ITEM 1.
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LEGAL PROCEEDINGS
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The information presented in Section 8 of
Item 1 (Legal Proceedings) of Part 1 of this Form 10-Q is incorporated herein by reference.
In addition to the foregoing, we are not
currently a defendant in any matter of litigation; however, we could be involved in litigation in the future that could arise out of the normal course of business
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Our operating results and
financial condition have varied in the past and may in the future vary significantly depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that
involve risks and uncertainties. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time.
Such factors, among others, may have a material adverse effect upon our business, results of operations and financial condition.
In
Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 16, 2007, we described risk factors related to our
operations. Our updated risk factors are included below in this Item 1A.
You should consider carefully the following risk
factors, together with all of the other information included in this quarterly report on Form 10Q. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value
of an investment in our common stock.
RISK RELATED TO OUR BUSINESS
We will need additional funds in the future to continue our operations, but we face uncertainties with respect to our access to capital that could
materially adversely impact our business, financial condition and results of operations.
We will require substantial future capital to implement
our revised business plan with a renewed focus on research and development activities. As of September 30, 2007, we had $18.9 million of cash on hand. However, our future capital requirements will depend on many factors, including factors
associated with:
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research and development, including, among other items, preclinical testing and clinical studies;
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obtaining marketing, sales and distribution capabilities;
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obtaining regulatory approvals;
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retaining employees and consultants;
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filing and prosecuting patent applications and enforcing patent claims;
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establishing strategic alliances;
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potential future litigation.
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We may also need to
spend more money than currently expected because we may further change our drug development plans, acquire additional drugs or product candidates or we may misjudge our costs. We have no committed sources of capital and do not know whether
additional financing will be available when needed, or, if available, that the terms will be favorable. There can be no assurance that our cash reserves together with any subsequent funding will satisfy our capital requirements. The failure to
satisfy our capital requirements will adversely affect our business, financial condition and results of operations. Our independent registered public accounting firm has expressed their view that there are material uncertainties which cast
significant doubt upon our ability to continue as a going concern. The addition of this going concern disclosure may discourage investors from purchasing our stock.
We may seek additional funding through strategic alliances, private or public sales of our securities or licensing all or a portion of our technology. Such funding may significantly dilute existing shareholders or may
limit our rights to our currently developing technology. There can be no assurance, however, that we can obtain additional funding on reasonable terms, or at all. If we cannot obtain adequate funds, we may need to significantly curtail our product
development programs and relinquish rights to our technologies or product candidates. This may adversely affect our business, financial condition and results of operations.
We have not completed the research and development stage of any of our product candidates. If we are unable to successfully commercialize our
products, it will materially adversely affect our business, financial condition and results of operations.
Our long-term viability and growth
depend on the successful commercialization of products which lead to revenue and profits. Pharmaceutical product development is an expensive, high risk, lengthy, complicated, resource intensive process. To succeed, among other things, we must be
able to:
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identify potential drug product candidates;
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design and conduct appropriate laboratory, preclinical and other research;
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submit for and receive regulatory approval to perform clinical studies;
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design and conduct appropriate preclinical and clinical studies according to good laboratory and good clinical practices;
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select and recruit clinical investigators;
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select and recruit subjects for our studies;
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collect, analyze and correctly interpret the data from our studies;
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submit for and receive regulatory approvals for marketing; and
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manufacture the drug product candidates according to current good manufacturing practices.
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The development program with respect to any given potential product will take many years and thus delay our ability to generate profits. In addition, potential products
that appear promising at early stages of development may fail for a number of reasons, including the possibility that the products may require significant additional testing or turn out to be unsafe, ineffective, too difficult or expensive to
develop or manufacture, too difficult to administer, or unstable.
In order to conduct the development programs for our products we must, among other
things, be able to successfully:
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raise sufficient money and pay for product development;
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attract and retain appropriate personnel; and
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develop relationships with other companies to perform various development activities that we are unable to perform.
