Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2011
includes a detailed discussion of our risk factors under the heading Part I, Item 1ARisk Factors. Set forth below are certain changes from the risk factors previously disclosed in our Annual Report on Form 10-K. You should
carefully consider the risk factors discussed in our Annual Report on Form 10-K and in this report, as well as the other information in this report, before deciding whether to invest in shares of our common stock. The occurrence of any of the risks
discussed in the Annual Report on Form 10-K or this report could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of
your investment. Except with respect to our trademarks, the trademarks, trade names and service marks appearing in this report are the property of their respective owners.
Risks Related to Our Business
We will require substantial additional
funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate planned activities or result in our inability to continue as a going concern.
We began generating revenues from the commercialization of Silenor late in the third quarter of 2010, and our operations to date have
generated substantial needs for cash. We expect our negative cash flows from operations to continue until we are able to generate significant cash flows from sales of Silenor. Based on our recurring losses, negative cash flows from operations and
working capital levels, we will need to raise substantial additional funds to finance our operations. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition
and results of operations will be materially and adversely affected. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2011 contains an explanatory paragraph stating that
our recurring losses raise substantial doubt about our ability to continue as a going concern.
We are responsible for the
costs relating to the sales and marketing of Silenor in the United States. As a result, commercial activities relating to Silenor are likely to result in the need for substantial additional funds. Our future capital requirements will depend on, and
could increase significantly as a result of, many factors, including:
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our success in generating cash flows from sales of Silenor;
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the costs of establishing or contracting for commercial programs and resources, and the scope of the commercial programs and resources we
pursue;
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the terms and timing of any future collaborative, licensing and other arrangements that we may establish;
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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, and any costs relating to
arrangements entered into to settle intellectual property litigation;
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the extent to which we acquire or in-license new products, technologies or businesses;
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the rate of progress and cost of any future non-clinical studies, any future clinical trials and other development activities;
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the scope, prioritization and number of development programs we pursue; and
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the effect of competing technological and market developments.
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On July 24, 2012, we sold to institutional investors an aggregate of approximately 1.2 million shares of our common stock and
warrants to purchase up to approximately 0.6 million additional shares of our common stock at a combined purchase price of $2.56 per share and per warrant. The total gross proceeds from the offering were approximately $3.0 million, before
deducting selling commissions and expenses. In August 2011, we entered into an at-the-market equity sales agreement with Citadel Securities LLC, or Citadel. However, there can be no assurance that we can or will consummate sales under the agreement
based on prevailing market conditions or in the quantities or at the prices that we deem appropriate. Citadel or we are permitted to terminate the sales agreement at any time.
We have two effective shelf registration statements on Form S-3 filed with the SEC under which we may offer from time to time any combination of debt securities, common and preferred stock and warrants.
However, the rules and regulations of the SEC or other regulatory agencies may restrict our ability to conduct certain types of financing activities,
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or may affect the timing of and the amounts we can raise by undertaking such activities. For example, under current SEC regulations, because the aggregate market value of our common stock held by
non-affiliates, or our public float, is less than $75 million, the amount that we can raise through primary public offerings of securities in any twelve-month period using one or more registration statements on Form S-3 is limited to an aggregate of
one-third of our public float. Our July 2012 offering of stock and warrants was a primary offering using one of our effective shelf registration statements on Form S-3 and was subject to this limitation.
At September 30, 2012 we had cash and cash equivalents totaling $8.2 million. We will need to obtain additional funds to finance our
operations. Actual financial results for the period of time through which our financial resources will be adequate to support our operations could vary based upon many factors, including but not limited to Silenor sales performance, the actual cost
of commercial activities and any litigation expenses we may incur.
In December 2011 we hired Stifel Nicolaus Weisel as a
strategic advisor to assist us in identifying and evaluating strategies to maximize stockholder value by leveraging our rights in Silenor. The exploration of strategic alternatives may not result in any agreement or transaction and, if completed,
any agreement or transaction may not be successful or on attractive terms. The inability to enter into a strategic transaction, or a strategic transaction that is not successful or on attractive terms, could accelerate our needs for cash and make
securing funding on reasonable terms more difficult. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our products, potential products
or proprietary technologies, or grant licenses on terms that are not favorable to us.
We intend to obtain any additional
funding we require through public or private equity or debt financings, strategic relationships, assigning receivables or royalty rights, or other arrangements and cannot assure that such funding will be available on reasonable terms, or at all. If
we are unsuccessful in raising additional required funds, we may be required to delay, scale-back or eliminate plans or programs relating to our business, relinquish some or all rights to Silenor, or renegotiate less favorable terms with respect to
such rights than we would otherwise choose or cease operating as a going concern. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in
defending against these claims, litigation could result in substantial costs and distract management, and may have unfavorable results that could further adversely impact our financial condition.
If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise
additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. If we are unable to
continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investments.
We will need to retain qualified sales and marketing personnel and successfully manage our sales and marketing programs
and resources in order to successfully generate sales of Silenor.
Prior to December 31, 2011, revenues we
received from sales of Silenor largely depended upon the efforts of sales representatives employed by P&G and Publicis. Because we did not believe that the growth of Silenor revenues throughout 2011 was sufficient to support sales and marketing
expenses at then-current levels, we terminated our agreements with Publicis and P&G in December 2011 in an effort to conserve cash, and effective January 3, 2012, we hired a reduced sales force of 25 field-based sales representatives from
Publicis as our employees to promote Silenor. In June 2012, we began reallocating our commercial resources relating to Silenor, including by eliminating 10 vacant and/or unprofitable field sales territories, and focusing greater resources on other
activities to better support our in-person promotional efforts. We are now solely relying on our limited number of sales representatives to market and sell Silenor, and our sales in the short term may suffer as we make this transition and may
continue to suffer in the long term if such transition is not successful. In addition, our strategy of focusing on an overall smaller, but more concentrated, geography may not be successful.
The efforts of our sales force are complemented by on-line and other non-personal promotional initiatives that target both physicians and
patients. We are also focused on ensuring broad patient access to Silenor by negotiating agreements with leading commercial managed care organizations and with government payors. Although our goal is to achieve Silenor sales through the efficient
execution of our sales and marketing plans and programs, we may not be able to effectively generate prescriptions and achieve broad market acceptance for Silenor on a timely basis, or at all.
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Restrictions on or challenges to our patent rights relating to our products and
limitations on or challenges to our other intellectual property rights may limit our ability to prevent third parties from competing against us.
