under the trade name Addyi®, has been
approved by the FDA for HSDD in premenopausal women. There are
other products being developed for HSDD and other FSD indications,
including a number of oral combination drugs, some of which
incorporate testosterone, antidepressants or PDE-5 inhibitors.
There is competition to develop drugs for treatment of HSDD and FSD
in both premenopausal and postmenopausal patients. Our
bremelanotide drug product is intended to be administered by
subcutaneous injection, and an as needed drug product for the same
indication which utilizes another route of administration, such as
a conventional oral drug product, may make subcutaneous
bremelanotide noncompetitive.
24
There
are three oral FDA-approved PDE-5 inhibitor drugs for the treatment
of ED, other approved products and devices for ED, and other
products in development for treatment of ED, including products in
clinical trials. There is competition to develop drugs for ED in
patients non-responsive to PDE-5 inhibitor drugs.
There
are several products approved for use in treatment of obesity and
related indications, and a number of other products being developed
for treatment of obesity, including products in clinical trials.
There is intense competition to develop drugs for treatment of
obesity and related indications.
There
are a number of products approved for use in treating inflammatory
diseases and dermatologic indication, and other products being
developed, including products in clinical trials.
We are
aware of one recombinant natriuretic peptide product for acutely
decompensated congestive heart failure approved and marketed in the
United States, and another recombinant natriuretic peptide product
approved and marketed in Japan. Clinical trials on other
natriuretic peptide products are being conducted in the United
States. In addition, other products for treatment of heart failure
are either currently being marketed or in development, including a
combination drug which increases active levels of ANP.
There
are numerous products approved for use in treatment of asthma, and
a number of other products being developed for treatment of acute
exacerbations of asthma, including products in clinical trials.
There is intense competition to develop drugs for treatment of
acute exacerbations of asthma.
As
discussed above, the biopharmaceutical industry is highly
competitive. We are likely to encounter significant competition
with respect to bremelanotide, other melanocortin receptor agonist
compounds and PL-3994. Most of our competitors have substantially
greater financial and technological resources than we do. Many of
them also have significantly greater experience in research and
development, marketing, distribution and sales than we do.
Accordingly, our competitors may succeed in developing, marketing,
distributing and selling products and underlying technologies more
rapidly than we can. These competitive products or technologies may
be more effective and useful or less costly than bremelanotide,
other melanocortin receptor agonist compounds or PL-3994. In
addition, academic institutions, hospitals, governmental agencies
and other public and private research organizations are also
conducting research and may develop competing products or
technologies on their own or through strategic alliances or
collaborative arrangements.
We rely on third parties over whom we have no control to conduct
preclinical studies, clinical trials and other research for our
product candidates and their failure to timely perform their
obligations could significantly harm our product
development.
We have
limited research and development staff and do not have dedicated
research or development facilities. We rely on third parties and
independent contractors, such as researchers at CROs and
universities, in certain areas that are particularly relevant to
our research and product development plans. We engage such
researchers to conduct our preclinical studies, clinical trials and
associated tests. These outside contractors are not our employees
and may terminate their engagements with us at any time. In
addition, we have limited control over the resources that these
contractors devote to our programs and they may not assign as great
a priority to our programs or pursue them as diligently as we would
if we were undertaking such programs ourselves. There is also
competition for these relationships, and we may not be able to
maintain our relationships with our contractors on acceptable
terms. If our third-party contractors do not carry out their duties
under their agreements with us, fail to meet expected deadlines or
fail to comply with appropriate standards for preclinical or
clinical research, our ability to develop our product candidates
and obtain regulatory approval on a timely basis, if at all, may be
materially adversely affected.
Production and supply of our product candidates depend on contract
manufacturers over whom we have no control, with the risk that we
may not have adequate supplies of our product candidates or
products.
We do
not have the facilities to manufacture the bremelanotide active
drug ingredient, the autoinjector pen component of our
bremelanotide combination product, or to fill, assemble and package
our bremelanotide combination product, or to manufacture any of our
other potential products such as PL-3994, PL-8177 and other
melanocortin receptor agonist compounds. Our contract manufacturers
must perform these manufacturing activities in a manner that
complies with FDA regulations. Our ability to control third-party
compliance with FDA requirements is limited to contractual remedies
and rights of inspection. The manufacturers of approved products
and their manufacturing facilities will be subject to continual
review and periodic inspections by the FDA and other authorities
where applicable, and must comply with ongoing regulatory
requirements, including FDA regulations concerning GMP. Failure of
third-party manufacturers to comply with GMP, medical device QSR,
or other FDA requirements may result in enforcement action by the
FDA. Failure to conduct their activities in compliance with FDA
regulations could delay our development programs or negatively
impact our ability to receive FDA approval of our potential
products or continue marketing if they are approved. Establishing
relationships with new suppliers, who must be FDA-approved, is a
time-consuming and costly process.
25
Reliance on
third-party manufacturers entails risk, to which we would not be
subject if we manufactured product candidates or products
ourselves, including:
●
reliance on the
third party for regulatory compliance and quality
assurance;
●
the possible breach
of the manufacturing agreement by the third party because of
factors beyond our control;
●
the possible
termination or non-renewal of the agreement by the third party,
based on its own business priorities, at a time that is costly or
inconvenient for us; and
●
drug product
supplies not meeting the requisite requirements for clinical trial
use.
If we
are not able to obtain adequate supplies of our product candidates,
it will be more difficult for us to develop our product candidates
and compete effectively. Our product candidates and any products
that we and/or our potential future collaborators may develop may
compete with other product candidates and products for access to
manufacturing facilities.
If we are unable to establish sales and marketing capabilities
within our organization or enter into and maintain agreements with
third parties to market and sell our product candidates, we may be
unable to generate product revenue.
We do
not currently have any experience in sales, marketing and
distribution of pharmaceutical products. We will need to establish
sales and marketing capabilities within our organization or
establish and maintain agreements with third parties to market and
sell our product candidates. We do not have marketing partners for
any of our products, including bremelanotide and PL-3994. If any of
these products are approved by the FDA or other regulatory
authorities, we must either develop marketing, distribution and
selling capacity and expertise, which will be costly and time
consuming, or enter into agreements with other companies to provide
these capabilities. We may not be able to enter into suitable
agreements on acceptable terms, if at all. Engaging a third party
to perform these services could delay the commercialization of any
of our product candidates, if approved for commercial sale. If we
are unable to establish adequate sales, marketing and distribution
capabilities, whether independently or with third parties, we may
not be able to generate product revenue and our business would
suffer. In addition, if we enter into arrangements with third
parties to perform sales, marketing and distribution services, our
product revenues are likely to be lower than if we could market and
sell any products that we develop ourselves.
We will need to hire additional employees in order to commercialize
our product candidates in the future. Any inability to manage
future growth could harm our ability to commercialize our product
candidates, increase our costs and adversely impact our ability to
compete effectively.
In
order to commercialize our product candidates, we will need to hire
experienced sales and marketing personnel to sell and market those
product candidates we decide to commercialize, and we will need to
expand the number of our managerial, operational, financial and
other employees to support commercialization. Competition exists
for qualified personnel in the biopharmaceutical
field.
Future
growth will impose significant added responsibilities on members of
management, including the need to identify, recruit, maintain and
integrate additional employees. Our future financial performance
and our ability to commercialize our product candidates and to
compete effectively will depend, in part, on our ability to manage
any future growth effectively.
Our ability to achieve revenues from the sale of our products in
development will depend, in part, on our ability to obtain adequate
reimbursement from Medicare, Medicaid, private insurers and other
healthcare payers.
Our
ability to successfully commercialize our products in development
will depend, in significant part, on the extent to which we or our
marketing partners can obtain reimbursement for our products and
also reimbursement at appropriate levels for the cost of our
products. Obtaining reimbursement from governmental payers,
insurance companies, HMOs and other third-party payers of
healthcare costs is a time-consuming and expensive process. There
is no guarantee that our products will ultimately be reimbursed.
There is significant uncertainty concerning third-party
reimbursement for the use of any pharmaceutical product
incorporating new technology and third-party reimbursement might
not be available for our proposed products once approved, or if
obtained, might not be adequate.
There
is significant uncertainty concerning the extent and scope of
third-party reimbursement for products treating HSDD and other
forms of FSD. Based on third-party reimbursement for approved
products treating ED, we believe bremelanotide for HSDD will be
classified as a Tier 3 drug, so that reimbursement will be limited
for bremelanotide for treatment of premenopausal women with HSDD,
assuming the product is approved by the FDA. If we are able to
obtain reimbursement, continuing efforts by governmental and
third-party payers to contain or reduce costs of healthcare may
adversely affect our future revenues and ability to achieve
profitability. Third-party payers are increasingly challenging the
prices charged for diagnostic and therapeutic products and related
services. Reimbursement from governmental payers is subject to
statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and other policy changes, all of which could
materially decrease the range of products for which we are
reimbursed or the rates of reimbursement by government payers. In
addition, recent legislation reforming the healthcare system may
result in lower prices or the actual inability of prospective
customers to purchase our products in development. The cost
containment measures that healthcare payers and providers are
instituting and the effect of any healthcare reform could
materially and adversely affect our ability to operate profitably.
Furthermore, even if reimbursement is available, it may not be
available at price levels sufficient for us to realize a positive
return on our investment, which would have a material adverse
effect on our business, financial condition and results of
operations.
26
Even if we receive regulatory approval for our products in Europe,
we may not be able to secure adequate pricing and reimbursement in
Europe for us or any strategic partner to achieve
profitability.
Even if
one or more of our products are approved in Europe, we may be
unable to obtain appropriate pricing and reimbursement for such
products. In most European markets, demand levels for healthcare in
general and for pharmaceuticals in particular are principally
regulated by national governments. Therefore, pricing and
reimbursement for our products will have to be negotiated on a
“Member State by Member State” basis according to
national rules, as there does not exist a centralized European
process. As each Member State has its own national rules governing
pricing control and reimbursement policy for pharmaceuticals, there
are likely to be uncertainties attaching to the review process, and
the level of reimbursement that national governments are prepared
to accept. In the current economic environment, governments and
private payers or insurers are increasingly looking to contain
healthcare costs, including costs on drug therapies. If we are
unable to obtain adequate pricing and reimbursement for our
products in Europe, we or a potential strategic partner or
collaborator may not be able to cover the costs necessary to
manufacture, market and sell the product, limiting or preventing
our ability to achieve profitability.
We may incur substantial liabilities and may be required to limit
commercialization of our products in response to product liability
lawsuits.
The
testing and marketing of medical products entails an inherent risk
of product liability. If we cannot successfully defend ourselves
against product liability claims, we may incur substantial
liabilities or be required to limit commercialization of our
products or cease clinical trials. Our inability to obtain
sufficient product liability insurance at an acceptable cost to
protect against potential product liability claims could prevent or
inhibit the commercialization of pharmaceutical products we
develop, alone or with corporate collaborators. We currently carry
$10 million liability insurance in the aggregate as to certain
clinical trial risks, but we do not have and have not obtained
quotations for commercial product liability insurance. We, or any
corporate collaborators, may not in the future be able to obtain
insurance at a reasonable cost or in sufficient amounts, if at all.
Even if our agreements with any future corporate collaborators
entitle us to indemnification against losses, such indemnification
may not be available or adequate should any claim
arise.
Our internal computer systems, or those of our third-party
contractors or consultants, may fail or suffer security breaches,
which could result in a material disruption of our product
development programs.
Despite
the implementation of security measures, our internal computer
systems and those of our third-party contractors and consultants
are vulnerable to damage from computer viruses, unauthorized
access, natural disasters, terrorism, war and telecommunication and
electrical failures. We rely on industry accepted measures and
technology to secure confidential and proprietary information
maintained on our computer systems. However, these measures and
technology may not adequately prevent security breaches. While we
do not believe that we have experienced any such system failure,
accident, or security breach to date, if such an event were to
occur and cause interruptions in our operations, it could result in
a loss of clinical trial data for our product candidates which
could result in delays in our regulatory approval efforts and
significantly increase our costs to recover or reproduce the data.
To the extent that any disruption or security breach results in a
loss of or damage to our data or applications or other data or
applications relating to our technology, intellectual property,
research and development or product candidates, or inappropriate
disclosure of confidential or proprietary information, we could
incur liabilities and the further development of our product
candidates could be delayed.
We may be subject, directly or indirectly, to federal and state
healthcare fraud and abuse laws, false claims laws, and health
information privacy and security laws. If we are unable to comply,
or have not fully complied, with such laws, we could face
substantial penalties.
If we
begin commercializing any of our products in the United States, our
operations may be directly, or indirectly through our customers,
subject to various federal and state fraud and abuse laws,
including, without limitation, the federal Anti-Kickback Statute,
the federal False Claims Act, and physician sunshine laws and
regulations. These laws may impact, among other things, our
proposed sales, marketing, and education programs. In addition, we
may be subject to 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:
27
●
the federal
Anti-Kickback Statute, which prohibits, among other things, persons
or entities from soliciting, receiving, offering or providing
remuneration, directly or indirectly, in return for or to induce
either the referral of an individual for, or the purchase order or
recommendation of, any item or services for which payment may be
made under a federal health care program such as the Medicare and
Medicaid programs;
●
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 payors that
are false or fraudulent;
●
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 and making false
statements relating to healthcare matters;
●
HIPPA, as amended
by the Health Information Technology and Clinical Health Act, or
HITECH, and its implementing regulations, which imposes certain
requirements relating to the privacy, security, and transmission of
individually identifiable health information;
●
The federal
physician sunshine requirements under the Affordable Care Act,
which require manufacturers of drugs, devices, biologics, and
medical supplies to report annually to the U.S. Department of
Health and Human Services information related to payments and other
transfers of value to physicians, other healthcare providers, and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members and applicable group purchasing organizations;
and
●
state law
equivalents of each of the above federal laws, such as
anti-kickback and false claims laws that may apply to items or
services reimbursed by any third-party payor, including commercial
insurers, state laws that require pharmaceutical companies to
comply with the pharmaceutical industry's voluntary compliance
guidelines and the relevant compliance guidance promulgated by the
federal government, or otherwise restrict payments that may be made
to healthcare providers and other potential referral sources; state
laws that require drug manufacturers to report information related
to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures; and state laws
governing the privacy and security of health information in certain
circumstances, many of which differ from each other in significant
ways and may not have the same effect, thus complicating compliance
efforts.
Because
of the breadth of these laws and the narrowness of the statutory
exceptions and safe harbors available, it is possible that some of
our business activities could be subject to challenge under one or
more of such laws. In addition, recent health care reform
legislation has strengthened these laws. For example, the
Affordable Care Act, among other things, amends the intent
requirement of the federal anti-kickback and criminal healthcare
fraud statutes. A person or entity no longer needs to have actual
knowledge of this statute or specific intent to violate it.
Moreover, the Affordable Care Act provides that the government may
assert that a claim including items or services resulting from a
violation of the federal anti-kickback statute constitutes a false
or fraudulent claim for purposes of the False Claims
Act.
If our
operations are found to be in violation of any of the laws
described above or any other governmental regulations that apply to
us, we may be subject to penalties, including civil and criminal
penalties, damages, fines, exclusion from participation in
government health care programs, such as Medicare and Medicaid,
imprisonment, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to
operate our business and our results of operations
We are highly dependent on our management team, senior staff
professionals and third-party contractors and consultants, and the
loss of their services could materially adversely affect our
business.
We rely
on our relatively small management team and staff as well as
various contractors and consultants to provide critical services.
Our ability to execute our clinical programs for bremelanotide and
PL-3994 and our preclinical programs for MC1r and MC4r peptide drug
candidates depends on our continued retention and motivation of our
management and senior staff professionals, including executive
officers and senior members of product development and management,
including commercialization, who possess significant technical
expertise and experience and oversee our development and
commercialization programs. If we lose the services of existing key
personnel, our development programs could be adversely affected if
suitable replacement personnel are not recruited quickly. Our
success also depends on our ability to develop and maintain
relationships with contractors, consultants and scientific
advisors.
There
is competition for qualified personnel, contractors and consultants
in the pharmaceutical industry, which makes it difficult to attract
and retain the qualified personnel, contractors and consultants
necessary for the development and growth of our business. Our
failure to attract and retain such personnel, contractors and
consultants could have a material adverse effect on our business,
results of operations and financial condition.
28
Because we expect bremelanotide for the treatment of HSDD to be
classified as a Tier 3 drug with reimbursement by third-party
payers similar to approved products for treating ED, demand for
this product will be tied to discretionary spending levels of our
targeted patient population and particularly affected by
unfavorable economic conditions.
The
market for HSDD may be particularly vulnerable to unfavorable
economic conditions. We expect bremelanotide for the treatment of
HSDD to have significant copay or deductible requirements and to be
only partially reimbursed by third-party payers and, as a result,
demand for this product may be tied to discretionary spending
levels of our targeted patient population. The recent global
financial crisis caused extreme volatility and disruptions in the
capital and credit markets. A severe or prolonged economic downturn
could result in a variety of risks to our business, including
weakened demand for bremelanotide for HSDD or any future product
candidates, if approved, and our ability to raise additional
capital when needed on acceptable terms, if at all. This is
particularly true in Europe, which is undergoing a continued severe
economic crisis. A weak or declining economy could also strain our
suppliers, possibly resulting in supply disruption, or cause our
customers to delay making payments for our services. Any of the
foregoing could harm our business and we cannot anticipate all of
the ways in which future economic climates and financial market
conditions could adversely impact our business.
Risks
Related to Government Regulation
Both before and after marketing approval, our product candidates
are subject to ongoing regulatory requirements and, if we fail to
comply with these continuing requirements, we could be subject to a
variety of sanctions and the sale of any approved commercial
products could be suspended.
Both
before and after regulatory approval to market a particular product
candidate, the manufacturing, labeling, packaging, adverse event
reporting, storage, advertising and promotion and record keeping
related to the product candidates are subject to extensive
regulatory requirements. If we fail to comply with the regulatory
requirements of the FDA and other applicable U.S. and foreign
regulatory authorities, we could be subject to administrative or
judicially imposed sanctions, including:
●
restrictions on the
products or manufacturing process;
●
warning
letters;
●
civil or criminal
penalties;
●
fines;
●
injunctions;
●
imposition of a
Corporate Integrity Agreement requiring heightened monitoring of
our compliance functions, overseen by outside monitors, and
enhanced reporting requirements to, and oversight by, the FDA and
other government agencies;
●
product seizures or
detentions and related publicity requirements;
●
suspension or
withdrawal of regulatory approvals;
●
regulators or IRBs
may not authorize us or any potential future collaborators to
commence a clinical trial or conduct a clinical trial at a
prospective trial site;
●
total or partial
suspension of production; and
●
refusal to approve
pending applications for marketing approval of new product
candidates.
Changes
in the regulatory approval policy during the development period,
changes in or the enactment of additional regulations or statutes,
or changes in the regulatory review for each submitted product
application may cause delays in the approval or rejection of an
application. Even if the FDA approves a product candidate, the
approval may impose significant restrictions on the indicated uses,
conditions for use, labeling, advertising, promotion, marketing
and/or production of such product, and may impose ongoing
requirements for post-approval studies, including additional
research and development and clinical trials. The approval may also
impose risk evaluation mitigation strategies, or REMS, on a product
if the FDA believes there is a reason to monitor the safety of the
drug in the marketplace. REMS may include requirements for
additional training for health care professionals, safety
communication efforts and limits on channels of distribution, among
other things. The sponsor would be required to evaluate and monitor
the various REMS activities and adjust them if need be. The FDA
also may impose various civil or criminal sanctions for failure to
comply with regulatory requirements, including withdrawal of
product approval.
Furthermore, the
approval procedure and the time required to obtain approval varies
among countries and can involve additional testing beyond that
required by the FDA. Approval by one regulatory authority does not
ensure approval by regulatory authorities in other jurisdictions.
The FDA has substantial discretion in the approval process and may
refuse to accept any application or may decide that our data are
insufficient for approval and require additional preclinical,
clinical or other studies.
29
In
addition, varying interpretations of the data obtained for
preclinical and clinical testing could delay, limit or prevent
regulatory approval of a product candidate. Even if we submit an
application to the FDA for marketing approval of a product
candidate, it may not result in marketing approval from the
FDA.
We do
not expect to receive regulatory approval for the commercial sale
of any of our product candidates that are in development in the
near future, if at all. The inability to obtain FDA approval or
approval from comparable authorities in other countries for our
product candidates would prevent us or any potential future
collaborators from commercializing these product candidates in the
United States or other countries.
We may not be able to obtain regulatory approval of bremelanotide
for HSDD even if the product is effective in treating
HSDD.
Clinical drug
development programs for our product candidates are very expensive,
time-consuming, difficult to design and implement and their outcome
is inherently uncertain. Approval of bremelanotide for treatment of
HSDD in premenopausal women requires a determination by the FDA
that the product is both safe and effective. Our Phase 2B clinical
trials for HSDD demonstrated an acceptable safety profile and, at
selected doses, statistically significant efficacy. However, the
FDA may ultimately disagree with our definition of efficacy in
HSDD, our clinical trial designs, or our interpretation of our
clinical trial results. Moreover, results obtained in Phase 3
clinical trials may be inconsistent with results obtained in our
Phase 2B trials, and may demonstrate either an unacceptable safety
profile or insufficient efficacy. It is also possible that safety
or efficacy results obtained in Phase 3 clinical trials will be
inconclusive. It is not possible to predict, with any assurance,
whether the FDA will approve bremelanotide for any indications. The
FDA may deny or delay approval of any application for bremelanotide
if the FDA determines that the clinical data do not adequately
establish the safety of the drug even if efficacy is established.
If FDA approves bremelanotide, the approved labeling of the product
may be limited or restricted in such ways as to inhibit or prevent
the successful market acceptance and profitability of the product.
Bremelanotide could take a significantly longer time to obtain
approval than we expect and it may never gain approval. If
regulatory approval of bremelanotide is delayed, limited or never
obtained, our business, financial condition and results of
operations would be materially adversely affected.
The regulatory approval process is lengthy, expensive and
uncertain, and may prevent us from obtaining the approvals that we
require.
Government
authorities in the United States and other countries extensively
regulate the advertising, labeling, storage, record-keeping,
safety, efficacy, research, development, testing, manufacture,
promotion, marketing and distribution of drug products. Drugs are
subject to rigorous regulation in the United States by the FDA and
similar regulatory bodies in other countries. The steps ordinarily
required by the FDA before a new drug may be marketed in the United
States include:
●
completion of
non-clinical tests including preclinical laboratory and formulation
studies and animal testing and toxicology;
●
submission to the
FDA of an investigational new drug, or IND, application, which must
become effective before clinical trials may begin, and which may be
placed on “clinical hold” by the FDA, meaning the trial
may not commence, or must be suspended or terminated prior to
completion;
●
performance of
adequate and well-controlled Phase 1, 2 and 3 human clinical trials
to establish the safety and efficacy of the drug for each proposed
indication, and potentially post-approval or Phase 4 studies to
further define the drug’s efficacy and safety, generally or
in specific patient populations;
●
submission to the
FDA of a new drug application, or NDA, that must be accompanied by
a substantial “user fee” payment;
●
FDA review and
approval of the NDA before any commercial marketing or sale;
and
●
compliance with
post-approval commitments and requirements.
Satisfaction of FDA
pre-market approval requirements for new drugs typically takes a
number of years and the actual time required for approval may vary
substantially based upon the type, complexity and novelty of the
product or disease to be treated by the drug. The results of
product development, preclinical studies and clinical trials are
submitted to the FDA as part of an NDA. The NDA also must contain
extensive manufacturing information, demonstrating compliance with
applicable GMP requirements. Once the submission has been accepted
for filing, the FDA generally has twelve months to review the
application and respond to the applicant. Such response may be an
approval, or may be a “complete response letter”
outlining additional data or steps that must be completed prior to
further FDA review of the NDA. The review process is often
significantly extended by FDA requests for additional information
or clarification. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from
clinical trials is not always conclusive and may be susceptible to
varying interpretations that could delay, limit or prevent
regulatory approval. The FDA may refer the NDA to an advisory
committee for review, evaluation and recommendation as to whether
the application should be approved, but the FDA is not bound by the
recommendation of the advisory committee. The FDA may deny or delay
approval of applications that do not meet applicable regulatory
criteria or if the FDA determines that the clinical data do not
adequately establish the safety and efficacy of the drug.
Therefore, our proposed products could take a significantly longer
time than we expect or may never gain approval. If regulatory
approval is delayed or never obtained, our business, financial
condition and results of operations would be materially adversely
affected.