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Even if we are successful in developing and obtaining approval for our product candidates, there are numerous circumstances that could prevent the successful
commercialization of the products such as:
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the regulatory approvals of our products are delayed or we are required to conduct further research and development of our products prior to receiving regulatory
approval;
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we are unable to build a sales and marketing group to successfully launch and sell our products;
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we are unable to raise the additional funds needed to successfully develop and commercialize our products or acquire additional products for growth;
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we are required to allocate available funds to litigation matters;
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we are unable to manufacture the quantity of product needed in accordance with current good manufacturing practices to meet market demand, or at all;
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our product is determined to be ineffective or unsafe following approval and is removed from the market or we are required to perform additional research and
development to further prove the safety and effectiveness of the product before re-entry into the market;
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competition from other products or technologies prevents or reduces market acceptance of our products;
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we do not have and cannot obtain the intellectual property rights needed to manufacture or market our products without infringing on another companys patents;
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we are unsuccessful in defending against patent infringement claims being brought against us our products or technologies; or
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we are unable to obtain reimbursement for our product or such reimbursement may be less than is necessary to produce a reasonable profit.
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Our growth strategy includes the commercialization of more than one product. We may not be able to identify and acquire complementary
products, businesses or technologies and if acquired or licensed, they might not improve our business, financial condition or results of operations.
The
failure to successfully acquire, develop and commercialize products will adversely affect our business, financial condition and results of operations.
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We have a history of operating losses and an expectation that we will generate operating losses for
the foreseeable future, we may not achieve profitability for some time, if at all.
Our dual path strategy involves leveraging our unique protein
process development and manufacturing experience to enter the generic biologics market, and to progress our proprietary protein platform for niche markets with unmet medical needs. We have incurred losses in each year we have been in operation and
we expect to continue incurring operating losses for the foreseeable future. The process of developing and commercializing our products requires significant preclinical testing and clinical trials as well as regulatory approvals for
commercialization and marketing before we were allowed to begin product sales. In addition, commercialization of our product candidates requires us to establish a sales and marketing organization and contractual relationships to enable product
manufacturing and other related activities. We expect that these activities, together with our general and administrative expenses, will result in substantial operating losses for the foreseeable future. As of September 30, 2007, our
accumulated deficit was $327 million and our consolidated net loss was $16.7 million through nine months ended September 30, 2007.
We currently have
three lead product candidates, IPLEX, rhIGFBP-3 and INSM-18. IPLEX is currently in a Phase II clinical study for the treatment of MMD, a Phase II clinical trial for the treatment of HARS and a Phase I clinical trial for the treatment of ROP. Our
second compound, rhIGFBP-3, is currently in a Phase I clinical study of breast cancer. A Phase I/II clinical trial of our third compound, INSM-18, in patients with refractory prostate cancer has recently been completed. Other clinical studies with
these compounds are contemplated.
If our products fail in preclinical or clinical trials or if we cannot enroll enough patients to
complete our clinical trials, such failures may adversely affect our business, financial condition and results of operations.
In order to sell our
products, we must receive regulatory approval. Before obtaining regulatory approvals for the commercial sale of any of our products under development, we must demonstrate through preclinical studies and clinical trials that the product is safe and
effective for use in each target indication. In addition, the results from preclinical testing and early clinical trials may not be predictive of results obtained in later clinical trials. There can be no assurance that our clinical trials will
demonstrate sufficient safety and effectiveness to obtain regulatory approvals for our products still in development. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in late stage clinical
trials even after promising results in early stage development. If our developmental products fail in preclinical or clinical trials, it will have an adverse effect on our business, financial condition and results of operations.
The completion rate of clinical studies of our products is dependent on, among other factors, the patient enrollment rate. Patient enrollment is a function of many
factors, including:
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investigator identification and recruitment;
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regulatory approvals to initiate study sites;
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patient population size;
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the nature of the protocol to be used in the trial;
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patient proximity to clinical sites;
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eligibility criteria for the study; and
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competition from other companies clinical studies for the same patient population.
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We believe our planned procedures for enrolling patients are appropriate; however, delays in patient enrollment would increase costs and delay ultimate commercialization
and sales, if any, of our products. Such delays could materially adversely affect our business, financial condition and results of operations.