Our success will depend on our ability to obtain and maintain patent protection for Silenor and any other product candidate we develop or commercialize, preserve our trade secrets, prevent third parties
from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. The patent rights that we have in-licensed relating to Silenor are limited in ways that may affect our ability to exclude third parties
from competing against us. In particular, we do not hold composition of matter patents covering the active pharmaceutical ingredient, or API, of Silenor. Composition of matter patents on APIs are a particularly effective form of intellectual
property protection for pharmaceutical products, as they apply without regard to any method of use or other type of limitation. As a result, competitors who obtain the requisite regulatory approval can offer products with the same APIs as our
products so long as the competitors do not infringe any method of use or formulation patents that we may hold.
The principal
patent protection that covers, or that we expect will cover, Silenor consists of method of use patents. This type of patent protects the product only when used or sold for the specified method. However, this type of patent does not limit a
competitor from making and marketing a product that is identical or similar to our product for an indication that is outside of the patented method. Moreover, physicians may prescribe such a competitive or similar identical product for off-label
indications that are covered by the applicable patents. Some physicians are prescribing generic 10 mg doxepin capsules and generic oral solution doxepin for insomnia on such an off-label basis. In addition, some managed health care plans are
requiring the substitution of these generic doxepin products for Silenor, and some pharmacies are suggesting such substitution. Although such off-label prescriptions may induce or contribute to the infringement of method of use patents, the practice
is common and such infringement is difficult to prevent or prosecute.
Because products with active ingredients identical to
ours have been on the market for many years, there can be no assurance that these other products were never used off-label or studied in such a manner that such prior usage would not affect the validity of our method of use patents. Due to some
prior art that we identified, we initiated a reexamination of one of the patents we have in-licensed covering Silenor, (specifically, U.S. Patent No. 5,502,047, Treatment for Insomnia) which claims the treatment of chronic insomnia
using doxepin in a daily dosage of 0.5 mg to 20 mg and expires in March 2013. The reexamination proceedings terminated and the U.S. Patent and Trademark Office, or USPTO, issued a reexamination certificate narrowing certain claims, so that the
broadest dosage ranges claimed by us are 0.5 mg to 20 mg for otherwise healthy patients with chronic insomnia and for patients with chronic insomnia resulting from depression, and 0.5 mg to 4 mg for all other chronic insomnia patients. We also
requested reissue of this same patent to consider some additional prior art and to add intermediate dosage ranges below 10 mg. In two office actions relating to this reissue request, the USPTO raised no prior art objections to 32 of the 34 claims we
were seeking and raised a prior art objection to the other two, as well as some technical objections. Each of the claims objected to by the USPTO related to dosages above 10 mg. After further review of the prior art submitted, the USPTO withdrew all
of its prior art objections. We then determined that the proposed addition of the intermediate dosage ranges and the resolution of the technical objections no longer warranted continuation of the reissue proceeding. As a result, we elected not to
continue that proceeding.
We also have multiple internally developed pending patent applications. No assurance can be given
that the USPTO or other applicable regulatory authorities will allow pending applications to result in issued patents with the claims we are seeking, or at all.
Patent applications in the United States are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries
by several months. As a result, we cannot be certain that the inventors of issued patents to which we hold rights were the first to conceive of inventions covered by pending patent applications or that the inventors were the first to file patent
applications for such inventions.
In addition, third parties may challenge issued patents to which we hold rights and any
additional patents that we may obtain, which could result in the invalidation or unenforceability of some or all of the relevant patent claims, or could attempt to develop products utilizing the same APIs as our products that do not infringe the
claims of our in-licensed patents or patents that we may obtain.
When a third party files an ANDA for a product containing
doxepin for the treatment of insomnia at any time during which we have patents listed for Silenor in the FDAs Orange Book publication, the applicant will be required to certify to
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the FDA concerning the listed patents. Specifically, the applicant must certify that: (1) the required patent information relating to the listed patent has not been filed in the NDA for the
approved product; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be
infringed by the manufacture, use or sale of the new product. A certification that the new product will not infringe the Orange Book-listed patents for Silenor or that such patents are invalid is called a paragraph IV certification.
We received notices from each of Actavis, Mylan, Par, and Zydus that each has filed with the FDA an ANDA for a generic version of Silenor
3 mg and 6 mg tablets. The notices included paragraph IV certifications with respect to eight of the nine patents listed in the Orange Book for Silenor.
We, together with ProCom, filed suit in the United States District Court for the District of Delaware against each of Actavis, Mylan, Par and Zydus alleging that each of Actavis, Mylan, Par and Zydus
infringed the 229 patent by seeking approval from the FDA to market generic versions of Silenor 3 mg and 6 mg tablets prior to the expiration of this patent.
In addition, we filed suit in the United States District Court for the District of Delaware against each of Actavis, Mylan, Par and Zydus alleging that such parties infringed the 307 patent by
seeking approval from the FDA to market generic versions of Silenor 3 mg and 6 mg tablets prior to the expiration of this patent.
In July 2012 we and our licensor for the 229 patent, ProCom, entered into separate settlement agreements with each of Mylan, Par and Zydus to resolve the pending patent litigation between the
parties. Mylan has the exclusive right under the 229 patent and the 307 patent to sell an authorized generic version of Silenor under our NDA in the United States for a limited period beginning January 1, 2020, or earlier under
certain circumstances. After Mylans license to sell such authorized generic product expires, Mylan will have a non-exclusive license to sell a generic version of Silenor under Mylans ANDA in the United States. Par and Zydus each have a
non-exclusive license under the 229 patent and the 307 patent to sell a generic version of Silenor in the United States 180 days after the earlier of the date that a third partys generic version of Silenor is first sold in the
United States under a license from us or a final court decision that the 229 patent and the 307 patent are not infringed, invalid or unenforceable, or earlier under certain circumstances. In July 2012, the U.S. District Court for the
District of Delaware entered an order dismissing the litigation with respect to each of Mylan, Par and Zydus.
Pursuant to the
provisions of the Hatch-Waxman Act, FDA final approval of the Actavis and Mylan ANDAs can occur no earlier than May 3, 2013, FDA final approval of the Par ANDA can occur no earlier than June 23, 2013 and FDA final approval of the Zydus
ANDA can occur no earlier than November 13, 2013, unless in each case there is an earlier court decision that the 229 patent and the 307 patent are not infringed and/or invalid or unless any party to the action is found to have
failed to cooperate reasonably to expedite the infringement action.
We intend to vigorously enforce our intellectual property
rights relating to Silenor, but we cannot predict the outcome of ongoing or any future actions. Any adverse outcome in ongoing or any future actions could result in one or more generic versions of Silenor being launched before the expiration of the
listed patents, which could adversely affect our ability to successfully execute our business strategy and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash
flows. Such events could also significantly impact our ability to continue as a going concern.