30
Some of
our products or product candidates, including bremelanotide, may be
used in combination with a drug delivery device, such as an
injector or other delivery system. Medical products containing a
combination of new drugs, biological products or medical devices
are regulated as “combination products” in the United
States. A combination product generally is defined as a product
comprised of components from two or more regulatory categories
(e.g., drug/device, device/biologic, drug/biologic). Each component
of a combination product is subject to the requirements established
by the FDA for that type of component, whether a new drug, biologic
or device. In order to facilitate pre-market review of combination
products, the FDA designates one of its centers to have primary
jurisdiction for the pre-market review and regulation of the
overall product based upon a determination by the FDA of the
primary mode of action of the combination product. The
determination whether a product is a combination product or two
separate products is made by the FDA on a case-by-case basis. Our
product candidates intended for use with such devices, or expanded
indications that we may seek for our products used with such
devices, may not be approved or may be substantially delayed in
receiving approval if the devices do not gain and/or maintain their
own regulatory approvals or clearances. Where approval of the drug
product and device is sought under a single application, the
increased complexity of the review process may delay approval. In
addition, because these drug delivery devices are provided by
single source unaffiliated third-party companies, we are dependent
on the sustained cooperation and effort of those third-party
companies both to supply the devices, maintain their own regulatory
compliance, and, in some cases, to conduct the studies required for
approval or other regulatory clearance of the devices. We are also
dependent on those third-party companies continuing to maintain
such approvals or clearances once they have been received. Failure
of third-party companies to supply the devices, to successfully
complete studies on the devices in a timely manner, or to obtain or
maintain required approvals or clearances of the devices, and
maintain compliance with all regulatory requirements, could result
in increased development costs, delays in or failure to obtain
regulatory approval and delays in product candidates reaching the
market or in gaining approval or clearance for expanded labels for
new indications.
Upon
approval, a product candidate may be marketed only in those dosage
forms and for those indications approved by the FDA. Once approved,
the FDA may withdraw the product approval if compliance with
regulatory requirements is not maintained or if problems occur
after the product reaches the marketplace. In addition, the FDA may
require post-marketing studies, referred to as Phase 4 studies, to
monitor the approved products in a specific subset of patients or a
larger number of patients than were required for product approval
and may limit further marketing of the product based on the results
of these post-market studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to seek
injunctions, levy fines and civil penalties, criminal prosecution,
withdraw approvals and seize products or request
recalls.
If
regulatory approval of any of our product candidates is granted, it
will be limited to certain disease states or conditions, patient
populations, duration or frequency of use, and will be subject to
other conditions as set forth in the FDA-approved labeling. Adverse
experiences with the product must be reported to the FDA and could
result in the imposition of market restriction through labeling
changes or in product removal. Product approvals may be withdrawn
if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur
following approval.
Outside
the United States, our ability to market our product candidates
will also depend on receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory approval
process generally includes all of the risks associated with FDA
approval described above. The requirements governing the conduct of
clinical trials and marketing authorization vary widely from
country to country. At present, foreign marketing authorizations
are applied for at a national level, although within the European
Community, or EC, registration procedures are available to
companies wishing to market a product to more than one EC member
state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficiency has been presented, a
marketing authorization will be granted. If we do not obtain, or
experience difficulties in obtaining, such marketing
authorizations, our business, financial condition and results of
operations may be materially adversely affected.
31
Legislative or regulatory healthcare reforms in the United States
may make it more difficult and costly for us to obtain regulatory
clearance or approval of bremelanotide for HSDD or any future
product candidates and to produce, market and distribute our
products after clearance or approval is obtained.
From
time to time, legislation is drafted and introduced in Congress,
and court decisions are issued, that could significantly change the
statutory provisions governing the regulatory clearance or
approval, manufacture and marketing of regulated products or the
reimbursement thereof. In addition, FDA regulations and guidance
are often revised or reinterpreted by the FDA in ways that may
significantly affect our business and our products. Any new
regulations or revisions or reinterpretations of existing
regulations may impose additional costs or lengthen review times of
bremelanotide for HSDD or any future product candidates. We cannot
determine what effect changes in regulations, statutes, court
decisions, legal interpretation or policies, when and if
promulgated, enacted, issued or adopted may have on our business in
the future. Such changes could, among other things:
●
require changes to
manufacturing methods;
●
require recall,
replacement or discontinuance of one or more of our
products;
●
require additional
recordkeeping;
●
limit or restrict
our ability to engage in certain types of marketing or promotional
activities;
●
alter or eliminate
the scope or terms of any currently available regulatory
exclusivities; and
●
restrict or
eliminate our ability to settle any patent litigation we may bring
against potential generic competitors.
Each of
these would likely entail substantial time and cost and could
materially harm our business and our financial results. In
addition, delays in receipt of or failure to receive regulatory
clearances or approvals for any future products would harm our
business, financial condition and results of
operations.
Changes in healthcare policy could adversely affect our
business.
U.S.
and foreign governments continue to propose and pass legislation
designed to reduce the cost of healthcare. For example, the
Medicare Prescription Drug Improvement and Modernization Act of
2003, or MMA, expanded Medicare coverage for drugs purchased by
Medicare beneficiaries and introduced new reimbursement
methodologies. In addition, this law provided authority for
limiting the number of drugs that will be covered in any
therapeutic class. We do not know what impact the MMA and similar
laws will have on the availability of coverage for and the price
that we receive for any approved products. Moreover, while the MMA
applies only to drug benefits for Medicare beneficiaries, private
payers often follow Medicare policies in setting their own
reimbursement policies, and any reduction in reimbursement that
results from the MMA may result in similar reductions by private
payers.
In
March 2010, the President signed the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education
Affordability Reconciliation Act, together the ACA. This law has
resulted in an increase in the number of people who are covered by
both public and private insurance and has changed the way health
care is financed by both government health program and private
insurers, with significant impacts on the pharmaceutical industry.
The ACA contains a number of provisions that may impact our
business and operations in ways that may negatively affect our
potential revenues in the future. For example, the ACA imposes a
non-deductible excise tax on pharmaceutical manufacturers or
importers that sell branded prescription drugs to U.S. government
programs which we believe will increase the cost of any products
that we develop. Moreover, the ACA established a 2.3% medical
device excise tax on certain transactions, including many United
States sales of medical devices, which currently includes, and we
expect will continue to include, United States sales of drug/device
combination products. While the 2.3% medical device excise tax has
been suspended for two years, until September 2017, unless
legislative action is taken it will go back into effect after the
suspension period. In addition, as part of the ACA’s
provisions closing a funding gap that currently exists in the
Medicare Part D prescription drug program (commonly known as the
“donut hole”), we will be required to provide a 50%
discount on any branded prescription drugs that we develop sold to
beneficiaries who fall within the donut hole. While it is too early
to predict all of the specific effects the ACA or any future
healthcare reform legislation will have on our business, they could
have a material adverse effect on our business and financial
condition.
The
availability of government reimbursement for prescription drugs
will be impacted by the Budget Control Act of 2011, which was
signed into law on August 2, 2011. This law is expected to result
in federal spending cuts totaling between $1.2 trillion and $1.5
trillion over the next decade, over half of which will include cuts
in Medicare and other health-related spending.
Risks
Related to Our Intellectual Property
If we fail to adequately protect or enforce our intellectual
property rights or secure rights to patents of others, the value of
our intellectual property rights would diminish.
Our
success, competitive position and future revenues will depend in
part on our ability and the abilities of our licensors to obtain
and maintain patent protection for our products, methods, processes
and other technologies, to preserve our trade secrets, to prevent
third parties from infringing on our proprietary rights and to
operate without infringing the proprietary rights of third parties.
We cannot predict:
32
●
the degree and
range of protection any patents will afford us against competitors,
including whether third parties will find ways to invalidate or
otherwise circumvent our patents;
●
if and when patents
will be issued;
●
whether or not
others will obtain patents claiming aspects similar to those
covered by our patents and patent applications; and
●
whether we will
need to initiate litigation or administrative proceedings, which
may be costly whether we win or lose.
If our
products, methods, processes and other technologies infringe the
proprietary rights of other parties we could incur substantial
costs and we may have to:
●
obtain licenses,
which may not be available on commercially reasonable terms, if at
all;
●
redesign our
products or processes to avoid infringement;
●
stop using the
subject matter claimed in the patents held by others;
●
pay damages;
or
●
defend litigation
or administrative proceedings, which may be costly whether we win
or lose, and which could result in a substantial diversion of our
management resources.
We may become involved in lawsuits to protect or enforce our
patents or other intellectual property or the patents of our
licensors, which could be expensive and time
consuming.
Competitors may
infringe our intellectual property, including our patents or the
patents of our licensors. As a result, we may be required to file
infringement claims to stop third-party infringement or
unauthorized use. This can be expensive, particularly for a company
of our size, and time-consuming. In addition, in an infringement
proceeding, a court may decide that a patent of ours 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 patent claims
do not cover its technology or that the factors necessary to grant
an injunction against an infringer are not satisfied.
An
adverse determination of any litigation or other proceedings could
put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk
of not issuing.
Interference,
derivation or other proceedings brought at the United States Patent
and Trademark Office, or USPTO, may be necessary to determine the
priority or patentability of inventions with respect to our patent
applications or those of our licensors or collaborators. Litigation
or USPTO proceedings brought by us may fail or may be invoked
against us by third parties. Even if we are successful, domestic or
foreign litigation or USPTO or foreign patent office proceedings
may result in substantial costs and distraction to our management.
We may not be able, alone or with our licensors or collaborators,
to prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as
in the United States.
Furthermore,
because of the substantial amount of discovery required in
connection with intellectual property litigation or other
proceedings, there is a risk that some of our confidential
information could be compromised by disclosure during this type of
litigation or proceedings. In addition, during the course of this
kind of litigation or proceedings, there could be public
announcements of the results of hearings, motions or other interim
proceedings or developments or public access to related documents.
If investors perceive these results to be negative, the market
price for our common stock could be significantly
harmed.
If we infringe or are alleged to infringe intellectual property
rights of third parties, our business could be harmed.
Our
research, development and commercialization activities may infringe
or otherwise violate or be claimed to infringe or otherwise violate
patents owned or controlled by other parties. There may also be
patent applications that have been filed but not published that,
when issued as patents, could be asserted against us. These third
parties could bring claims against us that would cause us to incur
substantial expenses and, if successful against us, could cause us
to pay substantial damages. Further, if a patent infringement suit
were brought against us, we could be forced to stop or delay
research, development, manufacturing or sales of the product or
product candidate that is the subject of the suit.
As a
result of patent infringement claims, or to avoid potential claims,
we may choose or be required to seek licenses from third parties.
These licenses may not be available on acceptable terms, or at all.
Even if we are able to obtain a license, the license would likely
obligate us to pay license fees or royalties or both, and the
rights granted to us might be nonexclusive, which could result in
our competitors gaining access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product,
or be forced to cease some aspect of our business operations, if,
as a result of actual or threatened patent infringement claims, we
are unable to enter into licenses on acceptable terms, if at
all.
33
There
has been substantial litigation and other proceedings regarding
patent and other intellectual property rights in the pharmaceutical
industry. In addition to infringement claims against us, we may
become a party to other patent litigation and other proceedings,
including interference, derivation or post-grant proceedings
declared or granted by the USPTO and similar proceedings in foreign
countries, regarding intellectual property rights with respect to
our current or future products. The cost to us of any patent
litigation or other proceeding, even if resolved in our favor,
could be substantial. Some of our competitors may be able to
sustain the costs of such litigation or proceedings more
effectively than we can because of their substantially greater
financial resources. Patent litigation and other proceedings may
also absorb significant management time. Uncertainties resulting
from the initiation and continuation of patent litigation or other
proceedings could impair our ability to compete in the marketplace.
The occurrence of any of the foregoing could have a material
adverse effect on our business, financial condition or results of
operations.
We may not be able to protect our intellectual property rights
throughout the world.
Filing,
prosecuting and defending patents on product candidates in all
countries throughout the world would be prohibitively expensive,
and our intellectual property rights in some countries outside the
United States can be less extensive than those in the United
States. In addition, the laws of some foreign countries do not
protect intellectual property rights to the same extent as federal
and state laws in the United States and in some cases may even
force us to grant a compulsory license to competitors or other
third parties. Consequently, we may not be able to prevent third
parties from practicing our inventions in all countries outside the
United States, or from selling or importing products made using our
inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we have
not obtained patent protection to develop their own products and
further, may export otherwise infringing products to territories
where we have patent protection, but enforcement is not as strong
as that in the United States. These products may compete with our
products and our patents or other intellectual property rights may
not be effective or sufficient to prevent them from
competing.
Many
companies have encountered significant problems in protecting and
defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain
developing countries, do not favor the enforcement of patents and
other intellectual property protection, particularly those relating
to biopharmaceuticals, which could make it difficult for us to stop
the infringement of our patents or marketing of competing products
in violation of our proprietary rights generally. Proceedings to
enforce our patent rights in foreign jurisdictions could result in
substantial costs and divert our efforts and attention from other
aspects of our business, could put our patents at risk of being
invalidated or interpreted narrowly and our patent applications at
risk of not issuing and could provoke third parties to assert
claims against us. We may not prevail in any lawsuits that we
initiate and the damages or other remedies awarded, if any, may not
be commercially meaningful. Accordingly, our efforts to enforce our
intellectual property rights around the world may be inadequate to
obtain a significant commercial advantage from the intellectual
property that we develop or license.
In
addition, our ability to protect and enforce our intellectual
property rights may be adversely affected by unforeseen changes in
domestic and foreign intellectual property laws.
If we are unable to keep our trade secrets confidential, our
technologies and other proprietary information may be used by
others to compete against us.
In
addition to our reliance on patents, we attempt to protect our
proprietary technologies and processes by relying on trade secret
laws and agreements with our employees and other persons who have
access to our proprietary information. These agreements and
arrangements may not provide meaningful protection for our
proprietary technologies and processes in the event of unauthorized
use or disclosure of such information, and may not provide an
adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, our competitors may
independently develop substantially equivalent technologies and
processes or gain access to our trade secrets or technology, either
of which could materially and adversely affect our competitive
position.
Risks
Related to Obligations in Our 2012, 2014 and 2015 Private
Placements
Under agreements relating to our 2012, 2014 and 2015 private
placements, we are required to allow purchasers in the 2012, 2014
and 2015 private placements to participate in certain future equity
and debt financings, which may restrict our ability to raise funds
on acceptable terms, or at all.
For six
years after our 2012 private placement, unless the purchasers own
less than 20% of our outstanding common stock calculated as if the
warrants were exercised, and for four years after our 2014 and 2015
private placements, unless the FDA earlier approves bremelanotide
for HSDD, the purchasers have the right of first negotiation on any
subsequent equity or debt financing. Under our 2012 private
placement, if we do not agree to terms of a financing with the
purchasers, and negotiate with a third party on a financing, we
must offer to sell to the purchasers at least 55% of the financing,
and the purchasers may elect to purchase all or a portion of the
financing. Under our 2014 and 2015 private placements, if we do not
agree to terms of a financing with the purchasers, depending on
pricing of the financing, the purchasers have the right to purchase
between 83.5% and all of the financing. We will require significant
additional resources and capital for our bremelanotide development
program, including completing safety and ancillary studies,
preparing and submitting an NDA, and implementing commercial scale
manufacturing, as well as for our other clinical trial programs.
The right of first negotiation and right of participation granted
to the purchasers in our 2012, 2014 and 2015 private placements may
make it more difficult to raise additional funding through public
or private equity or debt financings or other sources. If we are
able to obtain additional funding, such funding may not be
available on acceptable terms
34
Under agreements relating to our 2012, 2014 and 2015 private
placements, so long as any Series A 2012, Series B 2012, Series C
2014 and Series E 2015 warrants are outstanding, we are required to
redeem such warrants at the option of the holders in the event of
any takeover, change of control or other fundamental transaction
which we permit.
Under
the purchase agreements and forms of our Series A, Series B, Series
C and Series E warrants for our 2012, 2014 and 2015 private
placements, if we permit, make or allow a takeover, change of
control or other fundamental transaction, including any transfer of
all or substantially all of our properties or assets, then so long
as any warrants remain outstanding we are required, as elected by
such warrant holders, to pay such holders a warrant early
termination price tied to the greater of the then market price of
our common stock or the amount per share paid to any other person.
The application of these provisions could adversely affect our
financial position and have the effect of delaying or preventing a
change of control or other fundamental transaction, which could
adversely affect the market price of our common stock, and could
make any potential acquisition or change of control more
costly.
Under agreements relating to our 2012, 2014 and 2015 private
placements, so long as any Series A 2012, Series B 2012, Series C
2014 and Series E 2015 warrants are outstanding, we are required to
oppose any takeover or change of control that does not provide
specified rights to holders of such warrants.
Under
the purchase agreements and forms of our Series A, Series B, Series
C and Series E warrants for our 2012, 2014 and 2015 private
placements, so long as any such warrants remain outstanding we are
required to (i) not permit, (ii) take necessary action to prevent
both the occurrence or consummation of, and (iii) not be a party to
any fundamental transaction, change of control or similar event
unless contractually-specified rights are provided with respect to
payment of any such warrant early termination price tied to the
greater of the then market price of our common stock or the amount
per share paid to any other person.
We are
also required, subject to the exercise by our board of its
fiduciary duties, to take all reasonable efforts to adopt a poison
pill or any other anti-takeover provision or method necessary to
prevent the fundamental transaction, change of control or similar
event. The application of these provisions could have the effect of
delaying or preventing a change of control or other fundamental
transaction, which could adversely affect the market price of our
common stock, and could make any potential acquisition or change of
control more costly.
Risks
Related to the Ownership of Our Common Stock
Our stock price is volatile and may fluctuate in a way that is
disproportionate to our operating performance and we expect it to
remain volatile, which could limit investors’ ability to sell
stock at a profit.
The
volatile price of our stock makes it difficult for investors to
predict the value of their investment, to sell shares at a profit
at any given time or to plan purchases and sales in advance. A
variety of factors may affect the market price of our common stock.
These include, but are not limited to:
●
publicity regarding
actual or potential clinical results relating to products under
development by our competitors or us;
●
delay or failure in
initiating, completing or analyzing preclinical or clinical trials
or unsatisfactory designs or results of these trials;
●
interim decisions
by regulatory agencies, including the FDA, as to clinical trial
designs, acceptable safety profiles and the benefit/risk ratio of
products under development;
●
achievement or
rejection of regulatory approvals by our competitors or by
us;
●
announcements of
technological innovations or new commercial products by our
competitors or by us;
●
developments
concerning proprietary rights, including patents;
●
developments
concerning our collaborations;
●
regulatory
developments in the United States and foreign
countries;
●
economic or other
crises and other external factors;
35
●
period-to-period
fluctuations in our revenue and other results of
operations;
●
changes in the
structure of healthcare payment systems or other actions that
affect the effective reimbursement rates for treatment regimens
containing our products;
●
changes in
financial estimates and recommendations by securities analysts
following our business or our industry;
●
sales of our common
stock (or the perception that such sales could occur);
and
●
the other factors
described in this “Risk Factors” section.
We will
not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not
necessarily be indicative of our future performance. If our
revenues, if any, in any particular period do not meet
expectations, we may not be able to adjust our expenditures in that
period, which could cause our operating results to suffer further.
If our operating results in any future period fall below the
expectations of securities analysts or investors, our stock price
may fall by a significant amount.
For the
12-month period ended June 30, 2016, the price of our stock has
been volatile, ranging from a high of $1.18 per share to a low of
$0.36 per share. In addition, the stock market in general, and the
market for biotechnology companies in particular, has experienced
extreme price and volume fluctuations that may have been unrelated
or disproportionate to the operating performance of individual
companies. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our
operating performance.
As a public company in the United States, we are subject to the
Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. We can provide no
assurance that we will, at all times, in the future be able to
report that our internal controls over financial reporting are
effective.
Companies that file
reports with the SEC, including us, are subject to the requirements
of Section 404 of Sarbanes-Oxley. Section 404 requires management
to establish and maintain a system of internal control over
financial reporting, and annual reports on Form 10-K filed under
the Exchange Act, must contain a report from management assessing
the effectiveness of a company’s internal control over
financial reporting. Ensuring that we have adequate internal
financial and accounting controls and procedures in place to
produce accurate financial statements on a timely basis will be a
costly and time-consuming effort that needs to be re-evaluated
frequently. Failure on our part to have effective internal
financial and accounting controls would cause our financial
reporting to be unreliable, could have a material adverse effect on
our business, operating results, and financial condition, and could
cause the trading price of our common stock to fall
dramatically.
If securities or industry analysts do not publish research or
publish unfavorable research about our business, our stock price
and trading volume could decline.
As a
smaller company, it may be difficult for us to attract or retain
the interest of equity research analysts. A lack of research
coverage may adversely affect the liquidity of and market price of
our common stock. We do not have any control of the equity research
analysts or the content and opinions included in their reports. The
price of our stock could decline if one or more equity research
analysts downgrade our stock or issue other unfavorable commentary
or research. If one or more equity research analysts ceases
coverage of our company, or fails to publish reports on us
regularly, demand for our stock could decrease, which in turn could
cause our stock price or trading volume to decline.
Holders of our preferred stock may have interests different from
our common stockholders.
We are
permitted under our certificate of incorporation to issue up to
10,000,000 shares of preferred stock. We can issue shares of our
preferred stock in one or more series and can set the terms of the
preferred stock without seeking any further approval from our
common stockholders. 4,030 shares of our Series A Preferred Stock
remain outstanding as of September 16, 2016. Each share of Series A
Preferred Stock is convertible at any time, at the option of the
holder, and such conversion could dilute the value of our common
stock to current stockholders and could adversely affect the market
price of our common stock. The conversion price decreases if we
sell common stock (or equivalents) for a price per share less than
the conversion price or less than the market price of the common
stock and is also subject to adjustment upon the occurrence of a
merger, reorganization, consolidation, reclassification, stock
dividend or stock split which results in an increase or decrease in
the number of shares of common stock outstanding. Upon (i)
liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, (ii) sale or other disposition of all or
substantially all of the assets of the Company, or (iii) any
consolidation, merger, combination, reorganization or other
transaction in which the Company is not the surviving entity or in
which the shares of common stock constituting in excess of 50% of
the voting power of the Company are exchanged for or changed into
other stock or securities, cash and/or any other property, after
payment or provision for payment of the debts and other liabilities
of the Company, the holders of Series A Preferred Stock will be
entitled to receive, pro rata and in preference to the holders of
any other capital stock, an amount per share equal to $100 plus
accrued but unpaid dividends, if any. Any preferred stock that we
issue may rank ahead of our common stock in terms of dividend
priority or liquidation premiums and may have greater voting rights
than our common stock.
36
Because we do not anticipate paying any cash dividends on our
common stock in the foreseeable future, capital appreciation, if
any, will be your sole source of gains.
We do
not anticipate paying any cash dividends in the foreseeable future
and intend to retain future earnings, if any, for the development
and expansion of our business. Our outstanding Series A Preferred
Stock, consisting of 4,030 shares on September 16, 2016, provides
that we may not pay a dividend or make any distribution to holders
of any class of stock unless we first pay a special dividend or
distribution of $100 per share to the holders of the Series A
Preferred Stock. In addition, the terms of existing or future
agreements may limit our ability to pay dividends. As a result,
capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Anti-takeover provisions of Delaware law and our charter documents
may make potential acquisitions more difficult and could result in
the entrenchment of management.
We are
incorporated in Delaware. Anti-takeover provisions of Delaware law
and our charter documents may make a change in control or efforts
to remove management more difficult. Also, under Delaware law, our
board of directors may adopt additional anti-takeover measures.
Under Section 203 of the Delaware General Corporation Law, a
corporation may not engage in a business combination with an
“interested stockholder” for a period of three years
after the date of the transaction in which the person first becomes
an “interested stockholder,” unless the business
combination is approved in a prescribed manner.
We are
authorized to issue up to 300,000,000 shares of common stock. To
the extent that we sell or otherwise issue authorized but currently
unissued shares, this could have the effect of making it more
difficult for a third party to acquire a majority of our
outstanding voting stock.
Our
charter authorizes us to issue up to 10,000,000 shares of preferred
stock and to determine the terms of those shares of stock without
any further action by our stockholders. If we exercise this right,
it could be more difficult for a third party to acquire a majority
of our outstanding voting stock.
In
addition, our equity incentive plans generally permit us to
accelerate the vesting of options and other stock rights granted
under these plans in the event of a change of control. If we
accelerate the vesting of options or other stock rights, this
action could make an acquisition more costly.
The
application of these provisions could have the effect of delaying
or preventing a change of control, which could adversely affect the
market price of our common stock.
We are a smaller reporting company and the reduced disclosure
requirements applicable to smaller reporting companies may make our
Common Stock less attractive to investors.