We may be required to conduct broad, long-term clinical trials to address concerns that the long-term use of one of our product candidates, IPLEX, in broader chronic indications might increase the risk of diabetic retinopathy. This
may materially adversely affect our business, financial condition and results of operations.
In previously published clinical trials of rhIGF-I,
concerns were raised that long-term use of rhIGF-I might lead to an increased incidence and/or severity of retinopathy, a disease of new blood vessel growth in the eye which results in loss of vision. Because IPLEX contains rhIGF-I, the FDA may
require us to conduct broad, long-term clinical trials to address these concerns prior to receiving FDA approval for broad chronic indications such as diabetes. These clinical trials would be expensive and could delay our commercialization of IPLEX
for these broader chronic indications. Adverse results in these trials could prevent our commercialization of IPLEX for broad chronic indications or could jeopardize existing development in other indications.
We cannot be certain that we will obtain regulatory approvals in the United States, European Union or other countries. The failure to obtain such
approvals may materially adversely affect our business, financial condition and results of operations.
We are required to obtain various
regulatory approvals prior to studying our products in humans and then again before we market and distribute our products. The regulatory review and approval process required to perform a clinical study in both the United States and European Union
includes evaluation of preclinical studies and clinical studies, as well as the evaluation of our manufacturing process. This process is complex, lengthy, expensive, resource intensive and uncertain. Securing regulatory approval to market our
products also requires the submission of extensive preclinical and clinical data, manufacturing information regarding the process and facility, scientific data characterizing our product and other supporting data to the regulatory authorities in
order to establish its safety and effectiveness. This process is also complex, lengthy, expensive, resource intensive and uncertain. We have limited experience in filing and pursuing applications necessary to gain these regulatory approvals.
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Data submitted to the regulators is subject to varying interpretations that could delay, limit or prevent regulatory
agency approval. We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a product and the period required for review of any application for regulatory agency approval of a
particular product. Delays in obtaining regulatory agency approvals could adversely affect the development and marketing of any drugs that we or our collaborative partners develop. Such delays could impose costly procedures on our collaborative
partners or our activities, diminish any competitive advantages that our collaborative partners or we may attain and adversely affect our ability to receive royalties, any of which could materially adversely affect our business, financial
condition and results of operations.
To market our products outside of the United States and European Union territories, we and our corporate partners
must comply with numerous and varying regulatory requirements of other countries. The approval procedures vary among countries and can involve additional product testing and administrative review periods. The time required to obtain approval in
these other territories might differ from that required to obtain FDA or European Agency for the Evaluation of Medicinal Products, or European Agency for the Evaluation of Medical Products (EMEA), approval. The regulatory approval
process in these other territories includes at least all of the risks associated with obtaining FDA and EMEA approval detailed above. Approval by the FDA or the EMEA does not ensure approval by the regulatory authorities of other countries. The
failure to obtain such approvals may materially adversely affect our business, financial condition and results of operations.
We may
not be able to manufacture sufficient quantities of our products to meet our supply and clinical studies obligations, which may adversely affect our business, financial condition and results of operations.
We intend to manufacture IPLEX and rhIGFBP-3 bulk drug substance and perform the majority of analytical testing at our manufacturing facility in Boulder, Colorado and
utilize contract manufacturers for sterile filtering, filling, finishing, labeling and some analytical testing. We intend to manufacture INSM-18 with contract manufacturers.
To meet our supply obligations and clinical demand for IPLEX and clinical demand for rhIGFBP-3, we plan to implement stepwise changes to our Boulder, Colorado manufacturing facility and manufacturing process this
year. We must submit to the FDA information and data pertaining to these changes and the FDA must approve these changes before we will be allowed to use IPLEX or rhIGFBP-3 that is manufactured following implementation of these changes.
The available capacity for the manufacture and testing of recombinant proteins that comprise our product candidates is limited. A shutdown or disruption at our
manufacturing facility whether due to technical, regulatory, force majeure, or other problems, resulting in an interruption in supply of these materials, could delay our development activities and adversely impact our business, financial condition
and results of operations.