Certain pharmaceutical
companies patent settlement agreements with generic pharmaceutical companies have been challenged by the U.S. Federal Trade Commission alleging a violation of Section 5(a) of the Federal Trade Commission Act. Our settlement agreements
with Mylan, Par and Zydus, or any other patent settlement agreement that we may enter into with any generic pharmaceutical company, may be subject to similar challenges, which will be both expensive and time consuming and may render such settlement
agreements unenforceable. In addition, legislation has been proposed by Congress that, if passed, would subject patent settlement agreements to further restrictions.
We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in
part, by confidentiality agreements with our collaborators, employees and consultants. We also have invention or patent assignment agreements with our employees and certain consultants. There can be no assurance that inventions relevant to us will
not be developed by a person not bound by an invention assignment agreement with us. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not
otherwise become known or be independently discovered by our competitors.
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Litigation or other proceedings to enforce or defend intellectual property rights is
often very complex in nature, expensive and time-consuming, may divert our managements attention from our core business and may have unfavorable results that could adversely impact our ability to prevent third parties from competing with us.
We are subject to uncertainty relating to healthcare reform measures, reimbursement policies and regulatory proposals
which, if not favorable to Silenor or any other product that we commercialize, could hinder or prevent our commercial success.
Our ability to successfully commercialize Silenor and any other product to which we obtain rights will depend in part on the extent to which governmental authorities, private health insurers and other
organizations establish appropriate coverage and reimbursement levels for the cost of our products and related treatments.
The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to
contain or reduce costs of healthcare may adversely affect:
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the ability to obtain a price we believe is fair for our products;
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the ability to generate revenues and achieve or maintain profitability;
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the future revenues and profitability of our potential customers, suppliers and collaborators; and
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the availability of capital.
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The U.S. Congress has enacted legislation to reform the healthcare system. A major goal of this healthcare reform law was to provide greater access to healthcare coverage for more Americans. Accordingly,
the healthcare reform law required individual U.S. citizens and legal residents to maintain qualifying health coverage, imposed certain requirements on employers with respect to offering health coverage to employees, amended insurance regulations
regarding when coverage can be provided and denied to individuals, and expanded existing government healthcare coverage programs to more individuals in more situations. Among other things, the healthcare reform law specifically:
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established annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs, beginning in 2011;
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increased minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, retroactive to January 1, 2010;
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redefined a number of terms used to determine Medicaid drug rebate liability, including average manufacturer price and retail community pharmacy,
effective October 2010;
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extended manufacturers Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations, effective March 2010;
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expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals
beginning April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133 percent of the Federal Poverty Level beginning 2014, thereby potentially increasing manufacturers Medicaid rebate
liability;
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established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness
research;
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required manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50 percent point-of-sale discounts off
negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D, beginning 2011; and
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increased the number of entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective January 2010.
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While this legislation will, over time, increase the number of patients who have insurance coverage for our
products, it also is likely to adversely affect our results of operations. Although this legislation was recently upheld by the U.S. Supreme Court, it is possible that it may be modified or repealed in the future. Some states are also considering
legislation that would control the prices of drugs, and state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and/or requiring prior authorization by the state program. It is likely that federal and state
legislatures and health agencies will continue to focus on additional healthcare reform in the future.
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As a result of these or other reform measures, we may determine to change our current
manner of operation or change our contract arrangements, any of which could harm our ability to operate our business efficiently or on the scale we would like and our ability to raise capital. In addition, in certain foreign markets, the pricing of
prescription drugs is subject to government control and reimbursement may in some cases be unavailable or insufficient.
Current healthcare reform measures and any future legislative proposals to reform healthcare or reduce government insurance programs may
result in lower prices for Silenor and any other product that we commercialize or exclusion of Silenor or any such other product from coverage and reimbursement programs. Either of those could harm our ability to market our products and
significantly reduce our revenues from the sale of our products.
Managed care organizations are increasingly challenging the
prices charged for medical products and services and, in some cases, imposing restrictions on the coverage of particular drugs. Many managed care organizations negotiate the price of medical services and products and develop formularies which
establish pricing and reimbursement levels. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organizations patient population. The process for obtaining coverage can be lengthy and costly, and
it can take several months before a particular payor initially reviews our product and makes a decision with respect to coverage. For example, third-party payors may require cost-benefit analysis data from us in order to demonstrate the
cost-effectiveness of any product we might market and sell. For any individual third-party payor, we may not be able to provide data sufficient to gain reimbursement on a similar or preferred basis to competitive products, or at all.
In addition, many insurers and other healthcare payment organizations encourage the use of less expensive alternative generic brands and
over the counter, or OTC, products through their prescription benefits coverage and reimbursement policies. The availability of generic prescription and OTC products for the treatment of insomnia has created, and will continue to create, a
competitive reimbursement environment. Insurers and other healthcare payment organizations frequently make the generic or OTC alternatives more attractive to the patient by providing different amounts of reimbursement so that the net cost of the
generic or OTC product to the patient is less than the net cost of a prescription branded product to the patient. Aggressive pricing policies by our generic or OTC product competitors and the prescription benefit policies of insurers could have a
negative effect on our product revenues and profitability.
The competition among pharmaceutical companies to have their
products approved for reimbursement also results in downward pricing pressure in the industry and in the markets where our products compete. In some cases, we may discount our products in order to obtain reimbursement coverage, and we may not be
successful in any efforts we take to mitigate the effect of a decline in average selling prices for our products. Declines in our average selling prices would also reduce our gross margins.
In addition, once reimbursement at an agreed level is approved by a third-party payor, we may lose that reimbursement entirely. As
reimbursement is often approved for a period of time, this risk is greater at the end of the time period, if any, for which the reimbursement was approved.
We may face additional challenges with regard to reimbursement which could affect our ability to successfully commercialize Silenor or any other product candidate that we commercialize, including:
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the variability of formulary coverage may discourage physicians from providing Silenor or any other product candidate that we commercialize to certain
or all patients depending on their insurance coverage;
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an increase in insurance plans that place more cost liability onto patients may limit patients willingness to pay for Silenor or any other
product candidate that we commercialize and thereby discourage uptake; and
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unforeseen changes in federal health care policy guidelines may negatively impact a physician practices willingness to provide novel treatments.
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If our products are not included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies increasingly favor generic or OTC products, our overall business and financial condition would be adversely affected.