We are
currently a “smaller reporting company” as defined in
the Exchange Act. Smaller reporting companies are able to provide
simplified executive compensation disclosures in their filings, are
exempt from the provisions of Section 404(b) of the Sarbanes-Oxley
Act requiring that an independent registered public accounting firm
provide an attestation report on the effectiveness of internal
control over financial reporting, and have certain other decreased
disclosure obligations in their SEC filings. We cannot predict
whether investors will find our common stock less attractive
because of our reliance on any of these exemptions. If some
investors find our common stock less attractive as a result, there
may be a less active trading market for our common stock and our
stock price may be more volatile.
As of September 16, 2016 there were 129,030,427 shares of common
stock underlying outstanding convertible preferred stock, options,
restricted stock units and warrants. Stockholders may experience
dilution from the conversion of preferred stock, exercise of
outstanding options and warrants and vesting of restricted stock
units.
As of
September 16, 2016, holders of our outstanding dilutive securities
had the right to acquire the following amounts of underlying common
stock:
●
60,592 shares
issuable on the conversion of immediately convertible Series A
Convertible preferred stock, subject to adjustment, for no further
consideration;
●
6,409,020 shares
issuable on the exercise of stock options, at exercise prices
ranging from $0.49 to $24.90 per share;
●
3,559,768 shares
issuable under restricted stock units which vest on dates between
December 8, 2016 and January 11, 2020, subject to the fulfillment
of service conditions; and
●
119,001,047 shares
issuable on the exercise of warrants at exercise prices ranging
from $0.01 to $1.00 per share, of which 84,546,764 are prefunded
warrants with an exercise price of $0.01.
If the
holders convert, exercise or receive these securities, or similar
dilutive securities we may issue in the future, stockholders may
experience dilution in the net book value of their common stock. In
addition, the sale or availability for sale of the underlying
shares in the marketplace could depress our stock price. We have
registered or agreed to register for resale substantially all of
the underlying shares listed above. Holders of registered
underlying shares could resell the shares immediately upon
issuance, which could result in significant downward pressure on
our stock price.
37
Our failure to meet the continued listing requirements of the NYSE
MKT could result in a de-listing of our common stock.
Our
common shares are listed on the NYSE MKT, a national securities
exchange, under the symbol “PTN”. Although we currently
meet the NYSE MKT’s listing standards, which generally
mandate that we meet certain requirements relating to
stockholders’ equity, market capitalization, aggregate market
value of publicly held shares and distribution requirements, we
cannot assure you that we will be able to continue to meet the NYSE
MKT’s listing requirements. If we fail to satisfy the
continued listing requirements of the NYSE MKT, such as the
corporate governance requirements or the minimum closing bid price
requirement, the NYSE MKT may take steps to de-list our common
stock. If the NYSE MKT delists our securities for trading on its
exchange, we could face significant material adverse consequences,
including:
●
a limited
availability of market quotations for our securities;
●
reduced liquidity
with respect to our securities;
●
a determination
that our shares of common stock are “penny stock” which
will require brokers trading in our shares of common stock to
adhere to more stringent rules, possibly resulting in a reduced
level of trading activity in the secondary trading market for our
shares of common stock;
●
a limited amount of
news and analyst coverage for our company; and
●
a decreased ability
to issue additional securities or obtain additional financing in
the future.
Such a
de-listing would likely have a negative effect on the price of our
common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing,
we may take actions to restore our compliance with the NYSE
MKT’s listing requirements, but we can provide no assurance
that any such action taken by us would allow our common stock to
become listed again, stabilize the market price or improve the
liquidity of our common stock, prevent our common stock from
dropping below the NYSE MKT minimum bid price requirement or
prevent future non-compliance with the NYSE MKT’s listing
requirements.
The
National Securities Markets Improvement Act of 1996, which is a
federal statute, prevents or preempts the states from regulating
the sale of certain securities, which are referred to as
“covered securities.” Our common shares are considered
to be covered securities because they are listed on the NYSE MKT.
Although the states are preempted from regulating the sale of our
securities, the federal statute does allow the states to
investigate companies if there is a suspicion of fraud, and, if
there is a finding of fraudulent activity, then the states can
regulate or bar the sale of covered securities in a particular
case. Further, if we were no longer listed on the NYSE MKT, our
common stock would not be covered securities and we would be
subject to regulation in each state in which we offer our
securities.
None.
Our
corporate offices are located at 4B Cedar Brook Drive, Cedar Brook
Corporate Center, Cranbury, NJ 08512, where we lease approximately
10,000 square feet of office space under a lease that expires in
June 2020. We also lease approximately 1,000 square feet of
laboratory space in the Township of South Brunswick, NJ, under a
lease that expires in July 2017. We believe our present facilities
are adequate for our current needs. We do not own any real
property.
We are
involved, from time to time, in various claims and legal
proceedings arising in the ordinary course of our business. We are
not currently a party to any claim or legal
proceeding.
Not
applicable.
38
The
table below provides, for the fiscal quarters indicated, the
reported high and low sales prices for our common stock on the NYSE
MKT since July 1, 2014.
|
FISCAL YEAR ENDED
JUNE 30, 2016
|
HIGH
|
LOW
|
|
Fourth
Quarter
|
$
0.74
|
$
0.40
|
|
Third
Quarter
|
0.69
|
0.36
|
|
Second
Quarter
|
0.90
|
0.62
|
|
First
Quarter
|
1.18
|
0.80
|
|
FISCAL YEAR ENDED
JUNE 30, 2015
|
HIGH
|
LOW
|
|
Fourth
Quarter
|
$
1.58
|
$
0.85
|
|
Third
Quarter
|
1.34
|
0.65
|
|
Second
Quarter
|
0.93
|
0.59
|
|
First
Quarter
|
1.28
|
0.82
|
Our
common stock has been listed on NYSE MKT under the symbol
“PTN” since December 21, 1999. It previously traded on
The Nasdaq SmallCap Market under the symbol
“PLTN.”
On
September 16, 2016, we had approximately 105 record holders of
common stock and the closing sales price of our common stock as
reported on the NYSE MKT was $0.50 per share.
Issuer purchases of equity securities.
We have not and do not currently intend to retire or repurchase any
of our capital securities other than providing our employees with
the option to withhold shares to satisfy tax withholding amounts
due from employees upon the vesting of restricted stock units in
connection with our 2011 Stock Incentive Plan. The following
123,127 shares were withheld during the quarter ended June 30, 2016
at the direction of the employees as permitted under the 2011 Stock
Incentive Plan in order to pay the minimum amount of tax liability
owed by the employee from the vesting of those units:
|
Period
|
Total Number of Shares Purchased (1)
|
Weighted Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs
|
Maximum
Number of Shares that May Yet be Purchased Under Announced Plans or
Programs
|
|
April
1-30, 2016
|
-
|
-
|
-
|
-
|
|
May
1-31, 2016
|
-
|
-
|
-
|
-
|
|
June
1-30, 2016
|
123,127
|
$
0.47
|
-
|
-
|
|
Total
|
123,127
|
$
0.47
|
-
|
-
|
(1)
Consists solely of 123,127 shares that were withheld to satisfy tax
withholding amounts due from employees upon the vesting of
previously issued restricted stock units.
Dividends and dividend policy
. We have
never declared or paid any dividends. We currently intend to retain
earnings, if any, for use in our business. We do not anticipate
paying dividends in the foreseeable future.
Dividend restrictions
. Our outstanding
Series A Preferred Stock, consisting of 4,030 shares on September
16, 2016, provides that we may not pay a dividend or make any
distribution to holders of any class of stock unless we first pay a
special dividend or distribution of $100 per share to the holders
of the Series A Preferred Stock.
Equity Compensation Plan
Information.
Reference is
made to the information contained in the Equity Compensation Plan
table contained in Item 12 of this Annual Report.
Not
Applicable.
The
following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes to the
consolidated financial statements filed as part of this Annual
Report.
39
Forward-Looking Statements
The
following discussion and analysis contains forward-looking
statements within the meaning of the federal securities laws. You
are urged to carefully review our description and examples of
forward-looking statements included earlier in this Annual Report
on Form 10-K immediately prior to Part I, under the heading
“Forward-Looking Statements.” Forward-looking
statements are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed in the
forward-looking statements. You are urged to carefully review the
disclosures we make concerning risks and other factors that may
affect our business and operating results, including those made in
Part I, Item 1A of this Annual Report on Form 10-K, and any of
those made in our other reports filed with the SEC. You are
cautioned not to place undue reliance on the forward-looking
statements included herein, which speak only as of the date of this
document. We do not intend, and undertake no obligation, to publish
revised forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the
occurrence of unanticipated events.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are described in Note 2 to the
consolidated financial statements included in this Annual Report.
We believe that our accounting policies and estimates relating to
revenue recognition, accrued expenses and stock-based compensation
charges are the most critical.
Revenue Recognition.
Revenue
resulting from license fees is recognized upon delivery of the
license for the portion of the license fee payment that is
non-contingent and non-refundable, if the license has standalone
value. Revenue resulting from the achievement of development
milestones is recorded in accordance with the accounting guidance
for the milestone method of revenue recognition. Revenue resulting
from the achievement of sales milestone events is recognized when
the milestone is achieved. Revenue from royalties is recorded when
earned.
Accrued Expenses.
Third
parties perform a significant portion of our development
activities. We review the activities performed under significant
contracts each quarter and accrue expenses and the amount of any
reimbursement to be received from our collaborators based upon the
estimated amount of work completed. Estimating the value or stage
of completion of certain services requires judgment based on
available information. If we do not identify services performed for
us but not billed by the service-provider, or if we underestimate
or overestimate the value of services performed as of a given date,
reported expenses will be understated or overstated.
Stock-based Compensation.
The
fair value of stock options granted has been calculated using the
Black-Scholes option pricing model, which requires us to make
estimates of expected volatility and expected option lives. We
estimate these factors at the time of grant based on our own prior
experience, public sources of information and information for
comparable companies. The amount of recorded compensation related
to an option grant is not adjusted for subsequent changes in these
estimates or for actual experience. The amount of our recorded
compensation is also dependent on our estimates of future option
forfeitures. If we initially over-estimate future forfeitures, our
reported expenses will be understated until such time as we adjust
our estimate. Changes in estimated forfeitures will affect our
reported expenses in the period of change and future periods. In
addition, awards containing a market condition are valued using a
multifactor Monte Carlo simulation.
The
amount and timing of compensation expense to be recorded in future
periods related to grants of restricted stock units may be affected
by employment terminations. As a result, stock-based compensation
charges may vary significantly from period to period.
Results
of Operations
Year Ended June 30, 2016 Compared to the Year Ended June 30,
2015:
Revenue –
For the fiscal year
ended June 30, 2016 (fiscal 2016), we did not recognize any
revenue. For the fiscal year ended June 30, 2015 (fiscal 2015), we
recognized $12,951,730 in revenue pursuant to our license,
co-development and commercialization agreement with Gedeon
Richter.
In
August 2014, we entered into a license, co-development and
commercialization agreement with Gedeon Richter, which provided for
$9,763,347 in upfront payments. The non-refundable portion of the
upfront payment, $4,932,315, was recorded as revenue in the three
months ended September 30, 2014 and the remaining balance was
recorded as revenue in the three months ended December 31, 2014,
which became non-refundable upon initiation of our Phase 3 clinical
trial program in the United States. We also recognized $3,188,383
in the three months ended December 31, 2014 relating to the
milestone payment due upon initiation of our Phase 3 clinical trial
program in the United States, which was initiated in December 2014.
On September 16, 2015, we entered into a termination agreement
pursuant to which we and Gedeon Richter agreed to mutually and
amicably terminate the license agreement.
40
Research and Development
–
Research and development expenses were $43,071,051 for fiscal 2016
compared to $24,560,233 for fiscal 2015. These costs primarily
relate to our bremelanotide Phase 3 clinical trial
program.
Research and
development expenses related to our bremelanotide, PL-3994, MC1r,
MC4r and other preclinical programs were $39,371,908 and
$21,879,136 in fiscal years 2016 and 2015, respectively. Spending
to date has been primarily related to our bremelanotide for the
treatment of HSDD program. The increase in research and development
expenses is mainly attributable to the continued progress of Phase
3 clinical trial and development of bremelanotide for HSDD. The
amount of such spending and the nature of future development
activities are dependent on a number of factors, including
primarily the availability of funds to support future development
activities, success of our clinical trials and preclinical and
discovery programs, and our ability to progress compounds in
addition to bremelanotide and PL-3994 into human clinical
trials.
The
amounts of project spending above exclude general research and
development spending, which were $3,699,143 and $2,681,097 in
fiscal years 2016 and 2015, respectively. The increase in general
research and development spending is primarily attributable to
additional staffing and secondarily to the recognition of
stock-based compensation primarily related to the restricted stock
units granted in December 2015.
Cumulative spending
from inception to June 30, 2016 is approximately $234,800,000 on
our bremelanotide program and approximately $123,900,000 on all our
other programs (which include PL-3994, PL-8177, other melanocortin
receptor agonists, obesity, other discovery programs and terminated
programs). Due to various risk factors described herein under
“Risk Factors,” including the difficulty in currently
estimating the costs and timing of future Phase 1 clinical trials
and larger-scale Phase 2 and Phase 3 clinical trials for any
product under development, we cannot predict with reasonable
certainty when, if ever, a program will advance to the next stage
of development or be successfully completed, or when, if ever,
related net cash inflows will be generated.
General and Administrative
–
General and administrative expenses, which consist mainly of
compensation and related costs, were $6,179,084 for fiscal 2016
compared to $5,677,654 for fiscal 2015. The increase in general and
administrative expenses is primarily attributable to the
recognition of stock-based compensation primarily related to the
restricted stock units granted in December 2015.
Other Income (Expense)
– Other
income (expense) was $(2,462,801) and $(910,914) for fiscal 2016
and fiscal 2015, respectively. For fiscal 2016, we recognized
$50,226 of investment income offset by $(2,513,027) of interest
expense primarily related to our venture debt. For fiscal 2015, we
recognized $35,439 of investment income offset by a $(284,656)
foreign exchange transaction loss and $(661,697) of interest
expense primarily related to our venture debt.
Income Tax Benefit –
We did not
record any income tax benefits in fiscal 2016. For fiscal 2015,
income tax benefits recorded of $531,508 related to the sale of New
Jersey state net operating loss carryforwards and tax credits. The
amount of such losses and tax credits that we were able to sell
depended on annual pools and allocations established by the state
of New Jersey. This program enables approved, unprofitable
biotechnology businesses to sell their unused Net Operating Loss
Carryovers, or NOLs, and unused Research and Development, or
R&D, Tax Credits to unaffiliated, profitable corporate
taxpayers in the state of New Jersey.
Year Ended June 30, 2015 Compared to the Year Ended June 30,
2014:
Revenue –
For the fiscal year
ended June 30, 2015 (fiscal 2015), we recognized $12,951,730 in
revenue pursuant to our license, co-development and
commercialization agreement with Gedeon Richter. We did not
recognize any revenue for the fiscal year ended June 30, 2014
(fiscal 2014).
Research and Development
–
Research and development expenses were $24,560,233 for fiscal 2015
compared to $10,826,921 for fiscal 2014. These costs primarily
relate to our bremelanotide Phase 3 clinical trial
program.
Research and
development expenses related to our bremelanotide, PL-3994, MC1r,
MC4r and other preclinical programs were $21,879,136 and $7,918,537
in fiscal years 2015 and 2014, respectively. Spending to date has
been primarily related our bremelanotide for the treatment of HSDD
program. The increase in research and development expenses is
mainly attributable to the initiation of Phase 3 clinical studies
of bremelanotide for HSDD. The amounts of project spending above
exclude general research and development spending, which were
$2,681,097 and $2,908,384 in fiscal years 2015 and 2014,
respectively.
41
General and Administrative
–
General and administrative expenses, which consist mainly of
compensation and related costs, were $5,677,654 for fiscal 2015
compared to $4,960,731 for fiscal 2014. The increase was
attributable to the fair value of stock-based compensation related
to restricted stock units granted in June 2014 and amortized to
expense through fiscal 2015 and increases in accounting and other
professional services.
Other Income (Expense)
– Other
income (expense) was $(910,914) and $12,712 for fiscal 2015 and
fiscal 2014, respectively. For fiscal 2015, we recognized $35,439
of investment income offset by a $(284,656) foreign exchange
transaction loss and $(661,697) of interest expense primarily
related to our venture debt. For fiscal 2014, we recognized $18,923
of investment income offset by $(6,211) of interest
expense.
Income Tax Benefit –
Income tax
benefits of $531,508 in fiscal 2015 and $1,846,646 in fiscal 2014
relate to the sale of New Jersey state net operating loss
carryforwards and tax credits.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenues or operating results during the periods
presented.
Liquidity
and Capital Resources
Since
inception, we have incurred net operating losses, primarily related
to spending on our research and development programs. We have
financed our net operating losses primarily through debt and equity
financings and amounts received under collaborative
agreements.
Our
product candidates are at various stages of development and will
require significant further research, development and testing and
some may never be successfully developed or commercialized. We may
experience uncertainties, delays, difficulties and expenses
commonly experienced by early stage biopharmaceutical companies,
which may include unanticipated problems and additional costs
relating to:
●
the development and
testing of products in animals and humans;
●
product approval or
clearance;
●
regulatory
compliance;
●
GMP
compliance;
●
intellectual
property rights;
●
product
introduction;
●
marketing, sales
and competition; and
●
obtaining
sufficient capital.
Failure
to enter into or successfully perform under collaboration
agreements and obtain timely regulatory approval for our product
candidates and indications would impact our ability to increase
revenues and could make it more difficult to attract investment
capital for funding our operations. Any of these possibilities
could materially and adversely affect our operations and require us
to curtail or cease certain programs.
During
fiscal 2016, net cash used in operating activities was $47,363,814,
compared to $13,358,042 in fiscal 2015 and $12,207,656 in fiscal
2014. Higher net cash outflows from operations in fiscal 2016
compared to fiscal 2015 were primarily the result of spending on
our bremelanotide for the treatment of HSDD program. Higher net
cash outflows from operation in fiscal 2015 compared to fiscal 2014
were primarily the result of spending on our bremelanotide for the
treatment of HSDD program offset by the receipt of the upfront and
milestone payments, relating to the license, co-development and
commercialization agreement with Gedeon Richter on bremelanotide
for the treatment of HSDD in Europe and selected other countries.
Our periodic prepaid expenses, accounts payable and accrued
expenses balances will continue to be highly dependent on the
timing of our operating costs.
During
fiscal 2016, net cash used in investing activities was $1,404,717
consisting primarily of the purchase of investments. We did not
engage in any investing activities in fiscal 2015. During fiscal
2014, net cash provided by investing activities was $5,243,415,
which consisted of $5,249,654 of proceeds from the maturity of
short-term investments offset by $6,239 used for capital
expenditures.
During
fiscal 2016, net cash provided by financing activities was
$29,471,931, which consisted of a private placement with net
proceeds of $19,834,278, a loan of $9,853,885, net of related debt
issuance costs offset by $216,232 for the payment of withholding
taxes related to restricted stock units and capital lease payments.
During fiscal 2015, net cash provided by financing activities was
$28,472,705, which consisted of a private placement with net
proceeds of $18,556,111, a loan of $9,790,634, net of related
issuance costs and $254,148 of proceeds from the exercise of common
stock warrants offset by $128,188 for the payment of withholding
taxes related restricted stock units and capital lease payments.
During fiscal 2014, cash used in financing activities of $18,786
consisted of the payment of withholding taxes related to restricted
stock units of $36,377 and payments on capital lease obligation of
$19,909 offset by $37,500 of proceeds from the exercise of common
stock warrants.
We have
incurred cumulative negative cash flows from operations since our
inception, and have expended, and expect to continue to expend in
the future, substantial funds to complete our planned product
development efforts. As a result, there is substantial doubt about
our ability to continue as a going concern. Continued
operations are dependent upon our ability to complete equity or
debt financing activities or collaboration arrangements. We believe
that if we do not have sufficient funding, we may have to curtail
or cease certain programs or operations within twelve months. As of
June 30, 2016, our cash, cash equivalents and investments were
$9,383,224 and our current liabilities were $13,994,439. On August
4, 2016, we completed an underwritten offering of units, with each
unit consisting of a share of common stock and a Series H warrant
to purchase 0.75 of a share of common stock. Investors whose
purchase of units in the offering would result in them beneficially
owning more than 9.99% of our outstanding common stock following
the completion of the offering had the opportunity to acquire units
with Series I prefunded warrants substituted for any common stock
they would have otherwise acquired. Gross proceeds were $9,225,000,
with net proceeds to us, after deducting estimated offering
expenses, of approximately $8,500,000. We issued 11,481,481 shares
of common stock and ten year prefunded Series I warrants to
purchase 2,218,045 shares of common stock at an exercise price of
$0.01, together with Series H warrants to purchase 10,274,646
shares of common stock at an exercise price of $0.70 per
share.
42
The
Series I warrants are exercisable at an initial exercise price of
$0.01 per share, exercisable immediately upon issuance and expire
on the tenth anniversary of the date of issuance. The Series I
warrants are subject to limitation on exercise if the holder and
its affiliates would beneficially own more than 9.99% of the total
number of Palatin’s shares of common stock following such
exercise. The Series H warrants are exercisable at an initial
exercise price of $0.70 per share, are exercisable commencing six
months following the date of issuance and expire on the fifth
anniversary of the date of issuance. The Series H warrants are
subject to the same beneficial ownership limitation as the Series I
warrants.
We
intend to utilize existing capital resources, including the
proceeds from the financing, for general corporate purposes and
working capital, including our bremelanotide clinical development
program for HSDD, preclinical and clinical development of our MC1r
and MC4r peptide programs and PL-3994 natriuretic peptide, and
development of other portfolio products. Based on our current plan,
we believe that the Phase 3 clinical trial program with
bremelanotide, including submission of an NDA to the FDA, will cost
at least $87,000,000. We intend to seek additional capital to
support the Phase 3 program through collaborative arrangements on
bremelanotide, public or private equity or debt financings, or
other sources.
We
believe that our existing capital resources, together with
approximately $8,500,000 received from the August 2016 financing,
will be adequate to fund our planned operations through the quarter
ending December 31, 2016. Assuming the double blind efficacy
portion of the Phase 3 clinical trial of bremelanotide for HSDD is
successful, as to which there can be no assurance, we will need
additional funding to complete required ancillary studies and
clinical trials, prepare and submit regulatory filings for product
approval, and establish commercial scale manufacturing capability.
We will also need additional funding to complete required clinical
trials for our other product candidates and, assuming those
clinical trials are successful, as to which there can be no
assurance, to complete submission of required regulatory
applications to the FDA.
We
anticipate incurring additional losses over at least the next few
years. To achieve profitability, if ever, we, alone or with others,
must successfully develop and commercialize our technologies and
proposed products, conduct preclinical studies and clinical trials,
obtain required regulatory approvals and successfully manufacture
and market such technologies and proposed products. The time
required to reach profitability is highly uncertain, and we do not
know whether we will be able to achieve profitability on a
sustained basis, if at all.
Off-Balance
Sheet Arrangements
None.
Contractual
Obligations
We have
entered into various contractual obligations and commercial
commitments. The following table summarizes our most significant
contractual obligations as of June 30, 2016:
|
|
Payments due by Period
|
||||
|
|
Total
|
Less than 1 Year
|
1 - 3 Years
|
3 - 5 Years
|
More than 5 Years
|
|
|
|
|
|
|
|
|
Facility
operating leases
|
$
923,166
|
$
255,985
|
$
445,837
|
$
221,344
|
$
-
|
|
Capital
lease obligations
|
43,707
|
29,138
|
14,569
|
-
|
-
|
|
Notes
payable
|
23,893,001
|
7,299,750
|
15,757,334
|
835,917
|
-
|
|
Other
Agreements
|
2,524,033
|
2,524,033
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
$
27,383,907
|
$
10,108,906
|
$
16,217,740
|
$
1,057,261
|
$
-
|
Not
applicable.