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The number of contract manufacturers with the expertise and facilities to manufacture our products is extremely limited
and it would take a significant amount of time and resources to arrange for alternative manufacturers. Even if we were to find alternative manufacturers, the prices they charge may not be commercially reasonable or they may only be able to provide
our products in a quantity that is less than our needs. Furthermore, if we need to change to other contract manufacturers, we would also need to transfer to these new manufacturers and validate the processes and analytical methods necessary for the
production and testing of our products. Any of these factors could lead to (1) the delay or suspension of our clinical studies, regulatory submissions and regulatory approvals, or (2) higher costs of production, or (3) our failure to
effectively commercialize our products.
Our manufacturing facility and the facilities of contract manufacturers must undergo inspections by the FDA and
the EMEA for compliance with current good manufacturing process (cGMP) regulations. In the event these facilities do not continue to receive satisfactory cGMP inspections for the manufacture and testing of our products, we may need to
fund additional modifications to our manufacturing or testing processes, conduct additional validation studies, or find alternative manufacturing and testing facilities, any of which would result in significant cost to us as well as a significant
delay of up to several years in the development of our products. In addition, our manufacturing facility and the facilities of any contract manufacturer we may utilize will be subject to ongoing periodic inspection by the FDA, the EMEA and other
foreign agencies for compliance with cGMP regulations and similar foreign standards. We have limited control over contract manufacturers compliance with these regulations and standards, which could limit our production of our final drug
product.
If our products fail to achieve market acceptance for any reason, such failure may materially adversely affect our
business, financial condition and results of operations.
There can be no assurance that any of our product candidates if approved for marketing,
will achieve market acceptance. If our product candidates, once approved, do not receive market acceptance for any reason, it will adversely affect our business, financial condition and results of operations. The degree of market acceptance of any
drugs we develop will depend on a number of factors, including:
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the establishment and demonstration in the medical community of the clinical efficacy and safety of our products;
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our products potential advantages over existing and future treatment methods;
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the price of our products; and
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reimbursement policies of government and third party payers, including hospitals and insurance companies.
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For example, even after we obtain regulatory approval to sell our products, physicians and healthcare payers could conclude that our products are not safe and effective
and physicians could choose not to use them to treat patients. Our competitors may also develop new technologies or products which are more effective or less costly, or that seem more cost-effective than our products.
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In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us. While
we cannot predict the likelihood of any legislative or regulatory proposals, if the government or an agency adopts such proposals, they could materially adversely affect our business, financial condition and results of operations.
We are dependent upon retaining and attracting key personnel and others, the loss of which could materially adversely affect our business,
financial condition and results of operations.
We depend highly on the principal members of our scientific and management staff, the loss of whose
services might significantly delay or prevent the achievement of research, development or business objectives and would materially adversely affect our business, financial condition and results of operations. Our success depends, in large part, on
our ability to attract and retain qualified management, scientific and medical personnel, and on our ability to develop and maintain important relationships with commercial partners, leading research institutions and key distributors. We face
intense competition for such personnel and relationships. We cannot assure that we will attract and retain such persons or maintain such relationships.
We
expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, manufacturing, sales, marketing and distribution will place additional requirements on our
management, operational and financial resources. We expect these demands will require an increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain
such personnel or to develop such expertise could materially adversely affect our business, financial condition and results of operations.
We rely on collaborative relationships for our success. If we are unable to form these relationships it could materially adversely impact our business, financial condition and results of operations.