Further, there have been a number of legislative and regulatory proposals concerning reimportation of pharmaceutical products and safety
matters. For example, in an attempt to protect against counterfeit drugs, the federal government and numerous states have enacted pedigree legislation. In particular, California has enacted legislation that requires development of an electronic
pedigree to track and trace each prescription drug at the saleable unit level through the distribution system. Californias electronic pedigree requirement is scheduled to take effect beginning in January 2015. Compliance with California and
future federal or state electronic pedigree requirements will likely require an increase in our operational expenses and will likely be administratively burdensome.
We expect intense competition in the marketplace for Silenor and any other product to which we acquire rights, and new products may emerge that provide different and/or better therapeutic
alternatives for the disorders that our products are intended to treat.
Silenor competes with well-established drugs
approved for the treatment of insomnia, including Lunesta, marketed by Sunovion Pharmaceuticals Inc., a wholly-owned subsidiary of Dainippon Sumitomo Pharma Co., Ltd., and the branded and generic versions of Sanofi-Synthélabo, Inc.s
Ambien and Ambien CR and Pfizer Inc.s Sonata, all of which are GABA-receptor agonists, and Takeda Pharmaceuticals North America, Inc.s Rozerem, a melatonin receptor antagonist.
A number of companies are marketing reformulated versions of previously approved GABA-receptor agonists. For example, in November 2011,
Transcept Pharmaceuticals, Inc. received approval from the FDA for Intermezzo, a low-dose sublingual tablet formulation of zolpidem. Transcept and Purdue Pharmaceutical Products L.P. have entered into an exclusive U.S. license and collaboration
agreement to commercialize Intermezzo, which was launched by Purdue in April 2012. Meda AB and Orexo AB launched Edluar, formerly known as Sublinox, a sublingual tablet formulation of zolpidem, in the third quarter of 2009. ECR Pharmaceuticals
Company, Inc., a wholly owned subsidiary of Hi-Tech Pharmacal Co., Inc., launched NovaDel Pharma, Inc.s ZolpiMist, an oral mist formulation of zolpidem, in the United States in February 2011.
In addition to the currently approved products for the treatment of insomnia, a number of new products may enter the insomnia market over
the next several years. It has been reported that Neurim Pharmaceuticals Ltd. is seeking FDA approval of Circadin, a prescription form of melatonin that is already approved in the European Union and several other countries. Neurim also announced
positive results from Phase 1 and 1b clinical trials for Neu-P11, a melatonin and serotonin agonist for the treatment of insomnia associated with pain.
Alexza Pharmaceuticals, Inc. has announced positive results from a Phase 1 clinical trial of an inhaled formulation of zaleplon, the API in Sonata. In July 2010, Alexza announced that it was advancing
this product candidate into Phase 2 clinical trials during the first half of 2011 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients who awake in the middle of the night and have difficulty falling
back asleep, but has not yet done so. Somnus Therapeutics, Inc. has announced positive results from two Phase 1 clinical trials and one Phase 2 clinical trial of a delayed-release formulation of zaleplon.
Vanda Pharmaceuticals Inc. has completed two Phase 3 clinical trials of tasimelteon, a melatonin receptor agonist. Tasimelteon received
orphan drug designation status for non-24 hour sleep/wake disorder in blind individuals with no light perception. Vanda has initiated Phase 3 clinical trials for tasimelteon to treat this disorder and plans to file an NDA with the FDA in the first
half of 2013.
Merck & Co., Inc. has completed Phase 3 clinical trials for suvorexant, an orexin antagonist, for the
treatment of insomnia and has MK-6096 and MK-3697 in Phase 2 clinical trials for the treatment of insomnia. Merck has announced that it plans to file regulatory applications for suvorexant in 2012.
Several other companies, including Sunovion Pharmaceuticals, are evaluating 5HT2 antagonists as potential hypnotics, and Eli Lilly and
Company is evaluating a potential hypnotic that is a dual histamine/5HT2 antagonist. Additionally, several other companies are evaluating new formulations of existing compounds and other compounds for the treatment of insomnia.
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Furthermore, generic versions of Ambien, Ambien CR and Sonata have been launched and are
priced significantly lower than approved, branded insomnia products. Some managed health care plans require that patients try generic versions of these branded insomnia products before the patient can be reimbursed for Silenor. Sales of all of these
drugs may reduce the available market for, and could put downward pressure on, the price we are able to charge for Silenor, which could ultimately limit our ability to generate significant revenues.
The active ingredient of Silenor is doxepin, which has been used at higher doses for over 40 years for the treatment of depression and
anxiety. Doxepin is available generically in strengths as low as 10 mg in capsule form, as well as in a concentrated liquid form dispensed by a marked dropper and calibrated for 5 mg. Some physicians are prescribing generic 10 mg doxepin capsules
and generic oral solution doxepin off-label for insomnia. In addition, some managed health care plans are requiring the substitution of these generic doxepin products for Silenor, and some pharmacies are suggesting such substitution. Such off label
uses of generic doxepin may reduce the sales of Silenor and may put a downward pressure on the price we are able to charge for Silenor, which could ultimately limit our ability to generate significant revenues.
Upon the expiration of, or successful challenge to, our patents or licenses covering Silenor, generic competitors may introduce a generic
version of Silenor at a lower price. Some generic manufacturers have also demonstrated a willingness to launch generic versions of branded products before the final resolution of related patent litigation, known as an at-risk
launch. A launch of a generic version of Silenor could have a material adverse effect on our business and we could suffer a significant loss of sales and market share in a short period of time.
We received notices from Actavis, Mylan, Par, and Zydus that each has filed with the FDA an ANDA for a generic version of Silenor 3 mg
and 6 mg tablets. The notices included paragraph IV certifications with respect to eight of the nine patents listed in the Orange Book for Silenor.
We, together with ProCom, filed suit in the United States District Court for the District of Delaware against each of Actavis, Mylan, Par and Zydus alleging that each of Actavis, Mylan, Par and Zydus
infringed the 229 patent by seeking approval from the FDA to market generic versions of Silenor 3 mg and 6 mg tablets prior to the expiration of this patent.
In addition, we filed suit in the United States District Court for the District of Delaware against each of Actavis, Mylan, Par and Zydus alleging that such parties infringed the 307 patent by
seeking approval from the FDA to market generic versions of Silenor 3 mg and 6 mg tablets prior to the expiration of this patent.