43
Table
of Contents
Consolidated
Financial Statements
The
following consolidated financial statements are filed as part of
this annual report:
|
|
|
Page
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
45
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
46
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
47
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Loss
|
48
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ (Deficiency) Equity
|
49
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
50
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
51
|
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and Stockholders
Palatin
Technologies, Inc.:
We have
audited the accompanying consolidated balance sheets of Palatin
Technologies, Inc. and subsidiary as of June 30, 2016 and 2015, and
the related consolidated statements of operations,
stockholders’ (deficiency) equity, comprehensive loss, and
cash flows for each of the years in the three-year period ended
June 30, 2016. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Palatin Technologies, Inc. and subsidiary as of June 30, 2016 and
2015, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 2016, in
conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has incurred recurring net losses and negative cash flows
from operations and will require substantial additional financing
to continue to fund its planned developmental activities. These
conditions raise substantial doubt about its ability to continue as
a going concern. Management’s plans regarding those matters
also are discussed in Note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
/s/
KPMG LLP
Philadelphia,
Pennsylvania
September 19,
2016
45
PALATIN TECHNOLOGIES, INC.
and Subsidiary
|
|
June 30, 2016
|
June 30, 2015
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
8,002,668
|
$
27,299,268
|
|
Available-for-sale
investments
|
1,380,556
|
-
|
|
Prepaid
expenses and other current assets
|
1,424,282
|
1,896,747
|
|
Total
current assets
|
10,807,506
|
29,196,015
|
|
|
|
|
|
Property
and equipment, net
|
97,801
|
123,158
|
|
Other
assets
|
146,428
|
155,279
|
|
Total
assets
|
$
11,051,735
|
$
29,474,452
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
713,890
|
$
1,106,484
|
|
Accrued
expenses
|
7,767,733
|
6,223,483
|
|
Notes
payable, net of discount
|
5,485,392
|
-
|
|
Capital
lease obligations
|
27,424
|
25,871
|
|
Total
current liabilities
|
13,994,439
|
7,355,838
|
|
|
|
|
|
Notes
payable, net of discount
|
14,189,809
|
9,781,086
|
|
Capital
lease obligations
|
14,324
|
41,749
|
|
Other
non-current liabilities
|
439,130
|
91,304
|
|
Total
liabilities
|
28,637,702
|
17,269,977
|
|
|
|
|
|
Commitments
and contengencies (Note 11)
|
|
|
|
|
|
|
|
Stockholders’
(deficiency) equity:
|
|
|
|
Preferred
stock of $0.01 par value – authorized 10,000,000
shares;
|
|
|
|
Series
A Convertible; issued and outstanding 4,030 shares as of June 30,
2016 and 4,697 shares as of June 30, 2015,
respectively
|
40
|
47
|
|
Common
stock of $0.01 par value – authorized 300,000,000
shares;
|
|
|
|
issued
and outstanding 68,568,055 shares as of June 30, 2016 and
57,128,433 as of June 30, 2015, respectively
|
685,680
|
571,284
|
|
Additional
paid-in capital
|
325,142,509
|
303,332,460
|
|
Accumulated
other comprehensive loss
|
(1,944
)
|
-
|
|
Accumulated
deficit
|
(343,412,252
)
|
(291,699,316
)
|
|
Total
stockholders’ (deficiency) equity
|
(17,585,967
)
|
12,204,475
|
|
Total
liabilities and stockholders’ equity
|
$
11,051,735
|
$
29,474,452
|
The
accompanying notes are an integral part of these consolidated
financial statements
46
PALATIN TECHNOLOGIES, INC.
and Subsidiary
|
|
Year Ended June 30,
|
||
|
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
License
and contract
|
$
-
|
$
12,951,730
|
$
-
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
Research
and development
|
43,071,051
|
24,560,233
|
10,826,921
|
|
General
and administrative
|
6,179,084
|
5,677,654
|
4,960,731
|
|
Total
operating expenses
|
49,250,135
|
30,237,887
|
15,787,652
|
|
|
|
|
|
|
Loss
from operations
|
(49,250,135
)
|
(17,286,157
)
|
(15,787,652
)
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
Investment
income
|
50,226
|
35,439
|
18,923
|
|
Interest
expense
|
(2,513,027
)
|
(661,697
)
|
(6,211
)
|
|
Foreign
exchange transaction loss
|
-
|
(284,656
)
|
-
|
|
Total
other income (expense), net
|
(2,462,801
)
|
(910,914
)
|
12,712
|
|
|
|
|
|
|
Loss
before income taxes
|
(51,712,936
)
|
(18,197,071
)
|
(15,774,940
)
|
|
Income
tax benefit
|
-
|
531,508
|
1,846,646
|
|
|
|
|
|
|
NET
LOSS
|
$
(51,712,936
)
|
$
(17,665,563
)
|
$
(13,928,294
)
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
$
(0.33
)
|
$
(0.15
)
|
$
(0.13
)
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding used in computing basic
and diluted net loss per common share
|
156,553,534
|
121,014,506
|
106,679,476
|
The
accompanying notes are an integral part of these consolidated
financial statements
47
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Comprehensive Loss
|
|
Year Ended June 30,
|
||
|
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
Net
loss
|
$
(51,712,936
)
|
$
(17,665,563
)
|
$
(13,928,294
)
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
Unrealized
loss on available-for-sale investments
|
(1,944
)
|
-
|
-
|
|
|
|
|
|
|
Total
comprehensive loss
|
$
(51,714,880
)
|
$
(17,665,563
)
|
$
(13,928,294
)
|
The
accompanying notes are an integral part of these consolidated
financial statements
48
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Stockholders’ (Deficiency)
Equity
|
|
|
|
|
|
Additional
|
Accumulated
Other
|
|
|
|
|
Preferred Stock
|
Common Stock
|
Paid-in
|
Comprehensive
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Loss
|
Deficit
|
Total
|
|
Balance,
July 1, 2013
|
4,697
|
47
|
39,116,948
|
391,169
|
282,692,520
|
-
|
(260,105,459
)
|
22,978,277
|
|
Stock-based
compensation
|
-
|
-
|
378,750
|
3,788
|
817,552
|
-
|
-
|
821,340
|
|
Withholding
taxes related to restricted stock units
|
-
|
-
|
(129,103
)
|
(1,291
)
|
(118,716
)
|
-
|
-
|
(120,007
)
|
|
Warrant
exercises
|
-
|
-
|
50,000
|
500
|
37,000
|
-
|
-
|
37,500
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,928,294
)
|
(13,928,294
)
|
|
Balance,
June 30, 2014
|
4,697
|
47
|
39,416,595
|
394,166
|
283,428,356
|
-
|
(274,033,753
)
|
9,788,816
|
|
Stock-based
compensation
|
-
|
-
|
705,833
|
7,058
|
1,160,221
|
-
|
-
|
1,167,279
|
|
Sale
of common stock units, net of costs
|
-
|
-
|
2,050,000
|
20,500
|
18,535,611
|
-
|
-
|
18,556,111
|
|
Issuance
of warrants on debt
|
-
|
-
|
-
|
-
|
267,820
|
-
|
-
|
267,820
|
|
Withholding
taxes related to restricted stock units
|
-
|
-
|
(174,568
)
|
(1,746
)
|
(162,390
)
|
-
|
-
|
(164,136
)
|
|
Warrant
exercises
|
-
|
-
|
15,130,573
|
151,306
|
102,842
|
-
|
-
|
254,148
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(17,665,563
)
|
(17,665,563
)
|
|
Balance,
June 30, 2015
|
4,697
|
47
|
57,128,433
|
571,284
|
303,332,460
|
-
|
(291,699,316
)
|
12,204,475
|
|
Stock-based
compensation
|
-
|
-
|
662,186
|
6,622
|
1,836,743
|
-
|
-
|
1,843,365
|
|
Sale
of common stock units, net of costs
|
-
|
-
|
-
|
-
|
19,834,278
|
-
|
-
|
19,834,278
|
|
Issuance
of warrants on debt
|
-
|
-
|
-
|
-
|
305,196
|
-
|
-
|
305,196
|
|
Withholding
taxes related to restricted stock units
|
-
|
-
|
(123,483
)
|
(1,235
)
|
(57,166
)
|
-
|
-
|
(58,401
)
|
|
Warrant
exercises
|
|
|
10,890,889
|
108,909
|
(108,909
)
|
-
|
-
|
-
|
|
Series
A Conversion
|
(667
)
|
(7
)
|
10,030
|
100
|
(93
)
|
-
|
-
|
-
|
|
Unrealized
loss on investments
|
-
|
-
|
-
|
-
|
-
|
(1,944
)
|
-
|
(1,944
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(51,712,936
)
|
(51,712,936
)
|
|
Balance,
June 30, 2016
|
4,030
|
$
40
|
68,568,055
|
$
685,680
|
$
325,142,509
|
$
(1,944
)
|
$
(343,412,252
)
|
$
(17,585,967
)
|
The
accompanying notes are an integral part of these consolidated
financial statements
49
PALATIN TECHNOLOGIES, INC.
and Subsidiary
|
|
Year Ended June 30,
|
||
|
|
2016
|
2015
|
2014
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net loss
|
$
(51,712,936
)
|
$
(17,665,563
)
|
$
(13,928,294
)
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
used in operating activities:
|
|
|
|
|
Depreciation
and amortization
|
43,052
|
117,590
|
111,906
|
|
Non-cash
interest expense
|
327,479
|
87,087
|
-
|
|
Stock-based
compensation
|
1,843,365
|
1,167,279
|
821,340
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Prepaid
expenses and other assets
|
503,785
|
(1,667,139
)
|
176,697
|
|
Accounts
payable
|
(392,594
)
|
845,204
|
(77,446
)
|
|
Accrued
expenses
|
1,676,209
|
4,666,196
|
(311,859
)
|
|
Unearned
revenue
|
-
|
(1,000,000
)
|
1,000,000
|
|
Other
non-current liabilities
|
347,826
|
91,304
|
-
|
|
Net
cash used in operating activities
|
(47,363,814
)
|
(13,358,042
)
|
(12,207,656
)
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
Proceeds
from sale/maturity of investments
|
-
|
-
|
5,249,654
|
|
Purchases
of investments
|
(1,387,022
)
|
-
|
-
|
|
Purchases
of property and equipment
|
(17,695
)
|
-
|
(6,239
)
|
|
Net
cash (used in) provided by investing activities
|
(1,404,717
)
|
-
|
5,243,415
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
Payments
on capital lease obligations
|
(25,872
)
|
(12,380
)
|
(19,909
)
|
|
Payment
of withholding taxes related to restricted
|
|
|
|
|
stock units
|
(190,360
)
|
(115,808
)
|
(36,377
)
|
|
Proceeds
from exercise of common stock warrants
|
-
|
254,148
|
37,500
|
|
Proceeds
from the sale of common stock and warrants, net
|
|
|
|
|
of costs
|
19,834,278
|
18,556,111
|
-
|
|
Proceeds
from the issuance of notes payable and warrants
|
10,000,000
|
10,000,000
|
-
|
|
Payment
of debt issuance costs
|
(146,115
)
|
(209,366
)
|
-
|
|
Net
cash provided by (used in) financing activities
|
29,471,931
|
28,472,705
|
(18,786
)
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
|
|
AND CASH EQUIVALENTS
|
(19,296,600
)
|
15,114,663
|
(6,983,027
)
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
27,299,268
|
12,184,605
|
19,167,632
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
8,002,668
|
$
27,299,268
|
$
12,184,605
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
Cash
paid for interest
|
$
1,836,743
|
$
483,306
|
$
6,211
|
|
Equipment
acquired under capital lease
|
-
|
80,000
|
-
|
|
Issuance
of warrants in connection with debt financing
|
305,196
|
267,820
|
-
|
The
accompanying notes are an integral part of these consolidated
financial statements
50
PALATIN TECHNOLOGIES, INC.
and Subsidiary
(1) ORGANIZATION
Nature of Business
– Palatin
Technologies, Inc. (Palatin or the Company) is a biopharmaceutical
company developing targeted, receptor-specific peptide therapeutics
for the treatment of diseases with significant unmet medical need
and commercial potential. Palatin’s programs are based on
molecules that modulate the activity of the melanocortin and
natriuretic peptide receptor systems. The melanocortin system is
involved in a large and diverse number of physiologic functions,
and therapeutic agents modulating this system may have the
potential to treat a variety of conditions and diseases, including
sexual dysfunction, obesity and related disorders, cachexia
(wasting syndrome) and inflammation-related diseases. The
natriuretic peptide receptor system has numerous cardiovascular
functions, and therapeutic agents modulating this system may be
useful in treatment of acute asthma, heart failure, hypertension
and other cardiovascular diseases.
The
Company’s primary product in development is bremelanotide for
the treatment of hypoactive sexual desire disorder (HSDD), which is
a type of female sexual dysfunction (FSD). The Company also has
drug candidates or development programs for obesity, erectile
dysfunction, cardiovascular diseases, pulmonary diseases,
inflammatory diseases and dermatologic diseases.
Key
elements of the Company’s business strategy include using its
technology and expertise to develop and commercialize therapeutic
products; entering into alliances and partnerships with
pharmaceutical companies to facilitate the development,
manufacture, marketing, sale and distribution of product candidates
that the Company is developing; and partially funding its product
candidate development programs with the cash flow generated from
third parties.
Going Concern
– There is
substantial doubt about the Company’s ability to continue as
a going concern. Since inception, the Company has incurred negative
cash flows from operations, and has expended, and expects to
continue to expend in the future, substantial funds to complete its
planned product development efforts. As shown in the accompanying
consolidated financial statements, the Company had an accumulated
deficit as of June 30, 2016 of $343,412,252 and incurred a net loss
for fiscal 2016 of $51,712,936. The Company anticipates incurring
additional losses in the future as a result of spending on its
development programs and will require substantial additional
financing to continue to fund its planned developmental activities.
To achieve profitability, if ever, the Company, alone or with
others, must successfully develop and commercialize its
technologies and proposed products, conduct successful preclinical
studies and clinical trials, obtain required regulatory approvals
and successfully manufacture and market such technologies and
proposed products. The time required to reach profitability is
highly uncertain, and there can be no assurance that the Company
will be able to achieve profitability on a sustained basis, if at
all. The accompanying consolidated financial statements have been
prepared assuming that the Company continues as a going concern,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amount or classification of liabilities that might result from the
outcome of this uncertainty.
As
discussed in Note 15, on August 4, 2016, the Company closed on an
underwritten offering of units resulting in gross proceeds of
$9,225,000, with net proceeds, after deducting estimated offering
expenses, of approximately $8,500,000.
As of
June 30, 2016, the Company’s cash, cash equivalents and
investments were $9,383,224 and current liabilities were
$13,994,439. The Company intends to utilize existing capital
resources, including the proceeds from the financing for general
corporate purposes and working capital, including the Phase 3
clinical trial program with bremelanotide for HSDD and preclinical
and clinical development of our other product candidates and
programs, including PL-3994 and melanocortin recetptor-1 and
melanocortin receptor-4 programs. Management believes that the
Phase 3 clinical trial program with bremelanotide, including
regulatory filings for product approval, will cost at least
$87,000,000.
Management believes
that the Company’s existing capital resources, together with
approximately $8,500,000 received from the August 2016 financing,
will be adequate to fund its planned operations through the quarter
ending December 31, 2016. Assuming the double blind efficacy
portion of the Phase 3 clinical trial of bremelanotide for HSDD is
successful, as to which there can be no assurance, we will need
additional funding to complete required ancillary studies and
clinical trials, prepare and submit regulatory filings for product
approval, and establish commercial scale manufacturing
capability.
51
PALATIN TECHNOLOGIES, INC.
and Subsidiary
The
Company will need to raise additional capital to complete required
ancillary studies and clinical trials, prepare and submit
regulatory filings for product approval, and establish commercial
scale manufacturing capability. The Company will also need
additional funding to complete required clinical trials for its
other product candidates and, assuming those clinical trials are
successful, as to which there can be no assurance, to complete
submission of required applications to the FDA. If the Company is
unable to obtain approval or otherwise advance in the FDA approval
process, the Company’s ability to sustain its operations
would be materially adversely affected.
The
Company may seek the additional capital necessary to fund its
operations through public or private equity offerings,
collaboration agreements, debt financings or licensing
arrangements. Additional capital that is required by the Company
may not be available on reasonable terms, or at all.
Concentrations –
Concentrations
in the Company’s assets and operations subject it to certain
related risks. Financial instruments that subject the Company to
concentrations of credit risk primarily consist of cash and cash
equivalents and available-for-sale investments. The Company’s
cash and cash equivalents are primarily invested in one money
market account sponsored by a large financial institution. For the
years ended June 30, 2016 and 2014, the Company had no revenues
reported. For the year ended June 30, 2015, 100% of revenues were
from Gedeon Richter.
(2) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
– The
consolidated financial statements include the accounts of Palatin
and its wholly-owned inactive subsidiary. All intercompany accounts
and transactions have been eliminated in
consolidation.
Use of Estimates
– The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
– Cash
and cash equivalents include cash on hand, cash in banks and all
highly liquid investments with a purchased maturity of less than
three months. Cash equivalents consist of $7,782,243 and
$26,946,378 in a money market account at June 30, 2016 and 2015,
respectively.
Investments
– The Company determines the
appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the intent and
ability to hold the securities to maturity. Debt securities for
which the Company does not have the intent or ability to hold to
maturity are classified as available-for-sale. Held-to-maturity
securities are recorded as either short-term or long-term on the
balance sheet, based on the contractual maturity date and are
stated at amortized cost. Marketable securities that are bought and
held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair
value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities not classified as
held-to-maturity or as trading are classified as available-for-sale
and are carried at fair market value, with the unrealized gains and
losses, net of tax, included in the determination of other
comprehensive (loss) income.
The
fair value of substantially all securities is determined by quoted
market prices. The estimated fair value of securities for which
there are no quoted market prices is based on similar types of
securities that are traded in the market.
Fair Value of Financial Instruments
– The Company’s financial instruments consist primarily
of cash equivalents, accounts payable and notes payable. Management
believes that the carrying values of cash equivalents,
available-for-sale investments and accounts payable are
representative of their respective fair values based on the
short-term nature of these instruments. Management believes that
the carrying amount of its notes payable approximates fair value
based on terms of the notes.
Credit Risk
– Financial
instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents.
Total cash and cash equivalent balances have exceeded insured
balances by the Federal Depository Insurance Company
(FDIC).
52
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Property and Equipment
– Property
and equipment consists of office and laboratory equipment, office
furniture and leasehold improvements and includes assets acquired
under capital leases. Property and equipment are recorded at cost.
Depreciation is recognized using the straight-line method over the
estimated useful lives of the related assets, generally five years
for laboratory and computer equipment, seven years for office
furniture and equipment and the lesser of the term of the lease or
the useful life for leasehold improvements. Amortization of assets
acquired under capital leases is included in depreciation expense.
Maintenance and repairs are expensed as incurred while expenditures
that extend the useful life of an asset are
capitalized.
Impairment of Long-Lived Assets
–
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. To determine
recoverability of a long-lived asset, management evaluates whether
the estimated future undiscounted net cash flows from the asset are
less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is
determined by an evaluation of available price information at which
assets could be bought or sold, including quoted market prices, if
available, or the present value of the estimated future cash flows
based on reasonable and supportable assumptions.
Revenue Recognition
– Under our
license, co-development and commercialization agreement with Gedeon
Richter (Note 4), we received consideration in the form of a
license fee and development milestone payment.
Revenue
resulting from license fees is recognized upon delivery of the
license for the portion of the license fee payment that is
non-contingent and non-refundable, if the license has standalone
value. Revenue resulting from the achievement of development
milestones is recorded in accordance with the accounting guidance
for the milestone method of revenue recognition.
Research and Development Costs
–
The costs of research and development activities are charged to
expense as incurred, including the cost of equipment for which
there is no alternative future use.
Accrued Expenses –
Third parties
perform a significant portion of our development activities. We
review the activities performed under significant contracts each
quarter and accrue expenses and the amount of any reimbursement to
be received from our collaborators based upon the estimated amount
of work completed. Estimating the value or stage of completion of
certain services requires judgment based on available information.
If we do not identify services performed for us but not billed by
the service-provider, or if we underestimate or overestimate the
value of services performed as of a given date, reported expenses
will be understated or overstated.
Stock-Based Compensation –
The
Company charges to expense the fair value of stock options and
other equity awards granted. The Company determines the value of
stock options utilizing the Black-Scholes option pricing model.
Compensation costs for share-based awards with pro-rata vesting are
determined using the quoted market price of the Company’s
common stock on the date of grant and allocated to periods on a
straight-line basis, while awards containing a market condition are
valued using multifactor Monte Carlo simulations.
Income Taxes
– The Company and
its subsidiary file consolidated federal and separate-company state
income tax returns. Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
or operating loss and tax credit carryforwards are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date. The Company has recorded a
valuation allowance against its deferred tax assets based on the
history of losses incurred.
The
Company did not have a sale of New Jersey state net operating loss
(NJ NOL) carryforwards during the year ended June 30, 2016 and
therefore did not record a tax benefit. During the years ended June
30, 2015 and 2014, the Company sold New Jersey state net operating
loss carryforwards, which resulted in the recognition of $531,508
and $1,846,646, respectively, in tax benefits.
Net Loss per Common Share
– Basic
and diluted earnings per common share (EPS) are calculated in
accordance with the provisions of Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 260,
“Earnings per Share,” which includes guidance
pertaining to the warrants, issued in connection with the July 3,
2012, December 23, 2014, and July 2, 2015 private placement
offerings, that are exercisable for nominal consideration and,
therefore, are to be considered in the computation of basic and
diluted net loss per common share. The Series A 2012 warrants
issued on July 3, 2012 to purchase up to 31,988,151 shares of
common stock are included in the weighted average number of common
shares outstanding used in computing basic and diluted net loss per
common share for all periods presented in the consolidated
statements of operations.
53
PALATIN TECHNOLOGIES, INC.
and Subsidiary
The
Series B 2012 warrants issued on July 3, 2012 to purchase up to
35,488,380 shares of common stock are included in the weighted
average number of common shares outstanding used in computing basic
and diluted net loss per common share for all periods presented in
the consolidated statements of operations.
The
Series C 2014 warrants to purchase up to 24,949,325 shares of
common stock were exercisable starting at December 23, 2014 and,
therefore are included in the weighted average number of common
shares outstanding used in computing basic and diluted net loss per
common share starting on December 23, 2014.
The
Series E 2015 warrants to purchase up to 21,917,808 shares of
common stock were exercisable starting at July 2, 2015 and,
therefore are included in the weighted average number of common
shares outstanding used in computing basic and diluted net loss per
common share starting on July 2, 2015.
As of
June 30, 2016, 2015 and 2014, there were 32,167,737, 30,212,446,
and 29,358,926 common shares issuable upon conversion of Series A
Convertible Preferred Stock, the exercise of outstanding options
and warrants (excluding the Series A 2012, Series B 2012, Series C
2014, and Series E 2015 warrants issued in connection with the July
3, 2012, December 23, 2014, and July 2, 2015 private placement
offerings), and the vesting of restricted stock units,
respectively. These share amounts have been excluded from the
calculation of net loss per share as the impact would be
anti-dilutive.
(3) NEW
AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments
which
requires measurement and recognition of expected credit losses for
financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable
forecasts. This is different from the current guidance as this will
require immediate recognition of estimated credit losses expected
to occur over the remaining life of many financial assets. The new
guidance will be effective for the Company on July 1, 2020. Early
adoption will be available on July 1, 2019. The Company is
currently evaluating the effect that the updated standard will have
on its consolidated financial statements and related
disclosures.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Improvement to Employee
Share-Based Payment Accounting
, which amends the current
guidance related to stock compensation. The updated guidance
changes how companies account for certain aspects of share-based
payment awards to employees, including the accounting for income
taxes, forfeitures, and statutory tax withholding requirements, as
well as classification in the statement of cash flows. The update
to the standard is effective for the Company on July 1, 2017, with
early application permitted. We are evaluating the effect that the
new guidance will have on its consolidated financial statements and
related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases,
related to the recognition of
lease assets and lease liabilities. The new guidance requires
lessees to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability, other than leases that
meet the definition of a short- term lease, and requires expanded
disclosures about leasing arrangements. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee have not significantly changed from the
current guidance. Lessor accounting is similar to the current
guidance, but updated to align with certain changes to the lessee
model and the new revenue recognition standard. The new guidance is
effective for the Company on July 1, 2019, with early adoption
permitted. The Company is evaluating the impact that the new
guidance will have on its consolidated financial statements and
related disclosures.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments: Recognition and
Measurement of Financial Assets and Financial Liabilities
.
The new guidance relates to the recognition and measurement of
financial assets and liabilities. The new guidance makes targeted
improvements to GAAP impacting equity investments (other than those
accounted for under the equity method or consolidated), financial
liabilities accounted for under the fair value election, and
presentation and disclosure requirements for financial instruments,
among other changes. The new guidance is effective for the Company
on July 1, 2018, with early adoption prohibited other than for
certain provisions. The Company is evaluating the impact that the
new guidance will have on its consolidated financial statements and
related disclosures.
54
PALATIN TECHNOLOGIES, INC.
and Subsidiary
In
November 2015, the FASB issued ASU No. 2015-17
, Income Taxes: Balance Sheet Classification
of Deferred Taxes
which simplifies the balance sheet
classification of deferred taxes. The new guidance requires that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The current
requirement that deferred tax liabilities and assets of a
tax-paying component of an entity be offset and presented as a
single amount is not affected by the new guidance. The new guidance
is effective for the Company on July 1, 2017, with early adoption
permitted as of the beginning of an interim or annual reporting
period. The new guidance may be applied either prospectively to all
deferred tax liabilities and assets or retrospectively to all
periods presented. The Company is evaluating the impact that the
new guidance will have on its consolidated financial statements and
related disclosures; however, at the present time the Company has
recorded a valuation allowance against its deferred tax assets
based on the history of losses incurred.