We currently rely and may in the future rely on a number of significant collaborative relationships for intellectual property rights, research funding, manufacturing,
analytical services, preclinical development, clinical development and sales and marketing. For example, almost all of our clinical trial work is done in collaboration with academic institutions and we have licensed intellectual property to permit
the development, manufacture and commercialization of our product candidates. Reliance on collaborative relationships poses a number of risks, including the following:
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we may not be able to effectively control whether our corporate partners will devote sufficient resources to our programs or products;
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disputes may arise in the future with respect to the ownership of rights to technology developed with, licensed to or licensed from corporate partners;
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disagreements with corporate partners could result in loss of intellectual property rights, delay or terminate the research, development or commercialization of
product candidates or result in litigation or arbitration;
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contracts with our corporate partners may fail to provide sufficient protection for our intellectual property;
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we may have difficulty enforcing the contracts if one of these partners fails to perform;
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corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue technologies or products
either on their own or in collaboration with our competitors;
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corporate partners with marketing rights may choose to devote fewer resources to the marketing of our products than they do to products of their own development.;
and
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conflicts with our collaborators could reduce our ability to obtain future collaboration agreements and negatively influence our relationship with existing
collaborators.
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Certain of our collaborators could also be or become competitors. Our collaborators could harm our product development
efforts by:
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developing competing products;
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precluding us from entering into collaborations with their competitors;
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failing to obtain regulatory approvals;
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terminating their agreements with us prematurely; or
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failing to devote sufficient resources to the development and commercialization of products.
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Given these risks, a great deal of uncertainty exists regarding the success of our current and future collaborative efforts. Failure of these efforts could delay, impair
or prevent the development and commercialization of our products and adversely affect our business, financial condition and results of operations.
Our growth strategy includes acquiring complementary businesses or technologies that may not be available or, if available and purchased or licensed, might not improve our business, financial condition or results of operations.
As part of our business strategy, we expect to pursue acquisitions and in-license new products and technologies. Nonetheless, we cannot be certain
that we will identify suitable acquisitions or products or that we can make such acquisitions or enter into such license agreements on acceptable terms. If we acquire businesses, those businesses may require substantial capital, and we cannot
provide assurance that such capital will be available in sufficient amounts or that financing will be available in amounts and on terms that we deem acceptable. Furthermore, the integration of acquired businesses may result in unforeseen
difficulties that require a disproportionate amount of managements attention and our other resources. Finally, we cannot provide assurance that we will achieve productive synergies and efficiencies from these acquisitions.
We may not accurately predict the protection afforded by our patents and proprietary technology and if our predictions are wrong, this may
materially adversely affect our business, financial condition and results of operations.
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Our success will depend in part on our ability to obtain patent protection for our products, prevent third parties from
infringing on our patents, and refrain from infringing on the patents of others, both domestically and internationally. Our patent positions are highly uncertain, and any future patents we receive for our potential products will be subject to this
uncertainty, which may adversely affect our business, financial condition and results of operations.
We intend to actively pursue patent protection for
products resulting from our research and development activities that have significant potential commercial value. Nevertheless, it is possible that, in the patent application process, certain claims may be rejected or achieve such limited allowance
that the value of the patents would be diminished. Further, there can be no assurance that any patents obtained will afford us adequate protection. In addition, any patents we procure may require cooperation with companies holding related patents.
We may have difficulty forming a successful relationship with these other companies. Third parties may claim that we are infringing upon or have misappropriated their proprietary rights. Various third parties have obtained, and are attempting to
obtain, patent protection relating to the production and use of our approved product and product candidates.
We can provide no assurance that any issued
patents, or patents that may later issue to third parties, would not adversely affect our product candidates. We can provide no assurance that such patents can be avoided, invalidated or licensed. With respect to any infringement claim asserted by a
third party, we can provide no assurance that we will be successful in the litigation or that such litigation would not have a material adverse effect on our business, financial condition and results of operation. In the event of a successful claim
against us for infringement or misappropriation of a third partys proprietary rights, we may be required to:
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pay damages, including up to treble damages, and the other partys attorneys fees, which may be substantial;
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cease the development, manufacture, marketing and sale of products or use of processes that infringe the proprietary rights of others;
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expend significant resources to redesign our products or our processes so that they do not infringe the proprietary rights of others, which may not be possible;
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redesign our products or processes to avoid third party proprietary rights, which may cause us to suffer significant regulatory delays associated with conducting
additional clinical trials or other steps to obtain regulatory approval; and
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obtain one or more licenses arising out of a settlement of litigation or otherwise from third parties for the infringed proprietary rights, which may not be
available to us on acceptable terms or at all.