In July 2012 we and ProCom entered into separate settlement agreements with each of Mylan, Par and Zydus to resolve the pending patent litigation between the parties. Mylan has the exclusive right under
the 229 patent and the 307 patent to sell an authorized generic version of Silenor under our NDA in the United States for a limited period beginning January 1, 2020, or earlier under certain circumstances. After Mylans license
to sell such authorized generic product expires, Mylan will have a non-exclusive license to sell a generic version of Silenor under Mylans ANDA in the United States. Par and Zydus each have a non-exclusive license under the 229 patent
and the 307 patent to sell a generic version of Silenor in the United States 180 days after the earlier of the date that a third partys generic version of Silenor is first sold in the United States under a license from us or a final
court decision that the 229 patent and the 307 patent are not infringed, invalid or unenforceable, or earlier under certain circumstances. In July 2012, the U.S. District Court for the District of Delaware entered an order dismissing the
litigation with respect to each of Mylan, Par and Zydus.
Pursuant to the provisions of the Hatch-Waxman Act, FDA final
approval of the Actavis and Mylan ANDAs can occur no earlier than May 3, 2013, FDA final approval of the Par ANDA can occur no earlier than June 23, 2013 and FDA final approval of the Zydus ANDA can occur no earlier than November 13,
2013, unless in each case there is an earlier court decision that the 229 patent and the 307 patent are not infringed and/or invalid or unless any party to the action is found to have failed to cooperate reasonably to expedite the
infringement action.
We intend to vigorously enforce our intellectual property rights relating to Silenor, but we cannot
predict the outcome of ongoing or any future actions. Any adverse outcome in ongoing or any future actions could result in one or more generic versions of Silenor being launched before the expiration of the listed patents, which could adversely
affect our ability to successfully generate sales of Silenor and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows, such events could also significantly
impact our ability to continue as a going concern.
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SOMAXON PHARMACEUTICALS, INC.
The biotechnology and pharmaceutical industries are subject to rapid and intense
technological change. We face, and will continue to face, competition in the development and marketing of Silenor or any other product candidate to which we acquire rights from academic institutions, government agencies, research institutions and
biotechnology and pharmaceutical companies. There can be no assurance that developments by others, including the development of other drug technologies and methods of preventing the incidence of disease, will not render Silenor or any other product
candidate that we develop obsolete or noncompetitive.
Compared to us, many of our potential competitors have substantially
greater:
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manufacturing, distribution and sales and marketing resources and experience;
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research and development resources, including personnel and technology;
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experience conducting non-clinical studies and clinical trials, and related resources; and
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expertise in prosecution and enforcement of intellectual property rights.
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As a result of these factors, our competitors may develop drugs that are more effective and less costly than ours and may be more
successful than we are in manufacturing, marketing and selling their products. Our competitors may also obtain patent protection or other intellectual property rights or seek to invalidate or otherwise challenge our intellectual property rights,
limiting our ability to successfully market and sell products.
In addition, manufacturing efficiency and selling and
marketing capabilities are likely to be significant competitive factors. We currently have no commercial manufacturing capability and more limited sales and marketing infrastructure than many of our competitors and potential competitors.
If the manufacturers upon whom we rely fail to produce our products in the volumes that we require on a timely basis, or to comply
with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.
We do not manufacture Silenor, and we do not plan to develop any capacity to do so. We have a contract with Patheon Pharmaceuticals Inc.
to manufacture our future required clinical supplies, if any, of Silenor, and we have a contract with Patheon to manufacture our commercial supplies of Silenor. In addition, in connection with our settlement agreement with Mylan, in July 2012 we
entered into an agreement with Mylan to manufacture our commercial supplies of Silenor for the United States. We have also entered into agreements with Plantex USA, Inc. to manufacture our supply of doxepin API and with Anderson Packaging, Inc. to
package Silenor finished products.
The manufacture of pharmaceutical products requires significant expertise and capital
investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up and validating initial production. These
problems include difficulties with production costs and yields, quality control, including stability of the product and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and
foreign regulations. In connection with our supply agreement with Mylan, the FDA must approve Mylans facilities and processes prior to our use of commercial products supplied by Mylan, which could require new testing and compliance
inspections. In addition, Mylan will have to be educated in or independently develop the processes necessary for production.
Our manufacturers may not perform as agreed or may terminate their agreements with us. Additionally, our manufacturers may experience
manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual
obligations, our ability to sell Silenor or any other product candidate that we commercialize or provide any product candidates to patients in our clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial
supplies could delay the completion of our clinical trials, increase the costs associated with maintaining our clinical trial program and, depending upon the period of delay, require us to commence new clinical trials at significant additional
expense or terminate the clinical trials completely. In addition, any delay or interruption in our ability to meet commercial demand for Silenor will result in the loss of potential revenues.
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SOMAXON PHARMACEUTICALS, INC.
In addition, all manufacturers of pharmaceutical products must comply with current good
manufacturing practice, or cGMP, requirements enforced by the FDA through its facilities inspection program. The FDA is also likely to conduct inspections of our manufacturers facilities as part of their review of any marketing applications we
submit. These cGMP requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign
regulatory requirements. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the
safety of any quantities supplied is compromised due to our manufacturers failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products.
Moreover, our manufacturers and suppliers may experience difficulties related to their overall businesses and financial stability, which
could result in delays or interruptions of our supply of Silenor. In addition, once Mylans supply of commercial quantities of Silenor is approved by the FDA, we will be required to procure minimum percentages of our U.S. commercial
requirements of Silenor from Mylan, which could limit our flexibility with respect to supply and inventory management. Except for the dual supply of Silenor commercial requirements from Mylan and Patheon, we do not have alternate manufacturing plans
in place at this time. If we need to change to other manufacturers, the FDA and comparable foreign regulators must approve these manufacturers facilities and processes prior to our use, which would require new testing and compliance
inspections, and the new manufacturers would have to be educated in or independently develop the processes necessary for production.
Any of these factors could adversely affect the commercial activities for Silenor or suspend clinical trials, regulatory submissions, and required approvals for any other product candidate that we
develop, or entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our manufacturers failed to deliver the required commercial quantities of raw materials, including bulk drug substance, or
finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.
We, Paladin, CJ or any other future licensee may never receive approval or commercialize Silenor outside of the United States, or our or their activities may not be effective or in compliance with
applicable laws.
We have licensed to Paladin the rights to commercialize Silenor in Canada, South America, the
Caribbean and Africa, and we have licensed to CJ the rights to commercialize Silenor in South Korea. Silenor has not been approved for marketing in any jurisdiction outside of the United States. Paladin and CJ will be responsible for regulatory
submissions for Silenor in their respective licensed territories and will have the exclusive right to commercialize Silenor in such licensed territories. Paladins New Drug Submission filing in Canada was accepted for review by Health Canada in
February 2012, but there is no assurance regulatory approval will be obtained in Canada or any of the other licensed territories. We may license rights to Silenor or other future products to others for territories outside the United States in the
future.