In
April 2015, the FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance
Costs
, which requires debt issuance costs related to a
recognized debt liability to be presented on the balance sheet as a
direct deduction from the debt liability, similar to the
presentation of debt discounts. In August 2015, the FASB issued a
clarification that debt issuance costs related to line-of-credit
arrangements were not within the scope of the new guidance and
therefore should continue to be accounted for as deferred assets in
the balance sheet, consistent with existing GAAP. The new standard
is effective for the Company for its fiscal year ending June 30,
2017. The Company is evaluating the effect of the standard on its
consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going
Concern: Disclosures of Uncertainties about an Entity’s
Ability to Continue as a Going Concern
. The amendments in
this update provide guidance in U.S. GAAP about management's
responsibility to evaluate whether there is substantial doubt about
an entity's ability to continue as a going concern and to provide
related footnote disclosures. In doing so, the amendments should
reduce diversity in the timing and content of footnote disclosures.
The new standard is effective for the Company for its fiscal year
ending June 30, 2017. Early adoption is permitted. The Company is
evaluating the effect of the standard, if any, on its consolidated
financial statements.
In May 2014, the FASB issued ASU No.
2014-09,
Revenue from Contracts with
Customers
, which requires an
entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to
customers. The ASU will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB voted to defer the effective date of the new standard until
fiscal years beginning after December 15, 2017 with early
application permitted for fiscal years beginning after December 15,
2016. With the deferral, the new standard is effective for the
Company on July 1, 2018, with early adoption permitted one year
prior. The standard permits the use of either the retrospective or
cumulative effect transition method. The Company is evaluating the
effect that ASU 2014-09 will have on its consolidated financial
statements and related disclosures. The Company has not yet
selected a transition method nor has it determined the effect of
the standard on its ongoing financial
reporting.
(4) AGREEMENT
WITH GEDEON RICHTER
In
August 2014, the Company entered into a license, co-development and
commercialization agreement with Gedeon Richter on bremelanotide
for FSD in Europe and selected countries. On September 16, 2015,
the Company and Gedeon Richter mutually and amicably agreed to
terminate the license, co-development and commercialization
agreement. In connection with the termination of the license
agreement, all rights and licenses to co-develop and commercialize
bremelanotide for FSD indications granted by the Company under the
license agreement to Gedeon Richter terminated and reverted to the
Company, and neither party has any future material obligations
under the license agreement. Neither the Company nor Gedeon Richter
incurred any early termination penalties or other payment or
reimbursement obligations as a result of the termination of the
license agreement.
The
Company viewed the delivery of the license for bremelanotide as a
revenue generating activity that is part of its ongoing and central
operations. The other elements of the agreement with Gedeon Richter
were considered non-revenue activities associated with the
collaborative arrangement. The Company believes the license had
standalone value from the other elements of the collaborative
arrangement because it conveyed all of the rights necessary to
develop and commercialize bremelanotide in the licensed
territory.
55
PALATIN TECHNOLOGIES, INC.
and Subsidiary
In
August 2013, the Company received an initial payment of $1,000,000
from Gedeon Richter as a non-refundable option fee on the license,
co-development and commercialization agreement, and in September
2014, the Company received €6,700,000 ($8,763,347) on
execution of the definitive agreement. During the year ended June
30, 2015, the upfront payment of €7,500,000 ($9,763,347) was
recorded as license revenue in the consolidated statements of
operations. During the year ended June 30, 2015, the Company
recorded revenue related to a milestone payment of €2,500,000
($3,188,383) upon the initiation of the Company’s Phase 3
clinical trial program in the United States.
As a
result of fluctuations in the conversion rates between the Euro and
the U.S. Dollar between the transaction dates and the settlement
dates, the Company recorded a foreign exchange loss of $284,656 for
the year ended June 30, 2015.
(5) PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses
and other
current assets consist of the following:
|
|
June 30,
2016
|
June 30,
2015
|
|
Clinical
study costs
|
$
1,146,975
|
$
1,641,605
|
|
Insurance
premiums
|
23,010
|
30,039
|
|
Other
|
254,297
|
225,103
|
|
|
$
1,424,282
|
$
1,896,747
|
(6) INVESTMENTS
The
following summarizes the carrying value of our available-for-sale
investments at June 30, 2016, which consist of corporate debt
securities:
|
|
June 30,
|
|
|
2016
|
|
Cost
|
$
1,387,022
|
|
Amortization
of premium
|
(4,522
)
|
|
Gross
unrealized loss
|
(1,944
)
|
|
Fair
value
|
$
1,380,556
|
There
were no available-for-sale investments at June 30,
2015.
(7) FAIR
VALUE MEASUREMENTS
The
fair value of cash equivalents is classified using a hierarchy
prioritized based on inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
management’s own assumptions used to measure assets and
liabilities at fair value. A financial asset or liability’s
classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement.
56
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
The
following table provides the assets carried at fair
value:
|
|
Carrying Value
|
Quoted prices in
active markets
(Level 1)
|
Other quoted/observable inputs (Level 2)
|
Significant unobservable inputs
(Level 3)
|
|
June
30, 2016:
|
|
|
|
|
|
Money
Market Account
|
$
7,782,243
|
$
7,782,243
|
$
-
|
$
-
|
|
June
30, 2015:
|
|
|
|
|
|
Money
Market Account
|
$
26,946,378
|
$
26,946,378
|
$
-
|
$
-
|
(8) PROPERTY
AND EQUIPMENT, NET
Property and
equipment, net, consists of the following:
|
|
June 30,
2016
|
June 30,
2015
|
|
Office
equipment
|
$
1,180,210
|
$
1,180,210
|
|
Laboratory
equipment
|
415,303
|
397,608
|
|
Leasehold
improvements
|
751,226
|
751,226
|
|
|
2,346,739
|
2,329,044
|
|
Less:
Accumulated depreciation and amortization
|
(2,248,938
)
|
(2,205,886
)
|
|
|
$
97,801
|
$
123,158
|
The
aggregate cost of assets acquired under capital leases was $146,115
as of June 30, 2016 and June 30, 2015. Accumulated amortization
associated with assets acquired under capital leases was $90,115 as
of June 30, 2016 and $61,994 as of June 30, 2015.
(9) ACCRUED
EXPENSES
Accrued
expenses
consist of the
following:
|
|
June 30,
2016
|
June 30,
2015
|
|
Clinical
study costs
|
$
6,983,581
|
$
5,594,839
|
|
Other
research related expenses
|
69,609
|
176,105
|
|
Professional
services
|
231,482
|
201,831
|
|
Other
|
483,061
|
250,708
|
|
|
$
7,767,733
|
$
6,223,483
|
57
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(10)
NOTES
PAYABLE:
Notes
payable consist of the following:
|
|
June 30,
2016
|
June 30,
2015
|
|
Notes
payable under venture loan
|
$
20,000,000
|
$
10,000,000
|
|
Unamortized
related debt discount
|
(324,799
)
|
(218,914
)
|
|
Notes
payable
|
$
19,675,201
|
$
9,781,086
|
|
|
|
|
|
Less:
current portion
|
5,485,392
|
-
|
|
|
|
|
|
Long-term
portion
|
$
14,189,809
|
$
9,781,086
|
On July
2, 2015, the Company closed on a $10,000,000 venture loan led by
Horizon Technology Finance Corporation (Horizon). The debt facility
is a four-year senior secured term loan that bears interest at a
floating coupon rate of one-month LIBOR (floor of 0.50%) plus 8.50%
and provides for interest-only payments for the first eighteen
months followed by monthly payments of principal payments of
$333,333 plus accrued interest through August 1, 2019. The lenders
also received five-year immediately exercisable Series G warrants
to purchase 549,450 shares of Palatin common stock exercisable at
an exercise price of $0.91 per share. The Company has recorded a
debt discount of $305,196 equal to the fair value of these warrants
at issuance, which is being amortized to interest expense over the
term of the related debt. This debt discount is offset against the
note payable balance and included in additional paid-in capital on
the Company’s balance sheet at June 30, 2016. In addition, a
final incremental payment of $500,000 is due on August 1, 2019, or
upon early repayment of the loan. This final incremental payment is
being accreted to interest expense over the term of the related
debt. The Company incurred approximately $146,000 of costs in
connection with the loan agreement. These costs were capitalized as
deferred financing costs and are being amortized to interest
expense over the term of the related debt. In addition, if the
Company repays all or a portion of the loan prior to the applicable
maturity date, it will pay the lenders a prepayment penalty fee,
based on a percentage of the then outstanding principal balance,
equal to 3% if the prepayment occurs on or before 18 months after
the funding date thereof or 1% if the prepayment occurs more than
18 months after, but on or before 30 months after, the funding
date.
On
December 23, 2014, the Company closed on a $10,000,000 venture loan
which was led by Horizon. The debt facility is a four-year senior
secured term loan that bears interest at a floating coupon rate of
one-month LIBOR (floor of 0.50%) plus 8.50%, and provides for
interest-only payments for the first eighteen months followed by
monthly payments of principal payments of $333,333 plus accrued
interest through January 1, 2019. The lenders also received
five-year immediately exercisable Series D 2014 warrants to
purchase 666,666 shares of common stock exercisable at an exercise
price of $0.75 per share. The Company recorded a debt discount of
$267,820 equal to the fair value of these warrants at issuance,
which is being amortized to interest expense over the term of the
related debt. This debt discount is offset against the note payable
balance and included in additional paid-in capital on the
Company’s balance sheet at June 30, 2016 and June 30, 2015.
In addition, a final incremental payment equal to $500,000 is due
on January 1, 2019, or upon early repayment of the loan. This final
incremental payment is being accreted to interest expense over the
term of the related debt. The Company incurred approximately
$209,000 of costs in connection with the loan agreement. These
costs were capitalized as deferred financing costs and are being
amortized to interest expense over the term of the related debt. In
addition, if the Company repays all or a portion of the loan prior
to the applicable maturity date, it will pay the lenders a
prepayment penalty fee, based on a percentage of the then
outstanding principal balance, equal to 3% if the prepayment occurs
on or before 18 months after the funding date thereof or 1% if the
prepayment occurs more than 18 months after, but on or before 30
months after, the funding date.
The
Company’s obligations under these loan agreements are secured
by a first priority security interest in substantially all of its
assets other than its intellectual property. The Company also has
agreed to specified limitations on pledging or otherwise
encumbering its intellectual property assets.
These
loan agreements include customary affirmative and restrictive
covenants, but do not include any covenants to attain or maintain
specified financial metrics. These loan agreements include
customary events of default, including payment defaults, breaches
of covenants, change of control and a material adverse change
default. Upon the occurrence of an event of default and following
any applicable cure periods, a default interest rate of an
additional 5% may be applied to the outstanding loan balances, and
the lenders may declare all outstanding obligations immediately due
and payable and take such other actions as set forth in the loan
agreements. As of June 30, 2016, the Company was in compliance with
all its loan covenants
58
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Scheduled future
principal payments related to notes payable as of June 30, 2016 are
as follows:
|
Year Ending June 30,
|
|
|
2017
|
$
5,666,667
|
|
2018
|
8,000,000
|
|
2019
|
6,000,000
|
|
2020
|
333,333
|
|
|
20,000,000
|
|
Less:
debt discount
|
(324,799
)
|
|
Net
|
$
19,675,201
|
(11) COMMITMENTS
AND CONTINGENCIES
Operating Leases
– The Company
currently leases facilities under two non-cancelable operating
leases. The lease on our corporate offices was renewed effective
July 1, 2015 and expires on June 30, 2020 and in June 2015 we
entered into a lease for approximately 1,000 square feet of
laboratory space which currently expires in July 2017. Future
minimum lease payments under these leases are as
follows:
|
Year Ending June 30,
|
|
|
2017
|
$
255,985
|
|
2018
|
224,493
|
|
2019
|
221,344
|
|
2020
|
221,344
|
|
|
$
923,166
|
For the
years ended June 30, 2016, 2015 and 2014, rent expense was
$256,642, $222,215, and $219,686, respectively.
Capital Leases
– The Company has
acquired certain of its equipment under leases classified as
capital leases. Scheduled future payments related to capital leases
as of June 30, 2016 are as follows:
|
Year Ending June 30,
|
|
|
2017
|
$
29,138
|
|
2018
|
14,568
|
|
|
43,706
|
|
Amount
representing interest
|
(1,958
)
|
|
Net
|
$
41,748
|
Other agreements
– In connection
with its agreement with the Company’s third-party contract
manufacturer, Catalent Belgium S.A., the Company is obligated to
pay a space reservation fee over the next four quarters of
approximately € 2,300,000 ($2,524,033) in the
aggregate.
Employment Agreements
– The
Company has employment agreements with two executive officers which
provide a stated annual compensation amount, subject to annual
increases, and annual bonus compensation in an amount to be
approved by the Company’s Board of Directors. Each agreement
allows the Company or the employee to terminate the agreement in
certain circumstances. In some circumstances, early termination by
the Company may result in severance pay to the employee for a
period of 18 to 24 months at the salary then in effect,
continuation of health insurance premiums over the severance period
and immediate vesting of all stock options and restricted stock
units. Termination following a change in control will result in a
lump sum payment of one and one-half to two times the salary then
in effect and immediate vesting of all stock options and restricted
stock units.
59
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Employee Retirement Savings Plan
– The Company maintains a defined contribution 401(k) plan
for the benefit of its employees. The Company currently matches a
portion of employee contributions to the plan. For the years ended
June 30, 2016, 2015 and 2014, Company contributions were $138,184,
$147,203, and $140,870, respectively.
Contingencies
– The Company
accounts for litigation losses in accordance with ASC 450-20,
“Loss Contingencies.” Under ASC 450-20, loss
contingency provisions are recorded for probable losses when
management is able to reasonably estimate the loss. Any outcome
upon settlement that deviates from the Company’s best
estimate may result in additional expense or in a reduction in
expense in a future accounting period. The Company records legal
expenses associated with such contingencies as
incurred.
The
Company is involved, from time to time, in various claims and legal
proceedings arising in the ordinary course of its business. The
Company is not currently a party to any such claims or proceedings
that, if decided adversely to it, would either individually or in
the aggregate have a material adverse effect on its business,
financial condition or results of operations.
(12) STOCKHOLDERS’
(DEFICIENCY) EQUITY
Series A Convertible Preferred Stock
– As of June 30, 2016, 4,030 shares of Series A
Convertible Preferred Stock were outstanding. Each share of Series
A Convertible Preferred Stock is convertible at any time, at the
option of the holder, into the number of shares of common stock
equal to $100 divided by the Series A Conversion Price. As of June
30, 2016, the Series A Conversion Price was $6.65, so each share of
Series A Convertible Preferred Stock is currently convertible into
approximately 15.0 shares of common stock. The Series A Conversion
Price is subject to adjustment, under certain circumstances, upon
the sale or issuance of common stock for consideration per share
less than either (i) the Series A Conversion Price in effect on the
date of such sale or issuance, or (ii) the market price of the
common stock as of the date of such sale or issuance. The Series A
Conversion Price is also subject to adjustment upon the occurrence
of a merger, reorganization, consolidation, reclassification, stock
dividend or stock split which will result in an increase or
decrease in the number of shares of common stock outstanding.
Shares of Series A Convertible Preferred Stock have a preference in
liquidation, including certain merger transactions, of $100 per
share, or $403,000 in the aggregate as of June 30, 2016.
Additionally, the Company may not pay a dividend or make any
distribution to holders of any class of stock unless the Company
first pays a special dividend or distribution of $100 per share to
holders of the Series A Convertible Preferred Stock.
Financing Transactions –
On July
2, 2015, the Company closed on a private placement of Series E
warrants to purchase 21,917,808 shares of Palatin common stock and
Series F warrants to purchase 2,191,781 shares of Palatin common
stock. Certain funds managed by QVT Financial LP invested
$5,000,000 and another accredited investment fund invested
$15,000,000. The funds paid $0.90 for each Series E warrant and
$0.125 for each Series F warrant, resulting in gross proceeds to
the Company of $20,000,000, with net proceeds, after deducting
estimated offering expenses, of approximately
$19,834,278.
The
Series E warrants, which may be exercised on a cashless basis, are
exercisable immediately upon issuance at an initial exercise price
of $0.01 per share and expire on the tenth anniversary of the date
of issuance. The Series E warrants are subject to limitation
on exercise if QVT and its affiliates would beneficially own more
than 9.99% (4.99% for the other accredited investment fund holder)
of the total number of Palatin's shares of common stock following
such exercise. The Series F warrants are exercisable at an initial
exercise price of $0.91 per share, exercisable immediately upon
issuance and expire on the fifth anniversary of the date of
issuance. The Series F warrants are subject to the same beneficial
ownership limitation as the Series E warrants.
The
purchase agreement for the private placement provides that the
purchasers have certain rights until the earlier of approval of
bremelanotide for FSD by the U.S. Food and Drug Administration and
July 3, 2018, including rights of first refusal and participation
in any subsequent equity or debt financing. The purchase agreement
also contains certain restrictive covenants so long as the funds
continue to hold specified amounts of warrants or beneficially own
specified amounts of the outstanding shares of common
stock.
Common Stock Transactions
– On
December 23, 2014, the Company closed on a private placement
offering in which the Company sold 2,050,000 shares of its common
stock and Series C 2014 warrants to purchase up to 24,949,325
shares of common stock. Funds under the management of QVT Financial
LP (QVT) invested $10,000,000 and an unrelated accredited
investment fund invested $10,000,000. The funds paid $0.75 for each
share of common stock and $0.74 for each Series C 2014 warrant,
resulting in gross proceeds to Palatin of $20,000,000, with net
proceeds, after deducting estimated offering expenses, of
$18,556,111. The Series C 2014 warrants, which may be exercised on
a cashless basis, are exercisable immediately upon issuance at an
initial exercise price of $0.01 per share and expire on the tenth
anniversary of the date of issuance. The Series C 2014 warrants are
subject to limitation on exercise if QVT and its affiliates would
beneficially own more than 9.99% (4.99% for the other accredited
investment fund holder) of the total number of Palatin’s
shares of common stock following such exercise.
60
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
The
purchase agreement for the private placement provides that the
purchasers have certain rights until the earlier of approval of
bremelanotide for FSD by the U.S. Food and Drug Administration and
December 23, 2018, including rights of first refusal and
participation in any subsequent equity or debt financing. The
purchase agreement also contains certain restrictive covenants so
long as the funds continue to hold specified amounts of warrants or
beneficially own specified amounts of the outstanding shares of
common stock.
Outstanding Stock Purchase Warrants
– As of June 30,
2016, the Company had outstanding warrants exercisable for shares
of common stock as follows:
|
Shares of Common Stock
|
Exercise Price per Share
|
Latest Termination Date
|
|
20,771,740
|
1.00
|
March
2, 2017
|
|
6,117,245
|
0.01
|
July
3, 2022
|
|
35,344,341
|
0.01
|
September
27, 2022
|
|
666,666
|
0.75
|
December
23, 2019
|
|
24,949,325
|
0.01
|
December
23, 2024
|
|
2,191,781
|
0.91
|
July
2, 2020
|
|
549,450
|
0.91
|
July
2, 2020
|
|
21,917,808
|
0.01
|
July
2, 2025
|
|
112,508,356
|
|
|
During
the year ended June 30, 2016, the Company issued 10,890,889 shares
of common stock pursuant to the cashless exercise provisions of
warrants at an exercise price of $0.01. During the year ended June
30, 2015, the Company received $254,148 and issued 15,130,573
shares of common stock pursuant to the exercise of warrants at
exercise prices of $0.01 and $1.00, including warrants exercised
pursuant to cashless exercise provisions. During the year ended
June 30, 2014, the Company received $37,500 and issued 50,000
shares of common stock pursuant to the exercise of warrants at an
exercise price of $0.75 per share.
Stock Plan –
The Company’s
2011 Stock Incentive Plan was approved by the Company’s
stockholders at the annual meeting of stockholders held in May 2011
and amended at the annual meeting of stockholders held on June 9,
2016. The 2011 Stock Incentive Plan provides for incentive and
nonqualified stock option grants and other stock-based awards to
employees, non-employee directors and consultants for up to
12,500,000 shares of common stock. The 2011 Stock Incentive Plan is
administered under the direction of the Board of Directors, which
may specify grant terms and recipients. Options granted by the
Company generally expire ten years from the date of grant and
generally vest over three to four years. The 2005 Stock Plan was
terminated and replaced by the 2011 Stock Incentive Plan, and
shares of common stock that were available for grant under the 2005
Stock Plan became available for grant under the 2011 Stock
Incentive Plan. No new awards can be granted under the 2005 Stock
Plan, but awards granted under the 2005 Stock Plan remain
outstanding in accordance with their terms. As of June 30, 2016,
3,314,419 shares were available for grant under the 2011 Stock
Incentive Plan.
The
Company also has outstanding options that were granted under the
2005 Stock Plan. The Company expects to settle option exercises
under any of its plans with authorized but currently unissued
shares.
61
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
The
following table summarizes option activity and related information
for the years ended June 30, 2016, 2015 and 2014:
|
|
Number of Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Term in Years
|
Agregate
Instrinsic Value
|
|
Outstanding
- July 1, 2013
|
3,851,448
|
$
1.99
|
8.2
|
|
|
|
|
|
|
|
|
Granted
|
603,400
|
1.02
|
|
|
|
Forfeited
|
(161,900
)
|
0.68
|
|
|
|
Expired
|
(50,975
)
|
24.95
|
|
|
|
|
|
|
|
|
|
Outstanding
- June 30, 2014
|
4,241,973
|
1.63
|
7.7
|
|
|
|
|
|
|
|
|
Granted
|
975,800
|
1.06
|
|
|
|
Forfeited
|
(78,810
)
|
1.92
|
|
|
|
Expired
|
(8,733
)
|
36.47
|
|
|
|
|
|
|
|
|
|
Outstanding
- June 30, 2015
|
5,130,230
|
1.46
|
7.3
|
|
|
|
|
|
|
|
|
Granted
|
355,000
|
0.54
|
|
|
|
Forfeited
|
(170,550
)
|
0.80
|
|
|
|
Expired
|
(52,940
)
|
22.53
|
|
|
|
|
|
|
|
|
|
Outstanding
- June 30, 2016
|
5,261,740
|
$
1.21
|
6.2
|
$
-
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2016
|
3,769,402
|
$
1.35
|
5.4
|
$
-
|
|
|
|
|
|
|
|
Expected
to vest at June 30, 2016
|
1,209,630
|
$
0.83
|
8.5
|
$
-
|
For the
years ended June 30, 2016, 2015 and 2014, the fair value of option
grants is estimated at the grant date using the Black-Scholes
model. The Company’s weighted average assumptions for the
years ended June 30, 2016, 2015 and 2014 were as
follows:
|
|
2016
|
2015
|
2014
|
|
|
|
|
|
|
Risk-free
interest rate
|
1.4
%
|
1.9
%
|
1.9
%
|
|
Volatility
factor
|
73.5
%
|
83.4
%
|
97.1
%
|
|
Dividend
yield
|
0
%
|
0
%
|
0
%
|
|
Expected
option life (years)
|
5.7
|
6.1
|
6.1
|
|
Weighted
average grant date fair value
|
$
0.35
|
$
0.76
|
$
0.80
|
Expected
volatilities are based on the Company’s historical
volatility. The expected term of options is based upon the
simplified method, which represents the average of the vesting term
and the contractual term. The risk-free interest rate is based on
U.S. Treasury yields for securities with terms approximating the
expected term of the option.
For the
years ended June 30, 2016, 2015 and 2014 the Company recorded
stock-based compensation related to stock options of $529,454,
$572,609 and $520,855, respectively. As of June 30, 2016, there was
$674,007 of unrecognized compensation cost related to unvested
options, which is expected to be recognized over a weighted-average
period of 2.31 years.
In June
2016, the Company granted 262,500 options to its non-employee
directors under the Company’s 2011 Stock Incentive Plan. The
Company will amortize the fair value of these options of $81,435,
over the vesting period.
During
the year ended June 30, 2016, the Company granted an aggregate
92,500 options to certain employees under the Company’s 2011
Stock Incentive Plan. The Company is amortizing the fair value of
these options of $41,470, over the vesting period.
62
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
In June
2015, the Company granted 570,000 options to its executive
officers, 185,800 options to its employees and 160,000 options to
its non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $446,748, $145,439 and $111,876, respectively, over the
vesting period.
In June
2014, the Company granted 325,000 options to its executive
officers, 143,400 options to its employees and 135,000 options to
its non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $265,726, $117,247 and $97,530, respectively, over the
vesting period.
Stock
options granted to the Company’s executive officers and
employees vest over a 48 month period, while stock options granted
to its non-employee directors vest over a 12 month
period.