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Furthermore, litigation with any third party, even if the allegations are without merit,
would likely be expensive and time-consuming and divert managements attention.
Any conclusions we may have reached regarding non-infringement and
invalidity are based in part on a review of publicly available databases and other information. There may be information not available to us or otherwise not reviewed by us that might change our conclusions. Moreover, as described above, the scope
and validity of patent claims are determined based on many facts and circumstances, and in a litigation, a court may reach a different conclusion on any given patent claim than the conclusions that we have reached.
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Moreover, we may have to undertake costly litigation to enforce any patents issued or licensed to us or to determine the
scope and validity of another partys proprietary rights. We can provide no assurance that a court of competent jurisdiction would validate our issued or licensed patents. An adverse outcome in litigation or an interference or other proceeding
in a court or patent office could materially adversely affect our business, financial condition and results of operations.
We
operate in a highly competitive environment and if we are unable to adapt to our environment, we may be unable to compete successfully, which will materially adversely affect our business, financial condition and results of operations.
Biotechnology and related pharmaceutical technology have undergone and should continue to experience rapid and significant change. We expect that
the technologies associated with biotechnology research and development will continue to develop rapidly. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any
compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could materially adversely affect
our business, financial condition and results of operations.
We expect that successful competition will depend, among other things, on product efficacy,
safety, reliability, availability, timing and scope of regulatory approval and price. Specifically, we expect crucial factors will include the relative speed with which we can develop products, complete the clinical testing and regulatory approval
processes and supply commercial quantities of the product to the market. We expect competition to increase as technological advances are made and commercial applications broaden. In each of our potential product areas, we face substantial
competition from large pharmaceutical, biotechnology and other companies, universities and research institutions. Relative to us, most of these entities have substantially greater capital resources, research and development staffs, facilities and
experience in conducting clinical studies and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than us.
Furthermore, we believe that our competitors have used, and may continue to use, litigation to gain a competitive advantage. Finally, our competitors may use different technologies or approaches to the development of products similar to the products
we are seeking to develop.
Competitors could develop and gain FDA approval of products containing rhIGF-1, which could adversely
affect our competitive position in all indications where we are currently developing IPLEX.
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rhIGF-1 manufactured by other parties may be approved for use in other indications in the United States in the future,
including MMD, HARS and ROP. In the event there are other rhIGF-1 products approved by the FDA to treat indications other than those covered by IPLEX, physicians may elect to prescribe a competitors product containing rhIGF-1 to treat the
indications for which IPLEX has received and may receive approval. This is commonly referred to as off-label use. While under FDA regulations a competitor is not allowed to promote off-label use of its product, the FDA does not regulate the practice
of medicine and as a result cannot direct physicians as to what product containing rhIGF-1 to prescribe to their patients. As a result, we would have limited ability to prevent off-label use of a competitors product containing rhIGF-1 to treat
any diseases for which we have received FDA approval, even if it violates our patents and we have orphan drug exclusivity for the use of rhIGF-1 to treat such diseases.
If another party obtains orphan drug exclusivity for a product that is essentially the same as a product we are developing in a particular indication, we may be precluded or delayed from commercializing the
product in that indication. This may materially adversely affect our business, financial condition and results of operations.
Under the Orphan
Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. The company that obtains the
first marketing approval from the FDA for a designated orphan drug for a rare disease receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. Similar laws exist in European Union. If a competitor
obtains approval of the same drug for the same indication or disease before us, we would be blocked from obtaining approval for our product for seven or more years, unless our product can be shown to be clinically superior. In addition, more than
one drug may be approved by the FDA for the same orphan indication or disease as long as the drugs are different drugs. As a result, even if our product is approved and receives orphan drug exclusivity, as in the case of our drug IPLEX, the FDA can
still approve different drugs for use in treating the same indication or disease covered by our product, which could create a more competitive market for us.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Disclosure of this information may materially adversely affect our
business, financial condition and results of operations.
In order to protect our proprietary technology and processes, we rely in part on
confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and
may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation may be necessary
to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business, financial condition and results of operations.
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Our research, development and manufacturing activities involve the use of hazardous materials,
which could expose us to damages that could materially adversely affect our business, financial condition and results of operations.
Our research,
development and manufacturing activities involve the controlled use of hazardous materials, including hazardous chemicals. We believe that our procedures for handling hazardous materials comply with federal and state regulations; however, there can
be no assurance that accidental injury or contamination from these materials will not occur. We currently maintain a general liability insurance policy that has a $1.0 million per claim limit and also caps aggregate claims at $2.0 million. In
addition, we have an umbrella insurance policy that covers up to $2.0 million of liability in excess of the general liability policys $2.0 million limit. In the event of an accident, we could be held liable for damages, which would
likely exceed our insurance coverage and other available financial resources. This liability would limit our ability to commercialize IPLEX and develop other products which would materially adversely affect our business, financial condition and
results of operations.
We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. These laws and regulations may require us to incur significant costs to comply with environmental laws and regulations in the future that could materially adversely affect our business, financial condition and
results of operations.
We may be subject to product liability claims if our products harm people, and we have only limited product
liability insurance.
The manufacture and sale of human therapeutic products involve an inherent risk of product liability claims and associated
adverse publicity. We currently have only limited product liability insurance for clinical studies and no commercial product liability insurance. We do not know if we will be able to maintain existing or obtain additional product liability insurance
on acceptable terms or with adequate coverage against potential liabilities. This type of insurance is expensive and may not be available on acceptable terms. If we are unable to obtain or maintain sufficient insurance coverage on reasonable terms
or to otherwise protect against potential product liability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay
substantial amounts. This could have a material adverse effect our business, financial condition and results of operations.
If our
settlement agreement with Tercica and Genentech is terminated, the Consent order from the court would be reinstated, which would have a material adverse effect on our business, financial condition and results of operations.
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As part of our March 2007 settlement agreement with Genentech and Tercica, we entered into a Consent
Judgment and Permanent Injunction in the United States District Court for the Northern District of California. If our settlement agreement with Tercica and Genentech is terminated, the Consent Judgment and Permanent Injunction against us will
survive termination, which would have a material adverse effect on our business, financial condition and results of operations, as we would no longer have a license to manufacture IPLEX using the present process without incurring significant
penalties and royalties.
RISKS ASSOCIATED WITH OUR STOCK
Conversion of our outstanding notes and exercise of warrants and options issued by us will significantly dilute the ownership interest of existing shareholders.
As of September 30, 2007, the 2005 Notes, 2005 Warrants and the warrants we issued in May 2007, November 2004 and July 2003 were convertible into and
exercisable for up to approximately 15.9 million shares of our common stock, representing approximately 13% of our then outstanding common stock.
As
of September 30, 2007, our outstanding options to our employees, officers, directors and consultants were exercisable for up to 5.2 million shares of our common stock, representing approximately an additional four percent of our then
outstanding common stock.
The conversion or exercise of some or all of our convertible notes, warrants and options will significantly dilute the ownership
interests of existing shareholders. Any sales in the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock.
The market price of our stock has been and may continue to be highly volatile, and we do not anticipate paying any cash dividends on our common
stock in the foreseeable future.
Our common stock is listed on the Nasdaq Global Market under the ticker symbol INSM. The market price
of our stock has been and may continue to be highly volatile, and announcements by us or by third parties may have a significant impact on our stock price. These announcements may include:
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our listing status on the Nasdaq Global Market;
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results of our clinical studies and preclinical studies, or those of our corporate partners or our competitors;
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developments in our relationships with corporate partners;
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developments affecting our corporate partners;
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negative regulatory action or regulatory approval with respect to our announcement or our competitors announcements of new products;
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government regulation, reimbursement changes and governmental investigation or audits related to us or to our products;
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developments related to our patents or other proprietary rights or those of our competitors;
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changes in the position of securities analysts with respect to our stock; and
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operating results below the expectations of public market analysts and investors.
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In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and biopharmaceutical companies, and
which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.
In the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against
us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.
Future sales by
existing shareholders may lower the price of our common stock, which could result in losses to our shareholders. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely
affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. Substantially all of our common stock is freely tradable in the public market without restriction under the
Securities Act of 1933, unless these shares are held by affiliates of our company, as that term is defined in Rule 144 under the Securities Act of 1933.
We have never paid dividends on our common stock. We currently intend to retain our future earnings, if any, to fund the development and growth of our businesses and, therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
Our common stock could be delisted from the Nasdaq Global Market if our stock price continues
to trade below $1.00 per share.
On June 18, 2007, we received a letter from the Listing Qualifications Department of The Nasdaq Stock Market
indicating that we are not in compliance with Nasdaq Marketplace Rule 4450(a)(5) (the Minimum Bid Price Rule) because the closing bid price per share for the our common stock had been below $1.00 per share for 30 consecutive business
days. In accordance with Marketplace Rule 4450(e)(2), we were provided 180 calendar days, or until December 17, 2007, to regain compliance. This notification has no effect on the listing of our common stock at this time.
To regain compliance with the Minimum Bid Price Rule, the closing bid price of our common stock must remain at $1.00 per share or more for a minimum of ten consecutive
business days. If we do not regain compliance with the Minimum Bid Price Rule by December 17, 2007, we can apply to list our common stock on the Nasdaq Capital Market and Nasdaq will determine whether we meet the Nasdaq Capital Market initial
listing criteria as set forth in Nasdaq Marketplace Rule 4310(c), except for the bid price requirement. If we meet the initial listing criteria, Nasdaq will notify us that we have been granted an additional 180 calendar days to come into compliance
with the Minimum Bid Price Rule. If we do not meet the initial listing criteria,
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Nasdaq will provide us with written notification that our common stock will be delisted. At that time we would be permitted to appeal Nasdaqs
determination to delist our common stock to a Nasdaq Listings Qualifications Panel.
We will seek to regain compliance with the Minimum Bid Price Rule
within the 180 day cure period and are considering alternatives to address compliance with the continued listing standards of the Nasdaq Global Market.
Delisting from the Nasdaq Global Market could have an adverse effect on our business and on the trading of our common stock. If a delisting of our common stock were to occur, our common stock would trade on the OTC Bulletin Board or on the
pink sheets maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a
result.
Certain provisions of Virginia law, our articles of incorporation and our amended and restated bylaws, and our Rights Plan
make a hostile takeover by a third party difficult.
Certain provisions of Virginia law and our articles of incorporation and amended and restated
bylaws could hamper a third partys acquisition of, or discourage a third party from attempting to acquire control of us. The conditions could also limit the price that certain investors might be willing to pay in the future for shares of our
common stock. These provisions include:
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a provision allowing us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of the common
stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common
stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the common stock;
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the existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, thus expanding the time required
to change the composition of a majority of directors and perhaps discouraging someone from making an acquisition proposal for us;
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the amended and restated bylaws requirement that shareholders provide advance notice when nominating our directors;
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the inability of shareholders to convene a shareholders meeting without the chairman of the board, the president or a majority of the board of directors first
calling the meeting; and
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the application of Virginia law prohibiting us from entering into a business combination with the beneficial owner of 10% or more of our outstanding voting stock
for a period of three years after the 10% or greater owner first reached that level of stock ownership, unless we meet certain criteria.
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In addition, in May 2001, our board of directors approved the adoption of a Rights Plan under which shareholders received
rights to purchase new shares of preferred stock if a person or group acquires 15% or more of our common stock. These provisions are intended to discourage acquisitions of 15% or more of our common stock without negotiations with the board. The
rights trade with our common stock, unless and until they are separated upon the occurrence of certain future events. Our board of directors may redeem the rights at a price of $0.01 per right prior to the time a person acquires 15% or more of our
common stock.