Compared to a development and commercialization strategy for an ex-U.S. product that involves a third-party
collaborator, the development and commercialization of such a product by us without a collaborator is likely to require substantially greater resources on our part and potentially adversely impact the timing and results of the development or
commercialization of the product.
In order to market any products outside of the United States, we or our licensees must
establish and comply with numerous and varying regulatory requirements regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. Any additional
clinical studies that may be required to be conducted as part of the regulatory approval process may not corroborate the results of the clinical studies we have previously conducted or may have adverse results or effects on our ability to maintain
regulatory approvals in the United States or obtain them in other countries. The time required to obtain approval might differ from that required to obtain FDA approval for Silenor.
The regulatory approval process in other countries may include all of the risks regarding FDA approval in the U.S. as well as other
risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or
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SOMAXON PHARMACEUTICALS, INC.
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
setback in obtaining such approval could limit the uses of the product candidate and have an adverse effect on potential royalties and product sales. Such approval may be subject to limitations on the indicated uses for which the product may be
marketed or require costly, post-marketing follow-up studies.
In addition, any revenues we receive from sales of Silenor
outside the United States will likely depend upon the efforts of Paladin, CJ or any other future licensees, as applicable, which will not be within our control. If we are unable to maintain our license agreements or to effectively establish
alternative arrangements to market such products, or if Paladin, CJ or any future licensees do not perform adequately under such agreements or arrangements or comply with applicable laws, our business could be adversely affected and we could be
subject to regulatory sanctions.
We or any collaborator may not be successful in developing, receiving approval for or
commercializing an OTC product for Silenor.
In March 2012, P&G notified us that P&G elected not to exercise
its right to negotiate with us for rights to develop and commercialize an OTC pharmaceutical product containing doxepin as the sole API. As a result, P&G no longer has any rights relating to an OTC product and we are seeking potential
collaborations with other third parties interested in rights to develop and commercialize an OTC product. We cannot assure you that we will find another suitable third party interested in such rights, or that any negotiations with such a third party
will result in a completed transaction or that such a transaction will be successful or on attractive terms. If we are unable to establish an OTC collaboration, we will require substantial additional funds, which may not be available, if we should
decide to develop and commercialize the product on our own.
Even if we are successful in establishing a collaboration with a
third party for an OTC product, we or such third party must establish and comply with numerous and varying regulatory requirements regarding safety and efficacy of OTC products prior to selling the product, and we cannot give any assurance that any
such OTC product will receive applicable regulatory approval or be successfully commercialized.
If we are sued for
infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.
Our commercial success depends upon our ability, together with our collaborators, to manufacture, market and sell Silenor or any other
product candidates that we develop and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in
the fields in which we and our collaborators are operating. As the biotechnology and pharmaceutical industry expands and more patents are issued, the risk increases that our operations may give rise to claims that our products infringe the patent
rights of others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or proprietary technologies may infringe.
We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging
that our products and/or proprietary technologies infringe their intellectual property rights. For example, in August 2012, a complaint for patent infringement was filed against us by Classen in the United States District Court for the Central
District of California. The complaint alleges that we infringed one or more claims of two of plaintiffs patents by conducting one or more clinical studies relating to Silenor and seeking FDA approval for Silenor. The plaintiff seeks
damages, including for willful infringement, and attorneys fees. We believe that none of our activities has infringed plaintiffs patents, and we will defend the action vigorously.
If our products, proprietary technologies or their uses infringe any intellectual property rights, we or our collaborators could be
required to pay damages and could be unable to commercialize our products or use our proprietary technologies unless we or they obtained a license. A license may not be available to us or our collaborators on acceptable terms, or at all. In
addition, during litigation, the intellectual property rights holder could obtain a preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods.
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SOMAXON PHARMACEUTICALS, INC.
There is a substantial amount of litigation involving patent and other intellectual
property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:
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infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our
managements attention from our core business;
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substantial damages for infringement, including treble damages and attorneys fees, which we may have to pay if a court decides that the product
at issue infringes on or violates the third partys rights;
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a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do;
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if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross-licenses to our products; and
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redesigning our products or processes so they do not infringe, which may not be possible or may require substantial funds and time.
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No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued,
which contain claims covering our products, technology or methods. Because of the substantial number of patents issued and patent applications filed in our field, we believe there is a risk that other third parties may allege they have patent rights
encompassing our products, technology or methods.
Risks Related to Our Finances and Capital Requirements
If we are unable to comply with the minimum requirements for listing on the Nasdaq Capital Market, we may be delisted from the
Nasdaq Capital Market, which would likely cause the liquidity and market price of our common stock to decline.
Our
stock is listed on the Nasdaq Capital Market. In order to continue to be listed on the Nasdaq Capital Market, we must meet specific quantitative standards, including maintaining a minimum bid price of $1.00 for our common stock, a public float of
$1.0 million, and either $2.5 million in stockholders equity or a market capitalization of $35 million. On December 13, 2011, we received a letter from the Listing Qualifications Department of Nasdaq informing us that because the closing bid
price for our common stock had been below $1.00 for 30 consecutive trading days, we did not comply with the minimum closing bid price requirement for continued listing on the Nasdaq Capital Market.
In June 2012, we received a second letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that we had
been granted an additional 180-day compliance period, or until December 10, 2012, to regain compliance with the $1.00 per share minimum closing bid price requirement under Nasdaq Marketplace Rule 5550(a)(2). Nasdaqs determination was
based on us meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and our written
notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
On October 5, 2012, our stockholders voted to approve an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of our outstanding common stock at an
exchange ratio of 1-for-8, and a decrease in the number of authorized shares of our common stock to 25,000,000 shares, subject to the authority of our Board of Directors to abandon such amendment. On October 10, 2012, our Board of Directors
authorized such amendment, and we filed a Certificate of Amendment to effect such amendment with the Secretary of State of the State of Delaware on October 11, 2012. The reverse stock split became effective at the close of trading on the Nasdaq
Stock Market, or Nasdaq, on October 11, 2012, and our common stock began trading on a post-split basis beginning on October 12, 2012. On October 26, 2012, we received notice from Nasdaq indicating that because we had maintained a closing
bid price of our common stock of at least $1.00 per share for a minimum of 10 consecutive business days, we had regained compliance with Nasdaq Marketplace Rule 5550(a)(2).
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SOMAXON PHARMACEUTICALS, INC.
If we were to be delisted from Nasdaq, trading, if any, in our shares may continue to be
conducted on the Over-the-Counter Bulletin Board or in a non-Nasdaq over-the-counter market, such as the pink sheets. Delisting of our shares would result in limited release of the market price of those shares and limited analyst
coverage and could restrict investors interest in our securities. Also, a delisting could have a material adverse effect on the trading market and prices for our shares and our ability to issue additional securities or to secure additional
financing. In addition, if our shares were not listed and the trading price of our shares was less than $5.00 per share, our shares could be subject to Rule 15g-9 under the Exchange Act which, among other things, requires that broker/dealers satisfy
special sales practice requirements, including making individualized written suitability determinations and receiving a purchasers written consent prior to any transaction. In such case, our securities could also be deemed to be a penny
stock under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in those shares, including the delivery of a disclosure schedule explaining the nature and risks of
the penny stock market. Such requirements could severely limit the liquidity of our securities and our ability to raise additional capital in an already challenging capital market.
In connection with the reporting of our financial condition and results of operations, we are required to make estimates and
judgments which involve uncertainties, and any significant differences between our estimates and actual results could have an adverse impact on our financial position, results of operations and cash flows.
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. In particular, as part of our revenue recognition policy, our estimates of product returns, rebates and chargebacks require our most subjective and complex judgment due to the
need to make estimates about matters that are inherently uncertain. Any significant differences between our actual results and our estimates under different assumptions or conditions could negatively impact our financial position, results of
operations and cash flows.
Capital raising activities, such as issuing securities, incurring debt, assigning
receivables or royalty rights or entering into collaborations or other strategic transactions, may cause dilution to existing stockholders or a reduction in our stock price, restrict our operations or require us to relinquish proprietary rights and
may be limited by applicable laws and regulations.
Based on our recurring losses, negative cash flows from operations
and working capital levels, we will need to raise substantial additional funds. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of
operations will be materially and adversely affected. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2011 contains an explanatory paragraph stating that our recurring
losses raise substantial doubt about our ability to continue as a going concern.
Because we will need to raise additional
capital to fund our business, among other things, we may conduct substantial equity offerings. For example, on July 24, 2012, we sold to institutional investors an aggregate of approximately 1.2 million shares of our common stock and
warrants to purchase up to approximately 0.6 million additional shares of our common stock at a combined purchase price of $2.56 per share and per warrant. The total gross proceeds from the offering were approximately $3.0 million, before
deducting selling commissions and expenses. In addition, in August 2011 we entered into the sales agreement with Citadel pursuant to which we agreed to sell, at our option, up to an aggregate of $30.0 million in shares of our common stock through
Citadel, as sales agent, of which we have sold $0.8 million to date. Sales of the common stock made pursuant to the sales agreement, if any, will be made on Nasdaq, under our currently-effective Registration Statements on Form S-3 by means of
ordinary brokers transactions at then-prevailing market prices. Additionally, under the terms of the sales agreement, we may also sell shares of our common stock through Citadel, on Nasdaq or otherwise, at negotiated prices or at prices
related to the prevailing market price. However, there can be no assurance that we can or will consummate such sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate.
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SOMAXON PHARMACEUTICALS, INC.
We will not be able to make sales of our common stock pursuant to the sales agreement
unless certain conditions are met, which include the accuracy of representations and warranties made to Citadel under the sales agreement; compliance with laws; and the continued listing of our stock on Nasdaq.
In December 2011, we received a letter from the Listing Qualifications Department of Nasdaq, informing us that because the closing bid
price of our common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, we did not comply with the minimum closing bid price requirement for continued listing on the Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2).
In June 2012, we received a second letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that we had been granted an additional 180-day compliance period, or until December 10, 2012, to regain compliance with
the $1.00 per share minimum closing bid price requirement under Nasdaq Marketplace Rule 5550(a)(2). Nasdaqs determination was based on us meeting the continued listing requirement for market value of publicly held shares and all other
applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse
stock split, if necessary.
On October 5, 2012, our stockholders voted to approve an amendment to our Amended and
Restated Certificate of Incorporation to effect a reverse stock split of our outstanding common stock at an exchange ratio of 1-for-8, and a decrease in the number of authorized shares of our common stock to 25,000,000 shares, subject to the
authority of our Board of Directors to abandon such amendment. On October 10, 2012, our Board of Directors authorized such amendment, and we filed a Certificate of Amendment to effect such amendment with the Secretary of State of the State of
Delaware on October 11, 2012. The reverse stock split became effective at the close of trading on the Nasdaq Stock Market, or Nasdaq, on October 11, 2012, and our common stock began trading on a post-split basis beginning on
October 12, 2012. On October 26, 2012, we received notice from Nasdaq indicating that because we had maintained a closing bid price of our common stock of at least $1.00 per share for a minimum of 10 consecutive business days, we had regained
compliance with Nasdaq Marketplace Rule 5550(a)(2).
In addition, the rules and regulations of the SEC or other regulatory
agencies may restrict our ability to undertake certain types of financing activities, including sales under the sales agreement, or may affect the timing of and the amounts we can raise by undertaking such activities. For example, under current SEC
regulations, because the aggregate market value of our public float, is less than $75 million, the amount that we can raise through primary public offerings of securities in any twelve-month period using one or more registration statements on Form
S-3 is limited to an aggregate of one-third of our public float. Our July 2012 offering of stock and warrants was a primary offering using one of our effective shelf registration statements on Form S-3 and was subject to this limitation.
Citadel or we are permitted to terminate the sales agreement at any time. Sales of shares pursuant to the sales agreement will have a
dilutive effective on the holdings of our existing stockholders, and may result in downward pressure on the price of our common stock.
To the extent that we raise any required additional capital by issuing equity securities, our existing stockholders ownership will be diluted. Any such dilution of the holdings of our current
stockholders may result in downward pressure on the price of our common stock.
Any debt, receivables or royalty financing we
enter into may involve covenants that restrict our operations or conditions that require repayment.
Equity financing, debt
financing, receivables assignments, royalty interest assignments and other types of financing are often coupled with an additional equity component, such as warrants to purchase stock. To the extent that any of our outstanding warrants or additional
warrants that we may issue in the future, are exercised by their holders, dilution of our existing stockholders ownership interests will result.
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SOMAXON PHARMACEUTICALS, INC.
In December 2011 we hired Stifel Nicolaus Weisel as a strategic advisor to assist us in
identifying and evaluating strategies to maximize stockholder value by leveraging our rights in Silenor. The exploration of strategic alternatives may not result in any agreement or transaction and, if completed, any agreement or transaction may not
be successful or on attractive terms. The inability to enter into a strategic transaction, or a strategic transaction that is not successful or on attractive terms, could accelerate our needs for cash and make securing funding on reasonable terms
more difficult. In addition, if we raise additional funds through collaborations or other strategic transactions, it may be necessary to relinquish potentially valuable rights to our products, potential products or proprietary technologies, or grant
licenses on terms that are not favorable to us.
We may not be able to sell shares of our common stock under our equity
sales agreement with Citadel at times, prices or quantities that we desire and if such sales do occur, they may result in dilution to our existing stockholders.
In August 2011, we entered into the sales agreement with Citadel. Under the terms of the sales agreement, Citadel will use its commercially reasonable efforts to sell shares of our common stock designated
by us. However, there can be no assurance that we can or will consummate such sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate. Citadel or we are permitted to terminate the sales agreement at
any time.
We will not be able to make sales of our common stock pursuant to the sales agreement unless certain conditions are
met, which include the accuracy of representations and warranties made to Citadel under the sales agreement; compliance with laws; and the continued listing of our stock on Nasdaq.
In December 2011, we received a letter from the Listing Qualifications Department of Nasdaq informing us that because the closing bid
price of our common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, we did not comply with the minimum closing bid price requirement for continued listing on the Nasdaq Capital Market under Nasdaq Marketplace Rule 5550(a)(2).
In June 2012, we received a second letter from the Listing Qualifications Department of Nasdaq notifying us that we had been granted an additional 180-day compliance period, or until December 10, 2012, to regain compliance with the $1.00 per
share minimum closing bid price requirement under Nasdaq Marketplace Rule 5550(a)(2). Nasdaqs determination was based on us meeting the continued listing requirement for market value of publicly held shares and all other applicable
requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if
necessary.
On October 5, 2012, our stockholders voted to approve an amendment to our Amended and Restated Certificate of
Incorporation to effect a reverse stock split of our outstanding common stock at an exchange ratio of 1-for-8, and a decrease in the number of authorized shares of our common stock to 25,000,000 shares, subject to the authority of our Board of
Directors to abandon such amendment. On October 10, 2012, our Board of Directors authorized such amendment, and we filed a Certificate of Amendment to effect such amendment with the Secretary of State of the State of Delaware on
October 11, 2012. The reverse stock split became effective at the close of trading on the Nasdaq Stock Market, or Nasdaq, on October 11, 2012, and our common stock began trading on a post-split basis beginning on October 12, 2012. On
October 26, 2012, we received notice from Nasdaq indicating that because we had maintained a closing bid price of our common stock of at least $1.00 per share for a minimum of 10 consecutive business days, we had regained compliance with Nasdaq
Marketplace Rule 5550(a)(2).
In addition, the rules and regulations of the SEC or other regulatory agencies may restrict our
ability to make sales under the sales agreement, or may affect the timing of and the amounts we can raise by making such sales. For example, under current SEC regulations, because the aggregate market value of our common stock held by non-affiliates
(our public float), is less than $75 million, the amount that we can raise through primary public offerings of securities in any twelve-month period using one or more registration statements on Form S-3 is limited to an aggregate of
one-third of our public float.
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Should we sell shares pursuant to the sales agreement, it will have a dilutive effective
on the holdings of our existing stockholders, and may result in downward pressure on the price of our common stock. If we sell shares under the sales agreement at a time when our share price is decreasing, we will need to issue more shares to raise
the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.
We have never been profitable and we may not be able to generate revenues sufficient to achieve profitability.
We only began generating revenues from the commercialization of Silenor late in the third quarter of 2010, we have not been profitable
since inception, and it is possible that we will not achieve profitability. We incurred net losses of $8.8 million for the nine months ended September 30, 2012, and have accumulated losses totaling $284.9 million since inception. We expect to
continue to incur significant operating losses and capital expenditures. As a result, we will need to generate sufficient revenues relative to our operating expenses to achieve and maintain profitability. We cannot assure you that we will achieve
significant revenues, or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues are not
sufficient or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially and adversely affected. If we are unable to maintain sufficient financial
resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as
a going concern, it is likely that investors will lose all or a part of their investment.
Our quarterly operating
results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. The
revenues we generate, if any, and our operating results will be affected by numerous factors, including:
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the scope and effectiveness of commercial activities relating to Silenor or any other product that we may commercialize, alone or with a collaborator;
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commercial activities of our competitors;
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our entering into collaborations;
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developments in our current intellectual property lawsuits with Actavis and Classen;
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any other intellectual property infringement lawsuits in which we may become involved;
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our addition or termination of development programs or funding support;
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variations in the level of expenses related to development of any product candidate that we develop;
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non-cash charges which we incur, including relating to share-based compensation; and
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regulatory developments.
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If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in
our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future
performance.
Risks Relating to Securities Markets and Investment in Our Stock
There may not be a viable public market for our common stock, and market volatility may affect our stock price and the value of your
investment.
Our common stock had not been publicly traded prior to our initial public offering, which was completed in
December 2005, and an active trading market may not develop or be sustained. We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and
finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Therefore, investors will have to rely on appreciation in our stock price and a liquid trading market in order
to achieve a gain on their investment. The market prices for securities of biotechnology and pharmaceutical
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SOMAXON PHARMACEUTICALS, INC.
companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of
particular companies. Since our initial public offering on December 15, 2005 through September 30, 2012, the trading prices for our common stock have ranged from a high of $169.92 to a low of $1.44.
The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control,
including:
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variations in our quarterly operating results;
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events affecting our existing license agreements, and any future collaborations or other strategic transactions, commercial agreements and
grants;
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announcements of new products or technologies, commercial relationships or other events by us or our competitors;
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developments in our current intellectual property lawsuits with Actavis and Classen;
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any other intellectual property infringement lawsuits in which we may become involved;
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regulatory approval or other changes in the regulatory status of our products or product candidates;
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decreased coverage and changes in securities analysts estimates of our financial performance;
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our ability to maintain our listing on Nasdaq;
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regulatory developments in the United States and foreign countries;
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fluctuations in stock market prices and trading volumes of similar companies;
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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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announcements concerning financing activities;
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additions or departures of key personnel; and
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discussion of us or our stock price by the financial and scientific press and in online investor communities.
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The realization of any of the risks described in these Risk Factors could have a dramatic and material adverse impact on the
market price of our common stock. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility or declines in market price. Any such litigation brought against us could
result in substantial costs and a diversion of managements attention and resources, which could hurt our business, operating results and financial condition.