In
June 2016, the Company made the following modifications to certain
stock options that were granted to a former non-employee director
in recognition of their prior services; i) accelerated the vesting,
and ii) extended the date to exercise vested stock options to 24
months from the date of termination. An incremental $16,187 of
stock-based compensation expense was recognized during the year
ended June 30, 2016 and included in general and administrative
expense in connection with these activities.
During
the year ended June 30, 2015, the Company made the following
modifications to certain stock options that were granted to a
terminated employee and former non-employee directors in
recognition of their prior services; i) accelerated the vesting,
and ii) extended the date to exercise vested stock options to 24
months from the date of termination. An incremental $73,664 of
stock-based compensation expense was recognized during the year
ended June 30, 2015 and included in general and administrative
expense in connection with these activities.
During
the year ended June 30, 2014, the Company made the following
modifications to certain stock options that were granted to certain
terminated employees in recognition of their prior services; i)
accelerated the vesting, and ii) extended the date to exercise
vested stock options to 24 months from the date of termination. An
incremental $22,000 of stock-based compensation expense was
recognized during the year ended June 30, 2014 and included in
research and development expense in connection with these
activities.
Restricted Stock Units –
The following table
summarizes restricted stock award activity for the years ended June
30, 2016, 2015 and 2014:
|
|
2016
|
2015
|
2014
|
|
Outstanding
at beginning of year
|
1,028,017
|
957,150
|
757,500
|
|
Granted
|
2,302,500
|
785,800
|
603,400
|
|
Forfeited
|
(2,563
)
|
(9,100
)
|
(25,000
)
|
|
Vested
|
(662,186
)
|
(705,833
)
|
(378,750
)
|
|
Outstanding
at end of year
|
2,665,768
|
1,028,017
|
957,150
|
For the
years ended June 30, 2016, 2015 and 2014 the Company recorded
stock-based compensation related to restricted stock units of
$1,297,724, $594,670 and $300,485, respectively.
In June
2016, the Company granted 262,500 restricted stock units to its
non-employee directors under the Company’s 2011 Stock
Incentive Plan. The Company is amortizing the fair value of these
options of $131,250, over the vesting period.
In
January 2016, the Company granted 50,000 restricted stock units to
an employee and is amortizing the fair value of these restricted
stock units of $30,000 over a 48 month vesting period.
In
December 2015, the Company granted 625,000 performance-based
restricted stock units to its executive officers and 200,000
performance-based restricted stock units to its employees under the
Company’s 2011 Stock Incentive Plan, which vest during the
performance period, ending December 31, 2017, if and upon the
earlier of: i) achievement of a closing price for the
Company’s common stock equal to or greater than $1.20 per
share for 20 consecutive trading days, which is considered a market
condition, or ii) entering into a collaboration agreement (U.S. or
global) of bremelanotide for FSD, which is considered a performance
condition. The Company determined that the performance condition
was not probable of achievement on the date of grant since such
condition is outside the control of the Company. The fair value of
these awards, as calculated under a multifactor Monte Carlo
simulation, was $338,250. The Company is amortizing the fair value
over the derived service period of 0.96 years.
63
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
Also,
in December 2015, the Company granted 625,000 restricted stock
units to its executive officers, 340,000 restricted stock units to
its non-employee directors and 200,000 restricted stock units to
its employees under the Company’s 2011 Stock Incentive Plan.
For executive officers and employees, the restricted stock units
vest 25% on the date of grant and 25% on the first, second and
third anniversary dates from the date of grant. For non-employee
directors, the restricted stock units vest 50% on the first and
second anniversary dates from the date of grant. The Company is
amortizing the fair value of these restricted stock units of
$425,000, $231,200 and $136,000, respectively, over the vesting
period.
In June
2015, the Company granted 400,000 restricted stock units to its
executive officers, 185,800 restricted stock units to its employees
and 160,000 restricted stock units to its non-employee directors
under the Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$432,000, $200,664, and $172,800, respectively, over the vesting
period. In addition, in June 2015, the Company granted 20,000
restricted stock units to former non-employee directors in
recognition of their prior services. These restricted stock units
vested upon issuance and the Company recognized the fair value of
these restricted stock units of $21,600 as stock-based compensation
expense which was included in general and administrative expense at
June 30, 2015.
In
January 2015, the Company granted 20,000 restricted stock units to
an employee and is amortizing the fair value of these restricted
stock units of $16,000 over a 24 month vesting period.
In June
2014, the Company granted 325,000 restricted stock units to its
executive officers, 143,400 restricted stock units to its employees
and 135,000 restricted stock units to its non-employee directors
under the Company’s 2011 Stock Incentive Plan. The Company is
amortizing the fair value of these restricted stock units of
$331,500, $146,268 and $137,700, respectively, over the vesting
period.
Generally,
restricted stock units granted to the Company’s executive
officers, employees and non-employee directors in 2015 and 2014
vest over 24 months, 48 months and 12 months,
respectively.
In June
2013, the Company granted 420,000 restricted stock units to its
executive officers and 115,000 restricted stock units to employees
under the Company’s 2011 Stock Incentive Plan. The Company
amortized the fair value of these restricted stock units of
$260,000 and $71,000, respectively, over the 24 month vesting
period ended June 30, 2015.
In July
2012, the Company granted 222,500 restricted stock units to its
executive officers under the Company’s 2011 Stock Incentive
Plan. The Company amortized the fair value of these restricted
stock units of $160,000 over the 24 months ending July
2014.
During
the year ended June 30, 2014, the Company accelerated the vesting
of certain restricted stock units that were granted to a terminated
employee in recognition of prior services. An incremental $12,000
of stock-based compensation expense was recognized during the year
ended June 30, 2014 and included in research and development
expense in connection with these activities.
In
connection with the vesting of restricted share units during the
years ended June 30, 2016, 2015 and 2014, the Company withheld
123,483, 174,568 and 129,103 shares with aggregate values of
$58,401, $164,136 and $120,007, respectively, in satisfaction of
minimum tax withholding obligations.
(13) INCOME
TAXES
The
Company has had no income tax expense or benefit since inception
because of operating losses, except for amounts recognized for
sales of New Jersey state net operating loss carryforwards and tax
credits. Deferred tax assets and liabilities are determined based
on the estimated future tax effect of differences between the
financial statement and tax reporting basis of assets and
liabilities, as well as for net operating loss carryforwards and
research and development credit carryforwards, given the provisions
of existing tax laws.
As of
June 30, 2016, the Company had federal and state net operating loss
carryforwards of approximately $302,600,000 and $139,400,000,
respectively, which expire, if not utilized, between 2019 and 2036
for federal tax purposes and between 2016 and 2036 for state tax
purposes. As of June 30, 2016, the Company had federal research and
development credits of approximately $10,000,000 that will begin to
expire in 2019, if not utilized.
64
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
The Tax Reform Act of 1986 (the Act) provides for limitation on the use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s ability to utilize these carryforwards. The Company may have experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, the Company’s ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, the Company may not be able to take full advantage of these carryforwards for federal income tax purposes.
The
Company’s net deferred tax assets are as
follows:
|
|
June 30,
2016
|
June 30,
2015
|
|
Net
operating loss carryforwards
|
$
114,081,000
|
$
94,332,000
|
|
Research
and development tax credits
|
9,965,000
|
7,357,000
|
|
Basis
differences in fixed assets and other
|
1,491,000
|
1,208,000
|
|
|
125,537,000
|
102,897,000
|
|
Valuation
allowance
|
(125,537,000
)
|
(102,897,000
)
|
|
Net
deferred tax assets
|
$
-
|
$
-
|
In
assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income and the application of loss limitation
provisions related to ownership changes. Due to the Company’s
history of losses, the deferred tax assets are fully offset by a
valuation allowance as of June 30, 2016 and 2015.
The
Company did not have a sale of New Jersey state net operating loss
(NJ NOL) carryforwards during the year ended June 30, 2016 and
therefore did not record a tax benefit. During the years ended June
30, 2015 and 2014, the Company sold New Jersey state net operating
loss carryforwards, which resulted in the recognition of $531,508
and $1,846,646, respectively, in tax benefits.
65
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Notes to Consolidated Financial Statements
(14) CONSOLIDATED
QUARTERLY FINANCIAL DATA - UNAUDITED
The
following tables provide quarterly data for the years ended June
30, 2016 and 2015.
|
|
Three Months Ended
|
|||
|
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
|
|
2016
|
2016
|
2015
|
2015
|
|
|
(amounts
in thousands, except per share
data)
|
|||
|
Revenues
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Operating
expenses
|
12,738
|
12,086
|
12,628
|
11,798
|
|
Other
income (expense), net
|
(618
)
|
(611
)
|
(622
)
|
(612
)
|
|
Loss
before income taxes
|
(13,356
)
|
(12,697
)
|
(13,250
)
|
(12,410
)
|
|
Income
tax benefit
|
-
|
-
|
-
|
-
|
|
Net
loss
|
$
(13,356
)
|
$
(12,697
)
|
$
(13,250
)
|
$
(12,410
)
|
|
Basic
and diluted net loss per
common
share
|
$
(0.09
)
|
$
(0.08
)
|
$
(0.08
)
|
$
(0.08
)
|
|
Weighted
average number of
|
|
|
|
|
|
common
shares outstanding
|
|
|
|
|
|
used
in computing basic and
|
|
|
|
|
|
diluted
net loss per common share
|
156,841,053
|
156,744,867
|
156,456,801
|
156,176,618
|
|
|
Three Months Ended
|
|||
|
|
June 30,
|
March 31,
|
December 31,
|
September 30,
|
|
|
2015
|
2015
|
2014
|
2014
|
|
|
(amounts
in thousands, except per share data)
|
|||
|
Revenues
|
$
-
|
$
-
|
$
8,020
|
$
4,932
|
|
Operating
expenses
|
11,782
|
8,722
|
5,697
|
4,038
|
|
Other
income (expense), net
|
(306
)
|
(428
)
|
(78
)
|
(99
)
|
|
(Loss)
income before income taxes
|
(12,088
)
|
(9,150
)
|
2,245
|
795
|
|
Income
tax benefit
|
-
|
-
|
532
|
-
|
|
Net
(loss) income
|
$
(12,088
)
|
$
(9,150
)
|
$
2,777
|
$
795
|
|
Basic
net (loss) income per
common
share
|
$
(0.09
)
|
$
(0.07
)
|
$
0.03
|
$
0.01
|
|
Diluted
net (loss) income per
common
share
|
$
(0.09
)
|
$
(0.07
)
|
$
0.03
|
$
0.01
|
|
Weighted
average number of
|
|
|
|
|
|
common
shares outstanding
|
|
|
|
|
|
used
in computing basic net
|
|
|
|
|
|
(loss)
income per common share
|
134,207,300
|
134,008,239
|
109,314,460
|
106,953,898
|
|
Weighted
average number of
|
|
|
|
|
|
common
shares outstanding
|
|
|
|
|
|
used
in computing diluted net
|
|
|
|
|
|
(loss)
income per common share
|
134,207,300
|
134,008,239
|
109,815,718
|
107,946,021
|
|
|
|
|
|
|
(15) SUBSEQUENT
EVENTS
Financing Transactions –
On
August 4, 2016, the Company closed on an underwritten offering of
units, with each unit consisting of a share of common stock and a
Series H warrant to purchase 0.75 of a share of common stock.
Investors whose purchase of units in the offering would result in
them beneficially owning more than 9.99% of our outstanding common
stock following the completion of the offering had the opportunity
to acquire units with Series I prefunded warrants substituted for
any common stock they would have otherwise acquired. Gross proceeds
were $9,225,000, with net proceeds to us, after deducting estimated
offering expenses, of approximately $8,500,000. We issued
11,481,481 shares of common stock and ten year prefunded Series I
warrants to purchase 2,218,045 shares of common stock at an
exercise price of $0.01, together with Series H warrants to
purchase 10,274,646 shares of common stock at an exercise price of
$0.70 per share.
The
Series I warrants are exercisable at an initial exercise price of
$0.01 per share, exercisable immediately upon issuance and expire
on the tenth anniversary of the date of issuance. The Series I
warrants are subject to limitation on exercise if the holder and
its affiliates would beneficially own more than 9.99% of the total
number of Palatin’s shares of common stock following such
exercise. The Series H warrants are exercisable at an initial
exercise price of $0.70 per share, are exercisable commencing six
months following the date of issuance and expire on the fifth
anniversary of the date of issuance. The Series H warrants are
subject to the same beneficial ownership limitation as the Series I
warrants.
66
None.
Our
management carried out an evaluation, with the participation of our
Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the end
of the period covered by this report. Based upon this evaluation,
our Chief Executive Officer and our Chief Financial Officer
concluded that, as of June 30, 2016, our disclosure controls and
procedures were effective.
A
control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within a company have been detected.
Management’s Report on Internal Control Over Financial
Reporting
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) or
15d-15(f) of the Exchange Act. Our internal control system was
designed to provide reasonable assurance to management and the
board of directors regarding the preparation and fair presentation
of published financial statements.
All
internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
There
was no change in our internal control over financial reporting
during the fourth quarter of the period covered by this Annual
Report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
Management assessed
the effectiveness of our internal control over financial reporting
as of June 30, 2016. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in
Internal Control-Integrated Framework as
adopted in 2013
. Based on its assessment, management
believes that, as of June 30, 2016, our internal control over
financial reporting is effective based on those
criteria.
None.
67
Identification
of Directors
The
following table sets forth the names, ages, positions and committee
memberships of our current directors. All directors hold office
until the next annual meeting of stockholders or until their
successors have been elected and qualified. All current directors
were elected at our annual stockholders’ meeting on June 9,
2016.
|
Name
|
Age
|
Position with
Palatin
|
|
Carl Spana,
Ph.D.
|
54
|
Chief Executive
Officer, President and a Director
|
|
John K. A.
Prendergast, Ph.D. (3)
|
62
|
Director, Chairman
of the board of directors
|
|
Robert K. deVeer,
Jr. (1) (2)
|
70
|
Director
|
|
J. Stanley Hull (1)
(2)
|
64
|
Director
|
|
Alan W. Dunton,
M.D. (1) (2)
|
62
|
Director
|
|
Angela Rossetti (1)
(3)
|
63
|
Director
|
|
Arlene M. Morris
(2) (3)
|
64
|
Director
|
(1)
Member of the audit committee.
(2)
Member of the compensation committee.
(3)
Member of the nominating and corporate governance
committee.
CARL
SPANA, Ph.D., co-founder of Palatin, has been our Chief Executive
Officer and President since June 14, 2000. He has been a director
of Palatin since June 1996 and has been a director of our
wholly-owned subsidiary, RhoMed Incorporated, since July 1995. From
June 1996 through June 14, 2000, Dr. Spana served as an executive
vice president and our chief technical officer. From June 1993 to
June 1996, Dr. Spana was vice president of Paramount Capital
Investments, LLC, a biotechnology and biopharmaceutical merchant
banking firm, and of The Castle Group Ltd., a medical venture
capital firm. Through his work at Paramount Capital Investments and
The Castle Group, Dr. Spana co-founded and acquired several private
biotechnology firms. From July 1991 to June 1993, Dr. Spana was a
Research Associate at Bristol-Myers Squibb, a publicly-held
pharmaceutical company, where he was involved in scientific
research in the field of immunology. He was previously a member of
the board of the life science company AVAX Technologies, Inc. Dr.
Spana received his Ph.D. in molecular biology from the Johns
Hopkins University and his B.S. in biochemistry from Rutgers
University.
Dr.
Spana’s qualifications for our board include his leadership
experience, business judgment and industry experience. As a senior
executive of Palatin for over nineteen years, he provides in-depth
knowledge of our company, our drug products under development and
the competitive and corporate partnering landscape.
JOHN K.
A. PRENDERGAST, Ph.D., co-founder of Palatin, has served as the
non-executive Chairman of the board since June 14, 2000, and as a
director since August 1996. While Mr. Prendergast has served as a
member of the board, he does not, and has not, served in a
management or operational role with the company. Dr. Prendergast
has been president and sole stockholder of Summercloud Bay, Inc.,
an independent consulting firm providing services to the
biotechnology industry, since 1993. Dr. Prendergast is a director
and executive chairman of the board of directors of Antyra, Inc., a
privately-held biopharmaceutical firm, and a director of Heat
Biologics, Inc., a publicly traded clinical-stage immunotherapy
company. He was previously a member of the board of the life
science companies AVAX Technologies, Inc., Avigen, Inc. and
MediciNova, Inc. From October 1991 through December 1997, Dr.
Prendergast was a managing director of The Castle Group Ltd., a
medical venture capital firm. Dr. Prendergast received his M.Sc.
and Ph.D. from the University of New South Wales, Sydney, Australia
and a C.S.S. in administration and management from Harvard
University.
68
Dr.
Prendergast brings a historical perspective to our board coupled
with extensive industry experience in corporate development and
finance in the life sciences field. His prior service on other
publicly traded company boards provides experience relevant to good
corporate governance practices.
ROBERT
K. deVEER, Jr. has been a director of Palatin since November 1998.
Since January 1997, Mr. deVeer has been the president of deVeer
Capital LLC, a private investment company. He was a director of
Solutia Inc., a publicly-held chemical-based materials company,
until its merger with Eastman Chemical Company in July 2012. From
1995 until his retirement in 1996, Mr. deVeer served as Managing
Director, Head of Industrial Group, at New York-based Lehman
Brothers. From 1973 to 1995, he held increasingly responsible
positions at New York-based CS First Boston, including Head of
Project Finance, Head of Industrials and Head of Natural Resources.
He was a managing director, member of the investment banking
committee and a trustee of the First Boston Foundation. He received
a B.A. in economics from Yale University and an M.B.A. in finance
from Stanford Graduate School of Business.
Mr.
deVeer has extensive experience in investment banking and corporate
finance, including the financing of life sciences companies, and
serves as the audit committee’s financial
expert.
J.
STANLEY HULL has been a director of Palatin since September 2005.
Mr. Hull has over three decades of experience in the field of sales
and marketing. Mr. Hull joined GlaxoSmithKline, a research-based
pharmaceutical company, in October 1987 and retired as Senior Vice
President, Pharmaceuticals in May 2010, having previously served in
the R&D organization of Glaxo Wellcome as Vice President and
Worldwide Director of Therapeutic Development and Product Strategy
– Neurology and Psychiatry. Prior to that, he was Vice
President of Marketing – Infectious Diseases and
Gastroenterology for Glaxo Wellcome. Mr. Hull started his career in
the pharmaceutical industry with SmithKline and French Laboratories
in 1978. Mr. Hull received his B.S. in business administration from
the University of North Carolina at Greensboro.
Mr.
Hull has extensive experience in commercial operations, development
and marketing of pharmaceutical drugs and corporate alliances
between pharmaceutical companies and biotechnology
companies.
ALAN W.
DUNTON, M.D. has been a director of Palatin since June 2011. Since
November 2015, he has been senior vice president of research and
development for Purdue Pharma L.P., with responsibilities for
overall research strategy and development programs. Previously he
was president of Danerius, LLC, a biotechnology consulting company,
which he founded in 2006. From January 2007 to March 2009, Dr.
Dunton served as president and chief executive officer of Panacos
Pharmaceuticals Inc. and he served as a managing director of
Panacos from March 2009 to January 2011. Dr. Dunton is currently a
member of the board of directors of the publicly traded company
Oragenics, Inc. He previously served on the board of directors of
the publicly traded companies Targacept, Inc., EpiCept Corporation
(as Non-Executive Chairman), Adams Respiratory Therapeutics, Inc.
(acquired by Reckitt Benckiser Group plc), MediciNova, Inc. and
Panacos Pharmaceuticals, Inc. Dr. Dunton has served as a director
or executive officer of various pharmaceutical companies, and from
1994 to 2001, Dr. Dunton was a senior executive in various
capacities in the Pharmaceuticals Group of Johnson & Johnson.
Dr. Dunton received his M.D. degree from New York University School
of Medicine, where he completed his residency in internal medicine.
He also was a Fellow in Clinical Pharmacology at the New York
Hospital/Cornell University Medical Center.
Dr.
Dunton has extensive drug development and clinical research
experience, having played a key role in the development of more
than 20 products to regulatory approval, and also has extensive
experience as an executive and officer for both large
pharmaceutical companies and smaller biotechnology and
biopharmaceutical companies.
ANGELA
ROSSETTI has been a director of Palatin since June 2013. In June
2015 she became Executive Vice President of Cell Machines, Inc., an
early stage biopharmaceutical company developing transformational
biosimilars and novel protein therapies. Previously, Ms. Rossetti
served in pharmaceutical marketing, communications and financial
roles, including as Vice President at Pfizer Inc., where she led a
global commercial medicine team for smoking cessation, and as an
Assistant Vice President at Wyeth, managing a global hemophilia
business. Previously, she was President of Ogilvy Healthworld, an
advertising business in the pharmaceutical and biotechnology
sectors, and served on the Biotech and Pharmaceutical Advisory
Board of Danske Capital for six years. Ms. Rossetti is a director
of Viramal Limited, a privately held specialty pharmaceutical
company focused on women’s health therapeutics located in the
United Kingdom. Ms. Rossetti graduated from a joint program of the
Albert Einstein College of Medicine and Benjamin N. Cardozo School
of Law with an M.S.in Bioethics in 2014, has an M.B.A. in Finance
from Columbia University Graduate School of Business and a B.A. in
Biology from the University of Pennsylvania, and is an adjunct
Assistant Professor at New York Medical College.
69
Ms.
Rossetti has extensive experience in worldwide development and
marketing of specialty pharmaceuticals, including prefilled syringe
products, in communications and development of commercialization
plans and in pharmaceutical and biotechnology finance.
ARLENE
M. MORRIS has been a director of Palatin since June 2015. From
March 2012 until May 2015 she was Chief Executive Officer of Syndax
Pharmaceuticals, Inc., a privately held biopharmaceutical company
focused on the development and commercialization of an epigenetic
therapy for treatment-resistant cancers, and was President of
Syndax Pharmaceuticals from September 2013 until May 2015 and a
member of the board of directors from May 2011 until May 2015. From
2003 to January 2011, Ms. Morris served as the President, Chief
Executive Officer and a member of the board of directors of
Affymax, Inc., a publicly traded biotechnology company. Ms. Morris
has also held various management and executive positions at
Clearview Projects, Inc., a corporate advisory firm, Coulter
Pharmaceutical, Inc., a publicly traded pharmaceutical company,
Scios Inc., a publicly traded biopharmaceutical company, and
Johnson & Johnson, a publicly traded healthcare company. She is
currently a member of the board of directors of Viveve Medical,
Inc., a publicly traded medical technology company focused on
women’s health, Biodel Inc., a publicly traded specialty
pharmaceutical company, Dimension Therapeutics, Inc., a publicly
traded gene therapy company, and Neovacs, SA, a French publicly
traded biotechnology company. Ms. Morris received a B.A. in Biology
and Chemistry from Carlow College.
Ms.
Morris has extensive experience in the biotechnology industry,
including prior leadership positions, current senior management and
board service, and experience as chief executive officer of
companies with product candidates in phase 3 clinical
trials.
The
Board and Its Committees
Committees and meetings
. The board has
an audit committee, a compensation committee and a nominating and
corporate governance committee. During fiscal 2016, the board met
five times, the audit committee met four times, the compensation
committee met twice and the nominating and corporate governance
committee met twice. Each director attended at least 75% of the
total number of meetings of the board and committees of the board
on which he served. The independent directors meet in executive
sessions at least annually, following the annual board meeting. We
do not have a policy requiring our directors to attend stockholder
meetings. With the exception of Drs. Prendergast and Spana, the
directors did not attend the annual meeting of stockholders held on
June 9, 2016.
Audit committee
. The audit committee
reviews the engagement of the independent registered public
accounting firm and reviews the independence of the independent
registered public accounting firm. The audit committee also reviews
the audit and non-audit fees of the independent registered public
accounting firm and the adequacy of our internal control
procedures. The audit committee is currently composed of four
independent directors, Mr. deVeer (chair), and Dr. Dunton, Ms.
Rossetti and Mr. Hull. The board has determined that the members of
the audit committee are independent, as defined in the listing
standards of the NYSE MKT, and satisfy the requirements of the NYSE
MKT as to financial literacy and expertise. The board has
determined that at least one member of the committee, Mr. deVeer,
is the audit committee financial expert as defined by Item 407 of
Regulation S-K. The responsibilities of the audit committee are set
forth in a written charter adopted by the board and updated as of
October 1, 2013, a copy of which is available on our web site at
www.palatin.com.
Compensation committee.
The
compensation committee reviews and recommends to the board on an
annual basis employment agreements and compensation for our
officers, directors and some employees, and administers our 2011
Plan and the options still outstanding which were granted under
previous stock option plans. The compensation committee is composed
of Dr. Dunton (chair), Ms. Morris and Messrs. deVeer and Hull. The
board has determined that the members of the compensation committee
are independent, as defined in the listing standards of the NYSE
MKT. Our Chief Executive Officer aids the compensation committee by
providing annual recommendations regarding the compensation of all
executive officers, other than himself. Our Chief Financial Officer
supports the committee in its work by gathering, analyzing and
presenting data on our compensation arrangements and compensation
in the marketplace.
The
responsibilities of the compensation committee are set forth in a
written charter adopted by the board effective October 1, 2013, a
copy of which is available on our web site at www.palatin.com. The
committee administers our 2011 Plan, under which it has delegated
to an officer its authority to grant stock options to employees and
to a single-member committee of the board its authority to grant
restricted stock units to officers and to grant options and
restricted stock units to our consultants, but in either instance
not to grant options or restricted stock units to themselves, any
member of the board or officer, or any person subject to Section 16
of the Securities Exchange Act of 1934.
70
Nominating and corporate governance
committee.
The nominating and corporate governance committee
assists the board in recommending nominees for directors, and in
determining the composition of committees. It also reviews,
assesses and makes recommendations to the board concerning policies
and guidelines for corporate governance, including relationships of
the board, the stockholders and management in determining our
direction and performance. The responsibilities of the nominating
and corporate governance committee are set forth in a written
charter adopted by the board and updated as of October 1, 2013, a
copy of which is available on our web site at www.palatin.com. The
nominating and corporate governance committee is composed of Dr.
Prendergast (chair) and Mss. Rossetti and Morris, each of whom
meets the independence requirements established by the NYSE
MKT.
Duration of Office.
Unless a director
resigns, all directors hold office until the next annual meeting of
stockholders or until their successors have been elected and
qualified. Directors serve as members of committees as the board
determines from time to time.
Communicating
With Directors
Generally,
stockholders or other interested parties who have questions or
concerns should contact Stephen T. Wills, Secretary, Palatin
Technologies, Inc., 4B Cedar Brook Drive, Cranbury, NJ 08512.
However, any stockholder or other interest party who wishes to
address questions regarding our business directly to the board of
directors, or any individual director, can direct questions to the
board members or a director by regular mail to the Secretary at the
address above or by e-mail at boardofdirectors@palatin.com.
Stockholders or other interested parties may also submit their
concerns anonymously or confidentially by postal mail.
Communications are
distributed to the board, or to any individual directors as
appropriate, depending on the facts and circumstances outlined in
the communication, unless the Secretary determines that the
communication is unrelated to the duties and responsibilities of
the board, such as product inquiries, resumes, advertisements or
other promotional material. Communications that are unduly hostile,
threatening, illegal or similarly unsuitable will also not be
distributed to the board or any director. All communications
excluded from distribution will be retained and made available to
any non-management director upon request.
Board
Role in Risk Oversight
Our
board, as part of its overall responsibility to oversee the
management of our business, considers risks generally when
reviewing our strategic plan, financial results, business
development activities, legal and regulatory matters. The board
satisfies this responsibility through regular reports directly from
our officers responsible for oversight of particular risks. The
board’s risk management oversight also includes full and open
communications with management to review the adequacy and
functionality of the risk management processes used by management.
The board’s role in risk oversight has no effect on the
board’s leadership structure. In addition, committees of the
board assist in its risk oversight responsibility,
including:
●
The audit committee
assists the board in its oversight of the integrity of the
financial reporting and our compliance with applicable legal and
regulatory requirements. It also oversees our internal controls and
compliance activities, and meets privately with representatives
from our independent registered public accounting
firm.
●
The compensation
committee assists the board in its oversight of risk relating to
compensation policies and practices. The compensation committee
annually reviews our compensation policies, programs and
procedures, including the incentives they create and mitigating
factors that may reduce the likelihood of excessive risk taking, to
determine whether they present a significant risk to our
company.
Board
Leadership Structure
Since
2000, the roles of chairman of the board and chief executive
officer have been held by separate persons. John K.A. Prendergast,
Ph.D., a non-employee director, has served as Chairman of the board
since June 2000. Carl Spana, Ph.D., has been our Chief Executive
Officer and President since June 2000. Generally, the chairman is
responsible for advising the chief executive officer, assisting in
long-term strategic planning, and presiding over meetings of the
board, and the chief executive officer is responsible for leading
our day-to-day performance. While we do not have a written policy
with respect to separation of the roles of chairman of the board
and chief executive officer, the board believes that the existing
leadership structure, with the separation of these roles, provides
several important advantages, including: enhancing the
accountability of the chief executive officer to the board;
strengthening the board’s independence from management;
assisting the board in reaching consensus on particular strategies
and policies; and facilitating robust director, board, and
executive officer evaluation processes.
71
Code
of Corporate Conduct and Ethics
We have
adopted a code of corporate conduct and ethics, updated as of March
11, 2016, that applies to all of our directors, officers and
employees, including our Chief Executive Officer and Chief
Financial Officer. You can view the code of corporate conduct and
ethics at our website, www.palatin.com. We will disclose any
amendments to, or waivers from, provisions of the code of corporate
conduct and ethics that apply to our directors, principal executive
and financial officers in a current report on Form 8-K, unless the
rules of the NYSE MKT permit website posting of any such amendments
or waivers.
Executive
Officers
Executive officers
are appointed by the board and serve at the discretion of the
board. Each officer holds his position until his successor is
appointed and qualified. The current executive officers hold office
under employment agreements.
|
Name
|
Age
|
Position with
Palatin
|
|
Carl Spana,
Ph.D.
|
54
|
Chief Executive
Officer, President and Director
|
|
Stephen T. Wills,
MST, CPA
|
59
|
Chief Financial
Officer, Chief Operating Officer, Executive Vice President,
Secretary and Treasurer
|
Additional
information about Dr. Spana is included above under the heading
“Identification of Directors.”
STEPHEN
T. WILLS, MST, CPA, has been Executive Vice President, Secretary,
Treasurer and Chief Financial Officer since 1997 and was Executive
Vice President of Operations from 2005 until June 2011, when he was
appointed Chief Operating Officer and Executive Vice President.
Since December 2015, Mr. Wills has also served as interim executive
chairman and principal executive officer of Derma Sciences, Inc.,
or Derma, a publicly-held company which provides wound and skin
care products, and from July 1997 to July 2000, Mr. Wills was also
a vice president and the chief financial officer of Derma. He is
also currently a director of Derma, and was previously lead
director and chair of the audit committee. Mr. Wills is a trustee
of The Hun School of Princeton and is chair of its finance
committee. From 1991 to August 2000, he was the president and chief
operating officer of Golomb, Wills & Company, P.C., a public
accounting firm. Mr. Wills, a certified public accountant, received
his B.S. in accounting from West Chester University, and an M.S. in
taxation from Temple University.
Section
16(A) Beneficial Ownership Reporting Compliance
The
rules of the SEC require us to disclose failures to file or late
filings of reports of stock ownership and changes in stock
ownership required to be filed by our directors, officers and
holders of more than 10% of our common stock. To the best of our
knowledge, all of the filings for our directors, officers and
holders of more than 10% of our common stock were made on a timely
basis in fiscal 2016, except that a report on Form 4 relating to an
acquisition of our common stock by a director was inadvertently
filed late on behalf of J. Stanley Hull on December 3,
2015.
Fiscal
2016 Summary Compensation Table
The
following table summarizes the compensation earned by or paid to
our principal executive officer and our principal financial
officer, who constitute all of our executive officers, for our
fiscal years ended June 30, 2016 and 2015. We have no defined
benefit or actuarial pension plan, and no deferred compensation
plan.
72
|
Name and
Principal Position
|
Fiscal
Year
|
Salary
($)
|
Stock
awards (1)
($)
|
Option
awards (1)
($)
|
Nonequity
incentive plan compensation (2)($)
|
All
other
compensation
(3)($)
|
Total
($)
|
|
Carl
Spana, Ph.D.,
|
2016
|
476,400
|
354,250
|
-
|
101,000
(4)
|
13,598
|
945,248
|
|
Chief Executive
Officer and President
|
2015
|
462,500
|
226,800
|
234,832
|
195,000
|
18,937
|
1,138,069
|
|
|
|
|
|
|
|
|
|
|
Stephen T. Wills,
MST, CPA,
|
2016
|
435,200
|
327,000
|
-
|
92,000
(4)
|
13,568
|
867,768
|
|
Chief Financial
Officer, Chief Operating Officer and Executive Vice
President
|
2015
|
422,500
|
205,200
|
211,916
|
203,000
|
18,438
|
1,061,054
|
(1) Amounts in
these columns represent the aggregate grant date fair value for
stock awards and option awards computed using either the
Black-Scholes model or a multifactor Monte Carlo simulation. For a
description of the assumptions we used to calculate these amounts,
see Note 12 to the consolidated financial statements included in
this Annual Report.
(2) Bonus
amounts.
(3) Consists
of matching contributions to 401(k) plan.
(4) Bonus
amount for fiscal year 2016 paid after fiscal year end but accrued
as of June 30, 2016.
Employment
Agreements
Effective July 1,
2016, we entered into employment agreements with Dr. Spana and Mr.
Wills which continue through June 30, 2019 unless terminated
earlier. Under these agreements, which replaced substantially
similar agreements that expired on June 30, 2016, Dr. Spana is
serving as Chief Executive Officer and President at a base salary
of $476,400 per year and Mr. Wills is serving as Chief Financial
Officer and Chief Operating Officer at a base salary of $435,200
per year. Each agreement also provides for:
●
annual
discretionary bonus compensation, in an amount to be decided by the
compensation committee and approved by the board, based on
achievement of yearly performance objectives; and
●
participation in
all benefit programs that we establish, to the extent the
executive’s position, tenure, salary, age, health and other
qualifications make him eligible to participate.
Each
agreement allows us or the executive to terminate the agreement
upon written notice, and contains other provisions for termination
by us for “cause,” or by the employee for “good
reason” or due to a “change in control” (as these
terms are defined in the employment agreements and set forth
below). Early termination may, in some circumstances, result in
severance pay at the salary then in effect, plus continuation of
medical and dental benefits then in effect for a period of two
years (Dr. Spana) or 18 months (Mr. Wills). In addition, the
agreements provide that options and restricted stock units granted
to these officers accelerate upon termination of employment except
for voluntary resignation by the officer or termination for cause.
In the event of retirement, termination by the officer for good
reason, or termination by us other than for “cause”,
options may be exercised until the earlier of twenty-four months
following termination or expiration of the option term.
Arrangements with our named executive officers in connection with a
termination following a change in control are described below. Each
agreement includes non-competition, non-solicitation and
confidentiality covenants.
73
The
compensation committee awarded performance-based bonuses to our
named executive officers for fiscal 2016 and fiscal 2015, which
were paid in September 2016 and June 2015, respectively, based on
results of operations, including clinical trial operations and our
financial condition.
Stock
Option and Restricted Stock Unit Grants
The
compensation committee determined that additional equity grants
were necessary in order to reward, motivate and retain our
executive officers. On December 8, 2015, we granted 325,000
performance-based restricted stock units and 325,000
non-performance-based restricted stock units to Dr. Spana and
300,000 performance-based restricted stock units and 300,000
restricted stock units to Mr. Wills. The performance-based
restricted stock units vest during the performance period, ending
December 31, 2017, if and upon the earlier of: (i) achievement of a
closing price for the Company’s common stock equal to or
greater than $1.20 per share for 20 consecutive trading days, which
is considered a market condition, or (ii) entering into a
collaboration agreement (U.S. or global) of bremelanotide for FSD,
which is considered a performance condition. The
non-performance-based restricted stock units vest 25% on the date
of grant and 25% on the first, second and third anniversary dates
from the date of grant.
On June
11, 2015, we granted 210,000 restricted stock units to Dr. Spana
and 190,000 restricted stock units to Mr. Wills, which vest as to
50% on each anniversary of the grant date. We also granted 300,000
stock options to Dr. Spana and 270,000 stock options to Mr. Wills,
which vest as to 25% on each anniversary of the grant date. These
options have an exercise price of $1.08, the fair market value of
the common stock on the date of grant, and they expire on June 11,
2025.
Outstanding
Equity Awards at 2016 Fiscal Year-End
The
following table summarizes all of the outstanding equity-based
awards granted to our named executive officers as of June 30, 2016,
the end of our fiscal year.
|
|
|
Option awards
(1)
|
Stock awards
(2)
|
||||
|
Name
|
Option
or
stock
award
grant
date
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Option
exercise
price
($)
|
Option
expiration
date
|
Number of shares
or units of stock that have not vested
(#)
|
Market value of
shares or units of stock that have not vested
($)
(3)
|
|
Carl
Spana
|
10/06/06
|
12,500
|
-
|
24.90
|
10/06/16
|
|
|
|
|
03/26/08
|
28,125
|
-
|
2.80
|
03/26/18
|
|
|
|
|
03/26/08
|
4,687
|
-
|
5.00
|
03/26/18
|
|
|
|
|
03/26/08
|
4,688
|
-
|
6.60
|
03/26/18
|
|
|
|
|
07/01/08
|
25,000
|
-
|
1.80
|
07/01/18
|
|
|
|
|
07/01/09
|
25,000
|
-
|
2.80
|
07/01/19
|
|
|
|
|
06/22/11
|
300,000
|
-
|
1.00
|
06/22/21
|
|
|
|
|
07/17/12
|
112,500
|
37,500
|
0.72
|
07/17/22
|
|
|
|
|
06/27/13
|
206,250
|
68,750
|
0.62
|
06/27/23
|
|
|
|
|
06/25/14
|
87,500
|
87,500
|
1.02
|
06/25/24
|
|
|
|
|
06/11/15
|
75,000
|
225,000
|
1.08
|
06/11/25
|
|
|
|
|
06/11/15
|
|
|
|
|
105,000
|
46,200
|
|
|
12/08/15
|
|
|
|
|
243,750
|
107,250
|
|
|
12/08/15
|
|
|
|
|
325,000
|
143,000
|
|
Total
Stock Awards
|
673,750
|
$
296,450
|
|||||
74
|
|
Option awards
(1)
|
Stock awards
(2)
|
|||||
|
Name
|
Option
or
stock
award
grant
date
|
Number
of
securities
underlying
unexercised
options
(#)
exercisable
|
Number
of
securities
underlying
unexercised
options
(#)
unexercisable
|
Option
exercise
price
($)
|
Option
expiration
date
|
Number of shares
or units of stock that have not vested
(#)
|
Market value of
shares or units of stock that have not vested
($)
(3)
|
|
Stephen T.
Wills
|
10/06/06
|
10,000
|
-
|
24.90
|
10/06/16
|
|
|
|
|
03/26/08
|
22,500
|
-
|
2.80
|
03/26/18
|
|
|
|
|
03/26/08
|
3,750
|
-
|
5.00
|
03/26/18
|
|
|
|
|
03/26/08
|
3,750
|
-
|
6.60
|
03/26/18
|
|
|
|
|
07/01/08
|
20,000
|
-
|
1.80
|
07/01/18
|
|
|
|
|
07/01/09
|
20,000
|
-
|
2.80
|
07/01/19
|
|
|
|
|
06/22/11
|
250,000
|
-
|
1.00
|
06/22/21
|
|
|
|
|
07/17/12
|
101,250
|
33,750
|
0.72
|
07/17/22
|
|
|
|
|
06/27/13
|
187,500
|
62,500
|
0.62
|
06/27/23
|
|
|
|
|
06/25/14
|
75,000
|
75,000
|
1.02
|
06/25/24
|
|
|
|
|
06/11/15
|
67,500
|
202,500
|
1.08
|
06/11/25
|
|
|
|
|
06/11/15
|
|
|
|
|
95,000
|
41,800
|
|
|
12/08/15
|
|
|
|
|
225,000
|
99,000
|
|
|
12/08/15
|
|
|
|
|
300,000
|
132,000
|
|
Total
Stock Awards
|
620,000
|
$
272,800
|
|||||
(1) Stock
option vesting schedules: all options granted on or before June 22,
2011 have fully vested. Options granted after June 22, 2011 vest
over four years with 1/4 of the shares vesting per year starting on
the first anniversary of the grant date, provided that the named
executive officer remains an employee. See “Termination and
Change-In-Control Arrangements” below.
(2) Stock
award vesting schedule: stock awards consist of restricted stock
units granted on June 11, 2015, which will vest on June 11, 2017,
provided that the named executive officer remains an employee;
restricted stock units granted on December 8, 2015, as to 243,750
shares for Dr. Spana and 225,000 shares for Mr. Wills, which will
vest in equal amounts over a three year period, provided that the
named executive officer remains an employee; and performance-based
restricted stock units granted on December 8, 2015 as to 325,000
shares as to Dr. Spana and 300,000 shares as to Mr. Wills, which
expire December 31, 2017 unless the specified performance criteria
is met. See “Stock Options and Restricted Stock Unit
Awards” above and “Termination and Change-In-Control
Arrangements” below.
(3) Calculated
by multiplying the number of restricted stock units by $0.44, the
closing market price of our common stock on June 30, 2016, the last
trading day of our most recently completed fiscal
year.
Termination
and Change-In-Control Arrangements
The
employment agreements, stock option agreements and restricted stock
unit agreements with Dr. Spana and Mr. Wills contain the following
provisions concerning severance compensation and the vesting of
stock options and restricted stock units upon termination of
employment or upon a change in control. The executive’s
entitlement to severance, payment of health benefits and
accelerated vesting of options is contingent on the executive
executing a general release of claims against us.
Termination Without Severance
Compensation
. Regardless of whether there has been a change
in control, if we terminate employment for cause or the executive
terminates employment without good reason (as those terms are
defined in the employment agreement and set forth below), then the
executive will receive only his accrued salary and vacation
benefits through the date of termination. He may also elect to
receive medical and dental benefits pursuant to COBRA for up to two
years (Dr. Spana) or 18 months (Mr. Wills), but must remit the cost
of coverage to us. Under the terms of our outstanding options and
restricted stock units, all unvested options and restricted stock
units would terminate immediately, and vested options would be
exercisable for three months after termination.
75
Severance Compensation Without a Change in
Control
. If we terminate or fail to extend the employment
agreement without cause, or the executive terminates employment
with good reason, then the executive will receive as severance pay
his salary then in effect, paid in a lump sum, plus medical and
dental benefits at our expense, for a period of two years (Dr.
Spana) or 18 months (Mr. Wills) after the termination date. In
addition, upon such event all unvested options would immediately
vest and be exercisable for two years after the termination date
or, if earlier, the expiration of the option term, and all unvested
restricted stock units would accelerate and become fully
vested.
Severance Compensation After a Change in
Control
. If, within one year after a change in control, we
terminate employment or the executive terminates employment with
good reason, then the executive will receive as severance pay 200%
(Dr. Spana) or 150% (Mr. Wills) of his salary then in effect, paid
in a lump sum, plus medical and dental benefits at our expense, for
a period of two years (Dr. Spana) or 18 months (Mr. Wills) after
the termination date. We would also reimburse the executive for up
to $25,000 in fees and expenses during the six months following
termination, for locating employment. We would also reimburse the
executive for any excise tax he might incur on “excess
parachute payments” (as defined in Section 280G(b) of the
Internal Revenue Code). All unvested options would immediately vest
and be exercisable for two years after the termination date or, if
earlier, the expiration of the option term. All unvested restricted
stock units would vest upon a change in control, without regard to
whether the executive’s employment is
terminated.
Option and Restricted Stock Unit Vesting Upon
a Change in Control
. Options and restricted stock units
granted under the 2011 Stock Incentive Plan vest upon a change in
control. If any options granted under the 2005 Stock Plan are to be
terminated in connection with a change in control, those options
will vest in full immediately before the change in
control.
Definitions
. Under the employment
agreements, a “change in control,” “cause”
and “good reason” are defined as follows:
A
“change in control” occurs when:
(a) some
person or entity acquires more than 50% of the voting power of our
outstanding securities;
(b) the
individuals who, during any twelve month period, constitute our
board of directors cease to constitute at least a majority of the
board of directors;
(c) we enter
into a merger or consolidation; or
(d) we sell
substantially all our assets.
The
term “cause” means:
(a) the
occurrence of (i) the executive’s material breach of, or
habitual neglect or failure to perform the material duties which he
is required to perform under, the terms of his employment
agreement; (ii) the executive’s material failure to follow
the reasonable directives or policies established by or at the
direction of our board of directors; or (iii) the executive’s
engaging in conduct that is materially detrimental to our interests
such that we sustain a material loss or injury as a result thereof,
provided that the breach or failure of performance is not cured, to
the extent cure is possible, within ten days of the delivery to the
executive of written notice thereof;
(b) the
willful breach by the executive of his obligations to us with
respect to confidentiality, invention and non-disclosure,
non-competition or non-solicitation; or
(c) the
conviction of the executive of, or the entry of a pleading of
guilty or nolo contendere by the executive to, any crime involving
moral turpitude or any felony.
The
term “good reason” means the occurrence of any of the
following, with our failure to cure such circumstances within 30
days of the delivery to us of written notice by the executive of
such circumstances:
(a) any
material adverse change in the executive’s duties, authority
or responsibilities, which causes the executive’s position
with us to become of significantly less responsibility, or
assignment of duties and responsibilities inconsistent with the
executive’s position;
(b) a material
reduction in the executive’s salary;
(c) our
failure to continue in effect any material compensation or benefit
plan in which the executive participates, unless an equitable
arrangement has been made with respect to such plan, or our failure
to continue the executive’s participation therein (or in a
substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of the executive’s participation relative to other
participants;
76
(d) our
failure to continue to provide the executive with benefits
substantially similar to those enjoyed by the executive under any
of our health and welfare insurance, retirement and other
fringe-benefit plans, the taking of any action by us which would
directly or indirectly materially reduce any of such benefits, or
our failure to provide the executive with the number of paid
vacation days to which he is entitled; or
(e) the
relocation of the executive to a location which is a material
distance from Cranbury, New Jersey.
Director
Compensation
The
following table sets forth the compensation we paid to all
directors during fiscal 2016, except for Dr. Spana, whose
compensation is set forth above in the Summary Compensation Table
and related disclosure. Dr. Spana did not receive any separate
compensation for his services as a director.
|
Name
|
Fees earned or
paid in cash ($)
|
Stock awards ($)
(2)
|
Option awards
($) (1) (2)
|
Total
($)
|
|
John K.A.
Prendergast, Ph.D.
|
95,000
|
105,500
|
23,267
|
223,767
|
|
Robert K. deVeer,
Jr.
|
58,750
|
52,750
|
11,634
|
123,134
|
|
Zola P. Horovitz,
Ph.D. (3)
|
43,750
|
25,000
|
-
|
68,750
|
|
J. Stanley
Hull
|
52,500
|
52,750
|
11,634
|
116,884
|
|
Alan W. Dunton,
M.D.
|
58,750
|
45,950
|
11,634
|
116,334
|
|
Angela
Rossetti
|
50,000
|
39,150
|
11,634
|
100,784
|
|
Arlene
Morris
|
50,000
|
32,350
|
11,634
|
93,984
|
(1) The
aggregate number of shares underlying option awards and stock
awards outstanding at June 30, 2016 for each director
was:
|
|
Option
awards
|
Stock
awards
|
|
Dr.
Prendergast
|
388,750
|
175,000
|
|
Mr.
deVeer
|
224,500
|
87,500
|
|
Mr.
Hull
|
221,000
|
87,500
|
|
Dr.
Dunton
|
150,000
|
77,500
|
|
Ms.
Rossetti
|
102,500
|
67,500
|
|
Ms.
Morris
|
57,500
|
57,500
|
(2) Amounts in
these columns represent the aggregate grant date fair value for
stock awards and option awards computed using the Black-Scholes
model. For a description of the assumptions we used to calculate
these amounts, see Note 12 to the consolidated financial statements
included in this Annual Report. Amounts in this column include
options granted on June 9, 2016 for our current fiscal year ending
June 30, 2017.
(3) Dr.
Horovitz ceased serving as a director effective June 9,
2016.
Non-Employee Directors’ Equity
Grants.
Our non-employee directors receive an annual equity
grant at the board meeting closest to the beginning of each fiscal
year, or such other date as may be determined by the
board.
On June
9, 2016, as the annual equity grant for our current fiscal year
ending June 30, 2017, the Chairman of the board received 75,000
restricted stock units which vest on June 9, 2017, and an option to
purchase 75,000 shares of common stock, and each other serving
non-employee director received 37,500 restricted stock units which
vest on June 9, 2017, and an option to purchase 37,500 shares of
common stock. All of the options have an exercise price of $0.50
per share, the closing price of our common stock on the date of
grant, vest in twelve monthly installments beginning on July 31,
2016, expire ten years from the date of grant and provide for
accelerated vesting in the event of involuntarily termination as a
director following a change in control, with exercise permitted
following accelerated vesting for up to the earlier of one year
after termination or the expiration date of the
option.
77
On
December 8, 2015, the compensation committee determined that
additional equity grants were necessary in order to reward,
motivate and retain the non-employee directors, and we granted the
Chairman of the board 100,000 restricted stock units and the other
serving non-employee directors a total of 240,000 restricted stock
units, consisting of 50,000 to each of Mr. deVeer, Mr. Hull and Dr.
Horovitz, 40,000 to Dr. Dunton, 30,000 to Ms. Rossetti and 20,000
to Ms. Morris. The restricted stock units vest as to 50% on the
first and second anniversary of the grant date, conditioned on
continued service as a director through the applicable vesting
dates.
On June
11, 2015, as the annual equity grant for our fiscal year ending
June 30, 2016, the Chairman of the board received 40,000 restricted
stock units which vest on June 11, 2016, and an option to purchase
40,000 shares of common stock, and each other serving non-employee
director received 20,000 restricted stock units which vest on June
11, 2016, and an option to purchase 20,000 shares of common stock.
All of the options have an exercise price of $1.08 per share, the
closing price of our common stock on the date of grant, vest in
twelve monthly installments beginning on July 31, 2015, expire ten
years from the date of grant and provide for accelerated vesting in
the event of involuntarily termination as a director following a
change in control, with exercise permitted following accelerated
vesting for up to the earlier of one year after termination or the
expiration date of the option.
Non-Employee Directors’ Cash
Compensation
. Dr. Prendergast serves as Chairman of the
board and for our fiscal year ended June 30, 2016 received an
annual retainer of $87,500, payable quarterly. Other non-employee
directors received an annual base retainer of $40,000, payable on a
quarterly basis. The chairperson of the audit committee received an
additional annual retainer of $12,500, the chairperson of the
compensation committee received an additional annual retainer of
$12,500 and the chairperson of the corporate governance committee
received an additional annual retainer of $7,500. Members of the
foregoing committees, other than the non-employee Chairman,
received an additional retainer of one-half the retainer payable to
the committee chairperson. For the fiscal year ending June 30,
2017, cash compensation is unchanged.
Non-Employee Directors’ Expenses.
Non-employee directors are reimbursed for expenses incurred in
performing their duties as directors, including attending all
meetings of the board and any committees on which they
serve.
Employee Directors.
Employee directors
are not separately compensated for services as directors, but are
reimbursed for expenses incurred in performing their duties as
directors, including attending all meetings of the board and any
committees on which they serve.
Securities Authorized for Issuance Under
Equity Compensation Plans.
The table below provides
information on our equity compensation plans as of June 30,
2016:
|
Equity
Compensation Plan Information
as
of June 30, 2016
|
|||
|
Plan
category
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation
plans approved by security holders
|
7,927,508
(1)
|
$
1.21
(2)
|
3,314,419
|
|
Equity compensation
plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
7,927,508
|
|
3,314,419
|
(1) Consists
of 4,825,550 options and 2,665,768 restricted stock units granted
under our 2011 Stock Incentive Plan and 436,190 options granted
under our 2005 Stock Plan. Our 2005 Stock Plan has terminated, but
termination does not affect awards that are currently outstanding
under this plan. The shares subject to outstanding awards under the
2005 Stock Plan, if forfeited prior to exercise, will become
available for issuance under the 2011 Stock Incentive
Plan.
78
(2) The amount
in column (a) for equity compensation plans approved by security
holders includes 2,665,768 shares reserved for issuance on vesting
of outstanding restricted stock units, granted under our 2011 Stock
Incentive Plan, which vest on various dates through January 11,
2020, subject to the fulfillment of service conditions. Because no
exercise price is required for issuance of shares on vesting of the
restricted stock units, the weighted-average exercise price in
column (b) does not take the restricted stock units into
account.
Beneficial Ownership Tables.
The tables
below show the beneficial stock ownership and voting power, as of
September 16, 2016, of:
●
each director, each
of the named executive officers, and all current directors and
officers as a group; and
●
all persons who, to
our knowledge, beneficially own more than five percent of the
common stock or Series A preferred stock.
“Beneficial
ownership” here means direct or indirect voting or investment
power over outstanding stock and stock which a person has the right
to acquire now or within 60 days after September 16, 2016. See the
footnotes for more detailed explanations of the holdings. Except as
noted, to our knowledge, the persons named in the tables
beneficially own and have sole voting and investment power over all
shares listed.
The
common stock has one vote per share and the Series A preferred
stock has approximately 15 votes per share of Series A preferred
stock. Voting power is calculated on the basis of the aggregate of
common stock and Series A preferred stock outstanding as of
September 16, 2016, on which date
85,934,037 shares of
common stock and 4,030 shares of Series A preferred stock,
convertible into 60,592 shares of common stock, were
outstanding.
The
address for all members of our management and directors is c/o
Palatin Technologies, Inc., 4B Cedar Brook Drive, Cranbury, NJ
08512. Addresses of other beneficial owners are in the
table.
MANAGEMENT:
|
Class
|
Name
of beneficial owner
|
Amount
and nature of beneficial ownership
|
Percent
of
class
|
Percent
of total voting
power
|
|
Common
|
Carl Spana,
Ph.D.
|
1,721,079
(1)
|
2.0
%
|
*
|
|
Common
|
Stephen T.
Wills
|
1,574,041
(2)
|
1.8
%
|
*
|
|
Common
|
John K.A.
Prendergast, Ph.D.
|
410,517
(3)
|
*
|
*
|
|
Common
|
Robert K. deVeer,
Jr.
|
264,560
(4)
|
*
|
*
|
|
Common
|
J. Stanley
Hull
|
235,500
(5)
|
*
|
*
|
|
Common
|
Alan W. Dunton,
M.D.
|
167,520
(6)
|
*
|
*
|
|
Common
|
Angela
Rossetti
|
112,500
(7)
|
*
|
*
|
|
Common
|
Arlene M.
Morris
|
52,500
(8)
|
*
|
*
|
|
|
|
|
|
|
|
All current
directors and executive officers as a group (eight
persons)
|
4,538,217
(9)
|
5.1
%
|
1.9
%
|
|
*Less
than one percent.
(1) Includes
918,750 shares of common stock underlying outstanding options,
45,653 shares of common stock underlying outstanding warrants and
81,250 shares of common stock underlying restricted stock units but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(2) Includes
795,000 shares of common stock underlying outstanding options,
45,653 shares of common stock underlying outstanding warrants and
75,000 shares of common stock underlying restricted stock units but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(3) Includes
338,750 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(4) Includes
197,500 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(5) Includes
194,000 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(6) Includes
125,000 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(7) Includes
77,500 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(8) Consists
of 32,500 shares of common stock underlying outstanding options but
does not include shares of common stock underlying outstanding
options or restricted stock unit awards that have not vested and
will not vest within 60 days.
(9) Includes
2,926,556 shares of common stock underlying outstanding options,
warrants and restricted stock units.
79
MORE
THAN 5% BENEFICIAL OWNERS:
|
Class
|
Name and address
of beneficial owner
|
Amount and
nature of beneficial ownership (1)
|
Percent
of
class
|
Percent of total
voting
power
|
|
|
|
|
|
|
|
Common
|
QVT
Financial LP
1177
Avenue of the Americas, 9th Floor
New
York, New York 10036
|
9,089,296
(2)
|
9.9%
|
4.7%
|
|
Series
A
Preferred
|
Steven
N. Ostrovsky
43
Nikki Ct.
Morganville, NJ
07751
|
500
|
12.4%
|
*
|
|
Series
A
Preferred
|
Thomas
L. Cassidy IRA Rollover
38
Canaan Close
New
Canaan, CT 06840
|
500
|
12.4%
|
*
|
|
Series
A
Preferred
|
Jonathan E.
Rothschild
300
Mercer St., #28F
New
York, NY 10003
|
500
|
12.4%
|
*
|
|
Series
A
Preferred
|
Arthur
J. Nagle
19
Garden Avenue
Bronxville, NY
10708
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Thomas
P. and Mary E. Heiser, JTWROS
10
Ridge Road
Hopkinton, MA
01748
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Carl
F. Schwartz
31
West 87th St.
New
York, NY 10016
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Michael J.
Wrubel
3650
N. 36 Avenue, #39
Hollywood, FL
33021
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Myron
M. Teitelbaum, M.D.
175
Burton Lane
Lawrence, NY
11559
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Laura
Gold Galleries Ltd. Profit Sharing Trust Park South Gallery at
Carnegie Hall
154
West 57th Street, Suite 114
New
York, NY 10019
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Laura
Gold
180 W.
58th Street
New
York, NY 10019
|
250
|
6.2%
|
*
|
|
Series
A
Preferred
|
Nadji
T. Richmond
20 E.
Wedgewood Glen
The
Woodlands, TX 77381
|
230
|
5.7%
|
*
|
*Less
than one percent.
80
(1)
Unless otherwise indicated by footnote, all share amounts represent
outstanding shares of the class indicated, and all beneficial
owners listed have, to our knowledge, sole voting and dispositive
power over the shares listed.
(2) QVT
Financial LP (QVT Financial) is the investment manager for QVT Fund
V LP (Fund V) and other private investment funds (collectively, the
Funds). The information contained herein with respect to the Funds
is based on information included in filings by QVT Financial and
the Funds with the SEC. Based on a Form 13F filed by QVT Financial
on August 15, 2016 for the period ending June 30, 2016, the Funds
beneficially own in the aggregate 9,089,296 shares of common stock,
including 5,049,922 shares of common stock underlying outstanding
warrants. QVT Financial has the power to direct the vote and
disposition of the common stock held by the Funds, and accordingly
QVT Financial may be deemed to be the beneficial owner of an
aggregate amount of 9,089,296 shares of common stock, consisting of
the shares beneficially owned by the Funds.
QVT
Financial GP LLC, as General Partner of QVT Financial, may be
deemed to beneficially own the same number of shares of common
stock reported by QVT Financial. QVT Associates GP LLC, as General
Partner of the Funds may be deemed to beneficially own the
aggregate number of shares of common stock beneficially owned by
the Funds, and accordingly, QVT Associates GP LLC may be deemed to
be the beneficial owner of an aggregate amount of 9,089,296 shares
of common stock.
Exercise of
warrants held by the Funds is restricted if, as a result of an
exercise, the beneficial ownership of the holder and its affiliates
and any other party or person that could be deemed to be a group
would exceed 9.99% of the outstanding common stock. Beneficial
ownership as listed in the table above excludes warrants which are
not exercisable because of that restriction, but includes warrants
which are exercisable based on the common shares
outstanding.
The
board of directors has determined that all of the directors except
for Dr. Spana (our Chief Executive Officer and President) are
independent directors, as defined in the listing standards of the
NYSE MKT.
As a
condition of employment, we require all employees to disclose in
writing actual or potential conflicts of interest, including
related party transactions. Our code of corporate conduct and
ethics, which applies to employees, officers and directors,
requires that the audit committee review and approve related party
transactions. Since July 1, 2015, there have been no
transactions or proposed transactions in which we were or are to be
a participant, in which any related person had or will have a
direct or indirect material interest.
KPMG
LLP, or KPMG, served as our independent registered public
accounting firm for fiscal 2016 and fiscal 2015.
Audit Fees
. For fiscal 2016, KPMG
billed us a total of $235,500 for professional services rendered
for the audit of our annual consolidated financial statements,
review of our consolidated financial statements in our Forms 10-Q
and services provided in connection with regulatory filings. For
fiscal 2015, the total billed for the same services was
$419,200.
Audit-Related Fees
. For fiscal 2016 and
2015, KPMG did not perform or bill us for any audit-related
services.
Tax Fees
. For fiscal 2016, KPMG billed
us a total of $16,000 for professional services rendered for tax
compliance. For fiscal 2015, KPMG billed us $15,500 for
professional services rendered for tax compliance.
All Other Fees
. KPMG did not perform or
bill us for any services other than those described above for
fiscal 2015 and 2016.
Policy on Audit Committee Pre-Approval of
Audit and Permissible Non-Audit Services of Independent
Auditors
. Consistent with SEC policies regarding auditor
independence, the audit committee has responsibility for
appointing, setting compensation for and overseeing the work of the
independent registered public accounting firm. In recognition of
this responsibility, the audit committee has established a policy
to pre-approve all audit and permissible non-audit services
provided by the independent registered public accounting
firm.
The
audit committee pre-approves fees for each category of service. The
fees are budgeted and the audit committee requires the independent
registered public accounting firm and management to report actual
fees versus the budget periodically throughout the year by category
of service. During the year, circumstances may arise when it may
become necessary to engage the independent registered public
accounting firm for additional services not contemplated in the
original pre-approval. In those instances, the audit committee
requires specific pre-approval before engaging the independent
registered public accounting firm.
The
audit committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must
report, for informational purposes only, any pre-approval decisions
to the audit committee at its next scheduled meeting.
81
(a)
Documents filed as part of the report:
1.
Financial statements: The following consolidated financial
statements are filed as a part of this report under Item 8 –
Financial Statements and Supplementary Data:
—
Report of Independent Registered Public Accounting
Firm
—
Consolidated Balance Sheets
—
Consolidated Statements of Operations
—
Consolidated Statements of Comprehensive Loss
—
Consolidated Statements of Stockholders’ (Deficiency)
Equity
—
Consolidated Statements of Cash Flows
—
Notes to Consolidated Financial Statements
2.
Financial statement schedules: None.
3.
Exhibits: The exhibits, listed on the accompanying exhibit index
that is set forth after the signature page, are filed or
incorporated by reference (as stated thereon) as part of this
Annual Report on Form 10-K.
82
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
PALATIN
TECHNOLOGIES, INC.
By:
/s/ Carl Spana
Carl
Spana, Ph.D.
President and Chief
Executive Officer
(principal
executive officer)
Date:
September 19, 2016
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/ Carl Spana
|
President,
Chief Executive Officer and Director
|
September
19, 2016
|
|
Carl
Spana
|
(principal
executive officer)
|
|
|
|
|
|
|
/s/ Stephen T.
Wills
|
Executive
Vice President, Chief Financial Officer
|
September
19, 2016
|
|
Stephen
T. Wills
|
and
Chief Operating Officer (principal financial and accounting
officer)
|
|
|
|
|
|
|
/s/ John K. A.
Prendergast
|
Chairman
and Director
|
September
19, 2016
|
|
John K.
A. Prendergast
|
|
|
|
|
|
|
|
/s/ Robert K.
deVeer, Jr,
|
Director
|
September
19, 2016
|
|
Robert
K. deVeer, Jr.
|
|
|
|
|
|
|
|
/s/ J. Stanley Hull
|
Director
|
September
19, 2016
|
|
J.
Stanley Hull
|
|
|
|
|
|
|
|
/s/
Alan W.
Dunton
|
Director
|
September
19, 2016
|
|
Alan W.
Dunton
|
|
|
|
|
|
|
|
/s/ Angela Rossetti
|
Director
|
September
19, 2016
|
|
Angela
Rossetti
|
|
|
|
|
|
|
|
/s/ Arlene M. Morris
|
Director
|
September
19, 2016
|
|
Arlene
M. Morris
|
|
|
83
Exhibit Index
|
Exhibit Number
|
Description
|
Filed Herewith
|
Form
|
Filing Date
|
SEC File No.
|
|
3.1
|
Restated Certificate of Incorporation of Palatin Technologies,
Inc., as amended.
|
|
10-K
|
September 27, 2013
|
001-15543
|
|
3.2
|
Bylaws of Palatin Technologies, Inc.
|
|
10-Q
|
February 8, 2008
|
001-15543
|
|
4.1
|
Warrant Agreement, dated March 1, 2011, between American Stock
Transfer& Trust Company and Palatin Technologies,
Inc.
|
|
10-Q
|
May 13, 2011
|
001-15543
|
|
4.2
|
Form of Series B Warrant Certificate.
|
|
10-Q
|
May 13, 2011
|
001-15543
|
|
4.3
|
Form of Series A 2012 Warrant.
|
|
8-K
|
July 6, 2012
|
001-15543
|
|
4.4
|
Form of Series B 2012 Warrant.
|
|
8-K
|
July 6, 2012
|
001-15543
|
|
4.5
|
Form of
Series C 2014 Common Stock Purchase Warrant.
|
|
8-K
|
December
30,
2014
|
001-15543
|
|
4.6
|
Form of
Series D 2014 Common Stock Purchase Warrant.
|
|
8-K
|
December
30,
2014
|
001-15543
|
|
4.7
|
Form of
Series E 2015 Common Stock Purchase Warrant.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
4.8
|
Form of
Series F 2015 Common Stock Purchase Warrant.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
4.9
|
Form of
Series G 2015 Common Stock Purchase Warrant.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
4.10
|
Form of
Series H 2016 Common Stock Purchase Warrant.
|
|
8-K
|
August
2, 2016
|
001-15543
|
|
4.11
|
Form of
Series I 2016 Common Stock Purchase Warrant.
|
|
8-K
|
August
2, 2016
|
001-15543
|
|
10.1†
|
1996 Stock Option Plan, as amended.
|
|
10-K
|
September 28, 2009
|
001-15543
|
|
10.2†
|
Form of Option Certificate (Incentive Option) Under the 2005 Stock
Plan.
|
|
8-K
|
September 21, 2011
|
001-15543
|
|
10.3†
|
Form of Incentive Stock Option Under the 2005 Stock
Plan.
|
|
8-K
|
September 21, 2011
|
001-15543
|
|
10.4†
|
Form of Opinion Certificate (Non-Qualified Opinion) Under the 2005
Stock Plan.
|
|
8-K
|
September 21, 2011
|
001-15543
|
|
10.5†
|
Form of Non-Qualified Stock Option Agreement Under the 2005 Stock
Plan.
|
|
8-K
|
September 21, 2011
|
001-15543
|
|
10.6†
|
2007 Change in Control Severance Plan.
|
|
10-Q
|
February 8, 2008
|
001-15543
|
|
10.7†
|
2005 Stock Plan, as amended.
|
|
10-Q
|
May 15, 2009
|
001-15543
|
|
10.8†
|
Form of Executive Officer Option Certificate.
|
|
10-Q
|
May 14, 2008
|
001-15543
|
|
10.9†
|
Form of Amended Restricted Stock Unit Agreement.
|
|
10-Q
|
May 14, 2008
|
001-15543
|
|
10.10†
|
Form of Amended Option Certificate (Incentive Option) Under the
2005 Stock Plan.
|
|
10-Q
|
May 14, 2008
|
001-15543
|
|
10.11†
|
Employment Agreement, effective as of July 1, 2016, between Carl
Spana and Palatin Technologies, Inc.
|
|
8-K
|
June 13, 2016
|
001-15543
|
84
|
10.12†
|
Employment Agreement, effective as of July 1, 2016, between Stephen
T. Wills and Palatin Technologies, Inc.
|
|
8-K
|
June 13, 2016
|
001-15543
|
|
10.13
|
Underwriting Agreement, datedFebruary 24, 2011, by and between Roth
Capital Partners, LLC and Palatin Technologies, Inc.
|
|
8-K
|
February 24, 2011
|
001-15543
|
|
10.14†
|
2011 Stock Incentive Plan, as amended.
|
|
8-K
|
June 13, 2016
|
001-15543
|
|
10.15†
|
Form of Restricted Share Unit Agreement Under the 2011 Stock
Incentive Plan.
|
|
10-Q
|
May 13, 2011
|
001-15543
|
|
10.16†
|
Form of Nonqualified Stock Option Agreement under the 2011 Stock
Incentive Plan.
|
|
10-Q
|
May 13, 2011
|
001-15543
|
|
10.17†
|
Form of Incentive Stock Option Agreement under the 2011 Stock
Incentive Plan.
|
|
10-Q
|
May 13, 2011
|
001-15543
|
|
10.18†
|
Form of Restricted Share Unit Agreement under the 2011 Stock
Incentive Plan.
|
|
8-K
|
December 11, 2015
|
001-15543
|
|
10.19†
|
Form of Performance-Based Restricted Share Unit Agreement under the
2011 Stock Incentive Plan.
|
|
8-K
|
December 11, 2015
|
001-15543
|
|
10.20†
|
Form of Restricted Share Unit Agreement for Non-Employee Directors
under the 2011 Stock Incentive Plan.
|
|
8-K
|
December 11, 2015
|
001-15543
|
|
10.21†
|
Amended form of Restricted Share Unit Agreement under the 2011
Stock Incentive Plan.
|
|
10-Q
|
February 12, 2016
|
001-15543
|
|
10.22†
|
Amended form of Performance-Based Restricted Share Unit Agreement
under the 2011 Stock Incentive Plan.
|
|
10-Q
|
February 12, 2016
|
001-15543
|
|
10.23†
|
Amended form of Restricted Share Unit Agreement for Non-Employee
Directors under the 2011 Stock Incentive Plan.
|
|
10-Q
|
February 12, 2016
|
001-15543
|
|
10.24
|
Form of Indenture.
|
|
S-3
|
August 3, 2015
|
333-206047
|
|
10.25
|
Letter Agreement, dated October 7, 2011, between Biotechnology
Value Fund, L.P. and Palatin Technologies, Inc.
|
|
8-K
|
October 7, 2011
|
001-15543
|
|
10.26
|
Purchase Agreement, dated July 2, 2012, by and between QVT Fund IV
LP, QVT Fund V LP and Quintessence Fund L.P. and Palatin
Technologies, Inc.
|
|
8-K
|
July 6, 2012
|
001-15543
|
|
10.27
|
Registration Rights Agreement, dated July 2, 2012, by and between
QVT Fund IV LP, QVT Fund V LP and Quintessence Fund L.P. and
Palatin Technologies, Inc.
|
|
8-K
|
July 6, 2012
|
001-15543
|
|
10.28
|
Securities
Purchase Agreement, dated December 23, 2014, by and between Palatin
Technologies, Inc. and the investors named therein.
|
|
8-K
|
December
30,
2014
|
001-15543
|
85
|
10.29
|
Registration
Rights Agreement, dated December 23, 2014, by and between Palatin
Technologies, Inc. and the investors named therein.
|
|
8-K
|
December
30,
2014
|
001-15543
|
|
10.30
|
Placement
Engagement Letter, dated December 22, 2014, by and between Palatin
Technologies, Inc. and Piper Jaffray & Co.
|
|
8-K
|
December
30,
2014
|
001-15543
|
|
10.31
|
Amended and Restated Venture Loan and Security Agreement, dated
July 2, 2015, by and between Palatin Technologies, Inc. and Horizon
Technology Finance Corporation, Fortress Credit Co LLC, Horizon
Credit II LLC and Fortress Credit Opportunities V CLO
Limited.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
10.32
|
Securities
Purchase Agreement, dated July 2, 2015, by and between Palatin
Technologies, Inc. and the investors named therein.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
10.33
|
Registration
Rights Agreement, dated July 2, 2015, by and between Palatin
Technologies, Inc. and the investors named therein.
|
|
8-K
|
July 7,
2015
|
001-15543
|
|
10.34
|
Underwriting
Agreement, dated August 1, 2016, by and between Palatin
Technologies, Inc. and Canaccord Genuity Inc., on behalf of itself
and as representative of the underwriters named
therein.
|
|
8-K
|
August
2, 2016
|
001-15543
|
|
10.35††
|
License, Co-Development and Commercialization Agreement, dated
August 29, 2014, by and between Chemical Works of Gedeon Richter
Plc. and Palatin Technologies, Inc.
|
|
10-K/A
|
October 9, 2014
|
001-15543
|
|
10.36
|
Termination Agreement, dated September 16, 2015, by and
between
Chemical Works of
Gedeon Richter Plc. and Palatin Technologies,
Inc.
|
|
10-K
|
September 18, 2015
|
001-15543
|
|
|
Commercial Supply Agreement dated June 20, 2016, by and between
Catalent Belgium S.A. and Palatin Technologies, Inc.
|
X
|
|
|
|
|
|
Manufacturing Preparation and Services Agreement dated June 20,
2016, by and between Catalent Belgium S.A. and Palatin
Technologies, Inc.
|
X
|
|
|
|
|
|
Subsidiaries of Palatin Technologies, Inc.
|
X
|
|
|
|
|
|
Consent of KPMG LLP.
|
X
|
|
|
|
|
|
Certification of Chief Executive Officer.
|
X
|
|
|
|
86
|
|
Certification of Chief Financial Officer.
|
X
|
|
|
|
|
|
Certification of principal executive officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
X
|
|
|
|
|
|
Certification of principal financial officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
X
|
|
|
|
|
101.INS
|
XBRL Instance Document.
|
X
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
X
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
X
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.
|
X
|
|
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
Document.
|
X
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
X
|
|
|
|
† Management contract or compensatory plan or
arrangement.
††
Confidential treatment granted or requested as to certain portions,
which portions are omitted and filed separately with the
SEC.
87
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules