TESARO, Inc.
TESARO, Inc. (Form: 10-K, Received: 02/28/2017 18:26:08)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2016

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to     

 

Commission file number 001-35587

 

TESARO, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware

 

27-2249687

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

 

 

 

 

 

 

1000 Winter Street

 

 

Waltham, Massachusetts

 

02451

(Address of Principal Executive Offices)

 

(Zip Code)

 

(339) 970-0900

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001 per share, NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☒    No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller Reporting Company ☐

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of the registrant’s voting stock held by non-affiliates as of June 30, 2016 was approximately $2,451,342,540 based on the closing price of $84.05 of the Common Stock of the registrant as reported on the NASDAQ Global Select Market on such date.  As of February 24, 2017, there were 53,626,219 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 


 

Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant’s Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders, which is expected to be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

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TESARO, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2016

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

    

 

    

Page

 

PART I  

 

 

 

 

 

ITEM 1.  

 

BUSINESS

 

 

ITEM 1A.  

 

RISK FACTORS

 

34 

 

ITEM 1B.  

 

UNRESOLVED STAFF COMMENTS

 

68 

 

ITEM 2.  

 

PROPERTIES

 

68 

 

ITEM 3.  

 

LEGAL PROCEEDINGS

 

68 

 

ITEM 4.  

 

MINE SAFETY DISCLOSURES

 

68 

 

 

 

 

 

 

 

PART II  

 

 

 

 

 

ITEM 5.  

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

69 

 

ITEM 6.  

 

SELECTED FINANCIAL DATA

 

71 

 

ITEM 7.  

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

73 

 

ITEM 7A.  

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

91 

 

ITEM 8.  

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

92 

 

ITEM 9.  

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

127 

 

ITEM 9A.  

 

CONTROLS AND PROCEDURES

 

127 

 

ITEM 9B.  

 

OTHER INFORMATION

 

130 

 

 

 

 

 

 

 

PART III  

 

 

 

 

 

ITEM 10.  

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

131 

 

ITEM 11.  

 

EXECUTIVE COMPENSATION

 

131 

 

ITEM 12.  

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

131 

 

ITEM 13.  

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

132 

 

ITEM 14.  

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

132 

 

 

 

 

 

 

 

PART IV  

 

 

 

 

 

ITEM 15.  

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

133 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

134 

 

 

 

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PART I

 

Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed herein may be deemed to be forward-looking statements that involve risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Annual Report on Form 10-K, words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.

 

Examples of forward looking statements contained in this report include statements regarding the following: our commercialization plans for rolapitant, including the progress of the commercial launch of VARUBI ® (the oral formulation) in the U.S., and the potential timing of launches of the intravenous, or IV, formulation in the U.S. and of the oral formulation in Europe; our commercialization plans for niraparib, including the potential timing of launches in the U.S. and in Europe; our intent to in-license or acquire additional product candidates; our expectations regarding product revenues and license, collaboration and other revenues; our expectation that research and development and selling, general and administrative expenses will increase in the future; our expectations regarding the timing and design of our development plans, the timing of regulatory filings, and the timing of data from clinical trials, with respect to each of our rolapitant IV, niraparib, TSR-042, TSR-022 and TSR-033 programs; our expected gross-to-net adjustment range for VARUBI; our expectations regarding our discovery and development plans for immunotherapy antibodies, including the expected timing; our anticipated milestone and royalty payment obligations; our expectation that we will continue to incur significant expenses, including increases in our selling, general and administrative expenses, and that our operating losses and negative cash flows may continue, and possibly increase, for the foreseeable future; the expected impact of recent accounting pronouncements and guidance on our financial statements; and our needs for additional capital and the forecast of the period of time through which our financial resources will be adequate to support our operations.

 

Forward-looking statements are not guarantees of future performance.  Actual future results, performance, achievements or the timing of certain events may differ significantly from those expressed or implied by the forward-looking statements.  Risks and uncertainties involved in the forward-looking statements include, among others, the uncertainties inherent in the development or launch of any new pharmaceutical product, the execution and completion of clinical trials, the timing and availability of data from clinical trials, uncertainties regarding ongoing discussions with and actions by regulatory authorities, patient accrual rates for clinical trials, manufacturing and supply risks, risks related to intellectual property, risks related to competition, and other matters that could affect the timing of data, the potential regulatory approval or the commercial availability or viability of the Company’s product candidates or the success of any product.  Forward-looking statements contained in this Annual Report on Form 10-K should be considered in light of these factors and the factors discussed elsewhere in this Annual Report on Form 10-K, including under the heading “Risk Factors”.  You should read carefully the factors described in the “Risk Factors” section to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.  You are also advised to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our website.

 

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.  We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

TESARO, the TESARO logo and VARUBI are trademarks of TESARO, Inc. in the United States and in other selected countries.  All other brand names or trademarks appearing in this report are the property of their respective holders.  Unless the context requires otherwise, references in this report to “TESARO”, the “Company,” “we,” “us,” and “our” refer to TESARO, Inc.

 

ITEM 1. BUSINES

 

Overview

 

We are an oncology-focused biopharmaceutical company dedicated to improving the lives of cancer patients.  We were founded in March 2010 and have in-licensed and are developing oncology-related product candidates, including rolapitant, niraparib, and the product candidates under our immuno-oncology platform.

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On September 1, 2015, our first commercial product, VARUBI®, which is the oral formulation of rolapitant, was approved by the U.S. Food and Drug Administration, or FDA, for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  We commenced shipments of VARUBI to distributors during the fourth quarter of 2015.

 

A summary description of our current products and product candidates is as follows:

 

·

Rolapitant is a potent and long-acting neurokinin-1, or NK-1, receptor antagonist for the prevention of chemotherapy induced nausea and vomiting, or CINV.  The oral form of rolapitant, VARUBI, is approved for commercialization in the United States, and we are developing an IV formulation of rolapitant.  We submitted a new drug application, or NDA, for rolapitant IV to the FDA in March 2016.  In January 2017, the FDA issued a Complete Response Letter requesting additional information regarding the in vitro release method utilized to characterize the drug product and demonstrate comparability of drug product produced by our two proposed commercial manufacturers of rolapitant IV that were included in the NDA.  We will need to provide the additional requested information to the FDA in the form of a resubmission of the NDA, which the FDA will need to deem acceptable, in order for the NDA to be approved and for us to be allowed to market and sell rolapitant IV in the U.S.  We also submitted a Marketing Authorization Application, or MAA, for oral rolapitant to the European Medicines Agency, or EMA, in March 2016.  In February 2017, the EMA’s Committee for Medicinal Products for Human Use, or CHMP, rendered a positive opinion for our MAA for oral rolapitant, for the prevention of delayed nausea and vomiting associated with highly and moderately emetogenic chemotherapy in adults.

 

·

Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor.  We have several ongoing clinical trials evaluating niraparib for the treatment of ovarian or breast cancers, and we expect to initiate dosing in further clinical trials of niraparib during 2017.  We are also collaborating with various other organizations to evaluate niraparib in combination with other therapeutics for the treatment of various cancers.  Based on research related to PARP inhibitors generally, we believe niraparib may also be active in the treatment of several other tumor types.  In June 2016, we announced that the Phase 3 NOVA trial of niraparib successfully achieved its primary endpoint, demonstrating that niraparib significantly prolonged progression-free survival, or PFS, compared to control among patients with recurrent ovarian cancer.  We submitted an MAA for niraparib in October 2016, which the EMA has accepted for review.  We also submitted an NDA for niraparib in October 2016, for which the FDA has granted a priority review designation with a target Prescription Drug User Fee Act, or PDUFA, action date of June 30, 2017.

 

·

Immuno-Oncology Platform :  In March 2014, we added immuno-oncology programs to our portfolio of product candidates by entering into a collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, for the discovery and development of antibodies for several immuno-oncology targets.  We initiated a Phase 1, dose escalation study in March 2016 for our first immuno-oncology antibody, TSR-042, which targets PD-1.  In July 2016, we commenced the dosing of the first patient in a Phase 1, dose escalation study for our second immuno-oncology antibody, TSR-022, which targets TIM-3.  We have commenced pre-clinical research for our antibody candidate targeting LAG-3, TSR-033, and expect to initiate a Phase 1 study in 2017.  As part of our collaboration with AnaptysBio, we received exclusive rights to monospecific antibody product candidates targeting PD-1, TIM-3, and LAG-3, and certain bi-specific antibody product candidates. In addition, we are evaluating our immuno-oncology anti-tumor agents, including TSR-042, in preclinical combination studies with niraparib and other anti-tumor agents.

 

In February 2016, we entered into an exclusive collaboration with the Institute for Applied Cancer Science at The University of Texas MD Anderson Cancer Center, or MDACC, to discover and develop small molecule product candidates against undisclosed immuno-oncology targets.  Under the terms of the agreement, we will receive exclusive worldwide rights to develop and commercialize any small molecule product candidates that result from this collaboration.  MDACC will be responsible for conducting research activities aimed at identifying clinical candidates with defined characteristics targeting certain immuno-oncology targets.  We will fund research, development, and commercialization expenses for this collaboration.

 

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In addition to potential candidates arising from our agreements with AnaptysBio and MDACC, we intend to continue to leverage the experience and competencies of our senior management team to identify, acquire, develop and commercialize cancer therapeutics, including those that are potentially safer and more effective than existing treatments.

 

Upon successful development and regulatory approval of any of our product candidates, we intend to pursue commercialization of them in key product markets.  At this time, we intend to focus on commercializing our products directly in North America and Europe, and in partnership with established companies in other key markets.  In addition to developing commercial capabilities within these geographic areas, we intend to establish a network of licensees and distributors for our products in other geographic areas.

 

Since our founding, we have relied on private and public financing sources to fund our operations.  As of December 31, 2016, our principal source of liquidity was cash and cash equivalents, which totaled $785.9 million.  During the year ended December 31, 2016, we raised a total of $838.1 million in net cash proceeds from private placements of common stock and follow-on public offerings of common stock.

 

Our common stock trades on the NASDAQ Global Select Market, or NASDAQ, under the trading symbol “TSRO.”

 

Our Strategy

 

Our strategy is to leverage the experience and competencies of our management team to identify, acquire and develop promising drug candidates and to commercialize cancer therapeutics that are potentially safer and more effective than existing treatments.

 

The key components of our strategy are:

 

      Continue the Clinical Development of and Successfully Commercialize Niraparib for the Treatment of Cancers that are Susceptible to PARP Inhibition. We have submitted an NDA and an MAA for niraparib for the treatment of patients with recurrent ovarian cancer, based on the results of the NOVA Phase 3 clinical study.  The PDUFA action date is June 30, 2017.  We have initiated commercial preparations in support of the potential launch of niraparib, pending regulatory approvals that we anticipate in the U.S. in the first half of 2017 and in Europe in the second half of 2017.  In April 2015, we commenced the QUADRA Phase 2 clinical trial evaluating niraparib as a therapy for patients with ovarian cancer who have received three or four regimens of therapy.  We also commenced the PRIMA Phase 3 clinical trial of niraparib as a maintenance treatment in ovarian cancer patients following response to first-line platinum-based chemotherapy, in August 2016.  We are also evaluating niraparib in breast cancer patients with germline BRCA mutations in the BRAVO Phase 3 clinical trial, which we commenced in April 2014.  In May 2015, we entered into a research agreement with Merck Sharp & Dohme B.V., a subsidiary of Merck & Co., Inc., or Merck, to perform a trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® in patients with triple negative breast cancer and patients with ovarian cancer.  This trial, referred to as TOPACIO, initiated dosing in April 2016.  We also are collaborating with the Nordic Society of Gynecologic Oncology, or NSGO (in collaboration with the European Network for Gynaecological Oncological Trial groups, or ENGOT) in their trial evaluating niraparib plus bevacizumab in ovarian cancer patients in a Phase 1/2 trial referred to as the AVANOVA trial.  Based on research related to PARP inhibitors generally, we believe niraparib also may be active in the treatment of several other tumor types and we intend to initiate dosing in further clinical trials during 2017.  As further described below, we are also evaluating niraparib in preclinical pharmacology studies in combination with our immuno-oncology anti-tumor agents.

 

       Successfully Commercialize Rolapitant for the Prevention of CINV.  On September 1, 2015, our first commercial product, VARUBI, was approved by the FDA, for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy.  We launched VARUBI in November 2015.  Our rolapitant program also includes the development of an IV formulation, for which we submitted an NDA to the FDA in March 2016.  We also submitted an MAA for oral rolapitant to the EMA in March 2016.  Pending regulatory approvals, we intend to launch rolapitant IV in the U.S., and oral rolapitant in Europe, in the second half of 2017.  We intend to establish rolapitant as part of the standard of care for the prevention of CINV in patients who, consistent with established treatment guidelines, could benefit from an NK-1 receptor antagonist, in addition to treatment with a 5-HT3 receptor antagonist plus a corticosteroid.

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       Identify and Advance Potential Antibody Product Candidates Under Our Collaboration and Exclusive License Agreement with AnaptysBio.  Under our collaboration and exclusive license agreement with AnaptysBio, we received exclusive rights to products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of antibodies targeting certain immune checkpoint proteins.  Specifically, we received exclusive rights to monospecific antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates.  We initiated dosing in a Phase 1 clinical trial for TSR-042, our lead anti-PD-1 compound, in March 2016.  We initiated dosing in a Phase 1 clinical trial for TSR-022, our lead anti-TIM-3 compound, in July 2016.  We commenced pre-clinical research for TSR-033, our lead anti-LAG-3 compound, in September 2016.  We have also selected a bi-specific antibody to PD-1 and LAG-3 as a potential lead clinical candidate.  In addition, we are evaluating our immuno-oncology anti-tumor agents, including TSR-042, in preclinical combination studies with niraparib and other anti-tumor agents.  We believe that these therapeutic antibodies could form the basis of a strategic platform that will potentially enable us to develop novel monotherapy and combination-based approaches with immuno-oncology, including combinations of immuno-oncology agents and other anti-cancer agents in a variety of indications.  Specifically, we believe this platform will enable us to initiate clinical development in new tumor indications not addressed with our current product candidates, and to study combination approaches in the clinic, potentially both with our existing product candidates and new candidates that we either in-license or access through collaborative transactions with others.

 

       In-license or Acquire Additional Product Candidates to Create a Balanced Product Portfolio.  We intend to in-license or acquire additional product candidates across various stages of development.  We do not have, nor do we intend to build, our own drug discovery capabilities.  We intend to focus on product candidates that we believe are differentiated from existing cancer therapeutics and that have well-defined, and potentially expeditious, clinical and regulatory pathways.  We believe that our ability to execute on this strategy is due in part to our founding senior management team’s experience with in-licensing and acquiring cancer therapeutics and oncology supportive care products on advantageous terms, and their prior success in developing and obtaining regulatory approval for these compounds and developing markets for and commercializing these products.  Our objective is to build a portfolio of cancer therapeutics that is balanced by stage of development, resource requirements and development risk. 

 

       Build Global Capabilities to Maximize the Value of Our Product Candidates.  We have obtained exclusive worldwide rights to all of our current product candidates (rolapitant, niraparib, and any future product candidates that may result from our collaborations with AnaptysBio and MDACC).  We intend to develop and commercialize our product candidates globally, and potentially in collaboration with other companies.  We will also seek to acquire global rights for product candidates we acquire or in-license in the future.

 

Although our strategy focuses on in-licensing, developing and commercializing cancer therapeutics, we also may collaborate with other companies with regard to selected indications for our in-licensed product candidates.  For example, we have entered into a collaboration and license agreement with Janssen Biotech, Inc., or Janssen, under which we granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide (except Japan).  We may also collaborate with other companies regarding the rights to certain product candidates for specific geographies, such as with Jiangsu Hengrui Medicine Co., Ltd., or Hengrui, and Zai Lab (Shanghai) Co., Ltd., or Zai Lab.

 

Overview of the Market for Cancer Therapeutics and Oncology Supportive Care Products

 

Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells.  In January 2017, the American Cancer Society projected that there will be an estimated 1,688,780 new cancer cases diagnosed and 600,920 cancer deaths in the United States in 2017.  Current treatments for cancer include surgery, radiation therapy, chemotherapy, hormone therapy, targeted therapy and immunotherapy.  The IMS Institute for Healthcare Informatics reported in 2016 that total global spending on oncology medicines, including therapeutic treatments and supportive care, reached the $107 billion threshold in 2015.

 

Many marketed products and product candidates for treating cancer patients that are currently being developed by biopharmaceutical companies are cytotoxic chemotherapies that exert their anti-tumor effect on cancer generally through nonspecific damage to cellular components with the goal of causing cancer cell malfunction and cell death.  Other products and product candidates alter cell metabolism or internal repair mechanisms leading to the demise of the cancer cell.  More recently, targeted anti-cancer agents have been designed by scientists to inhibit the action of specific molecules within cancer cells that

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are driving the aberrant growth responsible for tumor development.  Some of these targeted agents are developed in conjunction with companion diagnostic tests that are used by clinicians to determine if a patient’s cancerous tumor contains these specific molecules and is, therefore, more likely to respond to a particular targeted therapy.  Recent advances in cancer immunology have led to the development and availability of effective immunotherapies for the treatment of certain cancers.  For our current cancer therapeutics, we believe we have acquired product candidates where diagnostics or specific clinical criteria will allow us to identify cancer patients who will be more likely to respond to the therapeutic.  In the future, our preference will be to in-license or acquire cancer therapeutics that can be developed in a targeted patient population enriched for those who may respond to the drug candidate.  We expect that the characteristics of these compounds will permit us to design clinical trials that, if successful, may allow us to achieve clinical outcomes that will support regulatory approval for targeted patient groups and reimbursement by healthcare payors due to attractive risk/benefit metrics in the targeted population.

 

All of these approaches may be associated with various side effects experienced by cancer patients that result from the treatments having an adverse impact on normal functioning cells and organ systems.  Some of the more common side effects of cancer therapy include nausea, vomiting or emesis, infections, fatigue and diarrhea.  Supportive care products are frequently prescribed or administered to cancer patients to prevent or treat these side effects thereby allowing the patients to continue to receive potentially life prolonging cancer therapies.

 

Treatment centers (such as hospitals and community cancer centers) and the healthcare professionals who treat cancer patients (physicians, nurse practitioners, physician assistants, nurses and pharmacists) utilize various combinations of cancer therapeutics and oncology supportive care products to extend and improve the quality of life of these patients.  Our strategy is aligned with these trends in cancer care; that is, to acquire, in-license and develop product candidates and to commercialize products that selectively treat cancers and those that address the side effects from such treatments.

 

Our Current Marketed Product

 

VARUBI is a substance P/NK-1 receptor antagonist marketed in oral formulation in the United States for use in combination with other antiemetic agents in adults for the prevention of delayed (24 to 120 hours after chemotherapy administration) nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  VARUBI received FDA approval on September 1, 2015, and we commenced shipments of VARUBI in November 2015.  The National Comprehensive Cancer Network, or NCCN®, has added VARUBI to the NCCN Clinical Practice Guidelines in Oncology, or NCCN Guidelines®, Antiemesis Version 2.2015 as a recommended option, in combination with other antiemetic agents, for patients receiving both high emetic risk intravenous chemotherapy, or HEC, and moderate emetic risk intravenous chemotherapy, or MEC.  Category 1, the highest level category of evidence and consensus, was granted to VARUBI for both HEC and MEC.  VARUBI is available to patients receiving emetogenic chemotherapy in hospitals and community cancer centers.

 

We obtained the exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant from OPKO Health, Inc., or OPKO, in December 2010.  OPKO had acquired certain NK-1 receptor related assets, including rolapitant, in 2010 from Schering-Plough Corporation, or Schering-Plough, as part of a U.S. Federal Trade Commission, or FTC, requirement to divest certain assets in connection with Schering-Plough’s combination with Merck.  We are also developing an IV formulation of rolapitant, for which we submitted an NDA to the FDA in March 2016.  In January 2017, the FDA issued us a Complete Response Letter with respect to the NDA.  In the Complete Response Letter, the FDA requested additional information regarding the in vitro release method utilized to characterize the drug product and demonstrate comparability of drug product produced at our two proposed commercial manufacturers for rolapitant IV that were included in the NDA.  We will need to provide the additional requested information to the FDA in the form of a resubmission of the NDA, which the FDA will need to deem acceptable, in order for the NDA to be approved and for us to be allowed to market and sell rolapitant IV in the U.S. 

 

Market research suggests physicians are not currently utilizing NK-1 receptor antagonists in many situations where practice guidelines recommend their use.  We believe the U.S. market could expand based upon our sales and marketing activities intended to heighten awareness of the underutilization of NK-1 receptor antagonists for accepted uses, as well as the commercial activities of other companies marketing NK-1 receptor antagonists.  Overall trends in the market, growing awareness of supportive care issues and the implementation of guidelines for patient care, including the prevention of CINV, that are developed and published by oncology organizations, may also lead to greater use of NK-1 receptor antagonists.

 

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Our Product Candidates

 

Our in-licensed product candidates and our immuno-oncology platform are consistent with our strategy to develop and commercialize cancer therapeutics and oncology supportive care products.  The following table summarizes the status of these product candidates.

 

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Rolapitant—Intravenous Formulation

 

We are developing a single dose IV formulation of rolapitant to address what we believe is the market need for this dosage form.  We believe this formulation will provide physicians with an additional route of administering rolapitant, while also alleviating certain concerns associated with payor pre-approval, logistics and pharmacy availability that are sometimes associated with oral formulations of drugs utilized by cancer patients.  We selected a single intravenous dose of 185mg for development and successfully completed a study comparing the exposure of rolapitant IV and oral rolapitant, as well as a clinical study evaluating the safety of rolapitant IV to support an NDA submission.  We submitted an NDA to the FDA in March 2016 for the IV formulation of rolapitant, which relies heavily on, and references data in, our NDA submission for oral rolapitant.  As described elsewhere in this Annual Report on Form 10-K, we received a Complete Response Letter in January 2017.

 

Niraparib—Poly (ADP-ribose) Polymerase (PARP) Inhibitor

 

Overview

 

Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor.  Niraparib has demonstrated promising results in clinical trials in advanced cancer patients.  In a Phase 1 trial, a maximum tolerated dose of 300mg of niraparib was determined, and anti-tumor activity in BRCA-deficient cancers was observed.  BRCA1 and BRCA2 belong to a class of human genes, the mutation of which has been linked to certain types of cancers, including breast, ovarian and lung.  PARP is a family of proteins involved in many functions in a cell, including DNA repair, gene expression, cell cycle control, intracellular trafficking and energy metabolism.  Results to date for clinical trials of PARP inhibitors indicate anti-cancer activity, which is particularly noteworthy in patients with germline BRCA mutations.  In addition, published scientific literature indicates that patients with platinum sensitive high-grade serous ovarian cancer who do not have germline BRCA1 or BRCA2 mutations may also experience clinical benefit from treatment with a PARP inhibitor.

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Background on PARP Inhibitors

 

One well-studied area of PARP activity relates to DNA repair.  DNA contains genetic instructions used in the development and functioning of most known living organisms.  DNA can be damaged by many types of mutagens, including oxidizing agents, alkylating agents, ultraviolet light and X-rays.  An important property of DNA is that it can replicate, or make copies of itself.  This is critical when cells divide because each new cell needs to have an exact copy of the DNA present in the old cell.  It is also critical to the integrity and survival of cells that DNA damage can be repaired.  Cells have evolved multiple mechanisms to enable such DNA repair, and these mechanisms are complementary to each other, each driving repair of specific types of DNA damage.  If a cell’s DNA damage repair system is overpowered, then the cell is programmed to die.

 

Radiation and certain chemotherapies such as alkylating agents and topoisomerase inhibitors induce significant damage to tumor cells, which results in programmed cell death.  DNA repair mechanisms may reduce the activity of these anti-cancer therapies but, conversely, inhibition of DNA repair processes may enhance the effects of DNA-damaging anti-cancer therapy.  PARP is essential for some DNA repair processes and therefore may be an important target in cancer therapy.  Clinical trial results to date suggest that PARP inhibitors may be effective as a monotherapy in cancer patients with mutations in genes such as BRCA1 and BRCA2.  PARP inhibitors have also been explored in numerous clinical trials as potentiators of chemotherapy, including in combination with temozolomide, cisplatin, carboplatin, gemcitabine and topotecan.

 

Key Characteristics of Niraparib

 

Niraparib is an investigational, orally active and potent PARP inhibitor that we believe has certain desirable characteristics.  Nonclinical and clinical data suggest that niraparib may have advantages as a treatment for certain cancers, including:

 

niraparib concentrates in the tumor to deliver potent inhibition of PARP and demonstrated tumor growth inhibition in tumor models;

 

favorable pharmacokinetic properties in humans;

 

reduction of PARP activity in human subjects;

 

amenable dosage formulation for further clinical and commercial development;

 

clinical activity with once daily oral administration as a monotherapy; and

 

tolerability in a Phase 1 combination trial with full doses of another chemotherapy agent, temozolomide, and a biologically active dose of niraparib.

 

Based upon these key characteristics, as well as the data discussed below, we believe that niraparib has the potential to be effective in patients with several tumor types.

 

Niraparib Clinical Development

 

In October 2016, we presented Phase 3 data from our NOVA trial at the annual congress of the European Society for Medical Oncology.  We have commenced the following clinical trials of niraparib:

 

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NOVA :  The NOVA trial was an international, randomized, double-blind, multi-center trial that assessed the effectiveness of niraparib compared with placebo to delay progression following a platinum containing chemotherapy regimen.  Patients enrolled into one of two independent cohorts based on germline BRCA mutation, or gBRCAmut, status.  Within each cohort, patients were randomized 2:1 to receive niraparib or placebo, and were continuously treated with placebo or 300mg of niraparib until progression.  The primary endpoint of this study was progression free survival, or PFS.  Secondary endpoints included patient-reported outcomes, chemotherapy free interval length, and overall survival.  This trial successfully achieved its primary endpoint in both cohorts, showing that niraparib treatment significantly prolonged PFS compared to control in patients who were gBRCAmut carriers and in patients who were non-gBRCAmut carriers. In addition, within the non-gBRCAmut cohort, niraparib treatment significantly prolonged PFS compared to control for the

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prospectively defined patient population with tumors deficient in homologous recombination as determined by the Myriad Genetics, Inc., or Myriad, myChoice® HRD test. A high proportion of patients in both treatment groups in both cohorts had received three or four prior lines of chemotherapy. The most common treatment-emergent grade 3/4 adverse events in the niraparib arm of the NOVA study were thrombocytopenia, anemia, and neutropenia.

 

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BRAVO :  The first patient was dosed in this trial in April 2014.  The BRAVO trial is an international, randomized, multi-center trial that assesses the effectiveness of niraparib compared with physician’s choice of either eribulin, capecitabine, vinorelbine or gemcitabine to delay progression in metastatic breast cancer patients who have germline BRCA mutations.  The primary endpoint of this trial is progression free survival and the key secondary endpoint of this trial is overall survival.  We expect to report data from this trial in the second half of 2017.

 

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QUADRA :  In March 2015, we commenced a potential registration trial of niraparib for the treatment of patients with ovarian cancer who have received three or four regimens of therapy.  The first patient was dosed in this trial in April 2015.  QUADRA is a single arm, open label study.  Endpoints include objective response rate and duration of response in patients with gBRCA mutations or homologous recombination deficiency, or HRD, tumors. We expect to report data from this trial in the second half of 2017.

 

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PRIMA :  We initiated dosing in a Phase 3 clinical trial of niraparib in the first-line maintenance setting in ovarian cancer patients in August 2016.  This study includes patients who have responded to first-line platinum chemotherapy.  Patients will be randomized 2:1 to receive niraparib or placebo.  The endpoints for this study include progression free survival, progression free survival in subsequent therapy and overall survival and safety.  We expect enrollment in this trial to continue during 2017.

 

We are also collaborating on the following niraparib studies:

 

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AVANOVA : In November 2014, we began collaborating with NSGO (in collaboration with ENGOT) in their trial evaluating niraparib plus bevacizumab in ovarian cancer patients in a Phase 1/2 trial.

 

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TOPACIO : In May 2015, we entered into a research agreement with Merck to perform a Phase 2 trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA in patients with triple negative breast cancer and patients with ovarian cancer.  We initiated dosing in this trial in April 2016.

 

Immuno-Oncology Platform

 

Background on Immuno-Oncology Platform

 

Antibodies to immune checkpoint receptors have demonstrated promise in the treatment of tumors, including metastatic melanoma, renal cell carcinoma and non-small cell lung cancer, or NSCLC.  Although the normal function of immune checkpoint receptors is to maintain immune homeostasis, they are co-opted by certain tumors to evade immune surveillance.  PD-1, TIM-3 and LAG-3 are each checkpoint regulators that modulate the function of the immune system via different mechanisms and, when activated and interacting with their respective ligands, may limit the ability of the immune system to respond effectively to tumors.  By blocking the interaction of PD-1, TIM-3 and LAG-3 with their respective ligands, antibodies targeting these checkpoint regulators aim to restore immune anti-cancer function in patients across a variety of tumor types.  We believe that therapeutic antibodies selected from our collaboration with AnaptysBio could form the basis of a strategic platform that will potentially enable us to develop novel monotherapy and combination-based approaches with immuno-oncology and other anti-cancer agents in a variety of new tumor indications, not addressed with our current product candidates, and to study combination approaches in the clinic, both with our existing product candidates and potentially with new candidates we either in-license or access through collaborative transactions with others.  As further discussed below, antibody candidates from these programs entered clinical trials in 2016.

 

Anti-PD-1 Antibodies

 

Programmed cell death protein 1 (PD-1, CD279) is a well-validated target for tumor immunotherapy.  PD-1 operates as a negative regulator of T-cell function and interacts with two ligands, PD-L1 and PD-L2.  Many tumor types up-regulate PD-L1 on the cell surface as a means of modulating the host immune system and avoiding anti-tumor responses.  Antibodies to

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PD-1 have now been studied in a number of clinical trials in several tumor types.  Anti-tumor responses of long duration have been noted, which may be further promoted through combination therapy with additional immuno-regulatory therapeutics.  These agents are now approved in multiple tumor types including, but not limited to, melanoma, NSCLC, bladder and renal carcinoma.

 

We have selected a lead monospecific antibody for the PD-1 program, TSR-042, to which we have exclusive rights.  We commenced a Phase 1 clinical trial of TSR-042 in March 2016.  In addition, we are evaluating our immuno-oncology anti-tumor agents, including TSR-042, in preclinical combination studies with niraparib and will potentially do so with other anti-tumor agents.

 

Anti-TIM-3 Antibodies

 

T-cell immunoglobulin domain and mucin domain-3 (TIM-3), initially identified on activated Th1 cells, has been shown to be a negative regulator of the immune response.  Blockade of TIM-3 promotes T-cell mediated anti-tumor immunity and has anti-tumor activity in a range of mouse tumor models.  Combinations of TIM-3 blockade with other immunotherapeutic agents such as TSR-042 (our lead anti-PD-1 antibody), anti-CD137 antibodies and others, can be additive or synergistic in increasing anti-tumor effects.  TIM-3 expression has been associated with a number of different tumor types, including melanoma, NSCLC and renal cancer, and additionally, expression of intratumoral TIM-3 has been shown to correlate with poor prognosis across a range of tumor types, including NSCLC, cervical, and gastric cancers.  Blockade of TIM-3 is also of interest in promoting increased immunity to a number of chronic viral diseases.  TIM-3 has also been shown to interact with a number of ligands including galectin-9, phosphatidylserine and HMGB1, although which of these, if any, are relevant in regulation of anti-tumor responses is not clear at present.

 

The aim of the TIM-3 program was to generate human or humanized antibodies to TIM-3 that have functional antagonist activity.  Such activity would be expected to block the negative signaling of TIM-3, enhance T-cell responses, and promote anti-tumor immune responses.  We have exclusive rights to a number of fully-human anti-TIM-3 antibodies with demonstrated functional activity that have been generated by AnaptysBio.  We have selected TSR-022 as our lead anti-TIM-3 candidate for clinical development, and we commenced a Phase 1 clinical trial of TSR-022 in July 2016.

 

Anti-LAG-3 and Bi-Specific Anti-PD-1/LAG-3 Antibodies

 

Lymphocyte-activation gene-3 (LAG-3) is a CD4 related transmembrane protein expressed on activated T-cells and regulatory T-cells.  Following T-cell activation and up-regulation of LAG-3, LAG-3 binds MHC Class II and results in down-regulation of the immune response.  Affinity of LAG-3 for MHC class II is higher than that of CD4, allowing for potent dampening of T-cell activation via direct blocking of the interaction as well as direct signaling.  Blockade of LAG-3 promotes T-cell mediated anti-tumor immunity and has anti-tumor activity in a range of mouse tumor models.  Simultaneous blockade of LAG-3 with PD-1 appears to be synergistic with enhanced anti-tumor effects.

 

The aim of the LAG-3 program was to generate human or humanized antibodies to LAG-3 that have functional antagonist activity.  Such activity would be expected to block the negative signaling of LAG-3 and promote anti-tumor immune responses.  Monospecific anti-LAG-3 antibodies were generated by AnaptysBio and from this effort, we have selected TSR-033 as our lead anti-LAG-3 candidate for clinical development.  We expect to submit an investigational new drug application, or IND, to the FDA for TSR-033 in the first half of 2017.  In addition, we have selected a bi-specific antibody to PD-1 and LAG-3 as a potential lead clinical candidate.

 

Licensing Agreements

 

License for Rolapitant

 

In December 2010, we entered into a license agreement with OPKO to obtain an exclusive, royalty bearing, sublicensable worldwide license, to research, develop, manufacture, market and sell rolapitant.  The license agreement also extends to an additional, backup compound, SCH900978, to which we have the same rights and obligations as rolapitant, but which we are not currently advancing.  Under the OPKO license, we are obligated to use commercially reasonable efforts to conduct all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant.

 

Under the terms of the OPKO license, upon signing of the agreement, we paid OPKO $6.0 million and issued convertible preferred stock then valued at $0.6 million, which has since been converted to common stock.  We are also required

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to make development milestone payments to OPKO of up to an aggregate of $30.0 million, of which we have paid $20.0 million to date, if specified regulatory and initial commercial sales milestones are achieved.  In addition, we are required to make additional milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved.  We are required to pay OPKO tiered royalties on the amount of annual net sales of rolapitant achieved in the United States and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens.  The royalty rate on annual net sales outside of the United States and Europe is slightly above the single digits.  We will pay royalties on rolapitant until the later of the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable and 12 years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis.  If we elect to develop and commercialize rolapitant in Japan through a third-party licensee, we will share equally with OPKO all amounts received by us in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions.

 

The license with OPKO will remain in force until the expiration of the royalty term in each country, unless OPKO has cause to terminate the license earlier for our material breach of the license or bankruptcy.  We have a right to terminate the license at any time during the term for any reason on three months’ written notice to OPKO.

 

License for Niraparib

 

In May 2012, we entered into a license agreement with Merck Sharp & Dohme Corp., a subsidiary of Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib and a backup compound, MK-2512, for all therapeutic and prophylactic uses in humans.  We are not currently advancing MK-2512.  Under the Merck license, we are obligated to use diligent efforts to develop and commercialize a licensed product.  In April 2016, we entered into an amendment to the license agreement with Merck in connection with the entry into our collaboration agreement with Janssen to develop and commercialize niraparib in prostate cancer patients.  Under the terms of the amendment, Merck agreed to waive or modify certain rights, including co-promotion, exclusivity, commercialization and diligence, solely with respect to products in prostate cancer developed or commercialized by Janssen.

 

Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012.  We are required to make total milestone payments to Merck of up to $57.0 million in development and regulatory milestones for the first indication, up to $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives.  We have made milestone payments to Merck to date totaling $12.8 million.  If commercial sales of niraparib commence, we will pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis.

 

The license with Merck will remain in effect until the expiration of the royalty term in such country, unless terminated earlier by the mutual agreement of the parties or due to the material breach or bankruptcy of a party.  In addition, beginning upon completion of the first Phase 2 clinical trial of a licensed product candidate, we may terminate the license without cause by giving 180 days written notice.

 

In October 2012, we also entered into two license agreements with AstraZeneca UK Limited, having aggregate up-front payments of $0.4 million.  These agreements provide us with the exclusive right to certain methods of treating patients with PARP inhibitors solely with respect to niraparib.  Under certain circumstances, we may be required to make milestone and royalty payments to AstraZeneca UK Limited based on the achievement of certain development and regulatory milestone events with regard to niraparib, and on net sales of niraparib.

 

License for Immuno-Oncology Platform

 

In March 2014, we entered into a collaboration and exclusive license agreement with AnaptysBio, a therapeutic antibody company.  We executed an amendment in November 2014 to add an additional bi-specific antibody product candidate.  We entered into another amendment in February 2016 to extend the term of the initial discovery period and our and AnaptysBio’s associated activities under the agreement.  Under the terms of the amended agreement, we obtained an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of certain specified immunotherapy antibodies.  Specifically, we received exclusive rights to monospecific antibody product candidates targeting PD-1 (TSR-042),

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TIM-3 (TSR-022) and LAG-3 (TSR-033) and certain bi-specific antibody product candidates.  Under the amended agreement, AnaptysBio is responsible for performing initial discovery and development of therapeutic antibodies with the goal of generating immunotherapy antibodies for use in the treatment of cancer.  We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.

 

Under the terms of this agreement, we made up-front, non-creditable and non-refundable cash payments of $19.0 million to AnaptysBio during 2014.  We are required to reimburse AnaptysBio on a quarterly basis for specified costs incurred by AnaptysBio in its initial discovery and development activities covered by the agreement.  For each of the four development programs, we will also be required to make milestone payments to AnaptysBio of up to $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications.  We have made $11.0 million in development milestone payments to date.  We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.

 

This agreement expires on the earliest date after which no further payments are due to AnaptysBio, unless earlier terminated.  Either party may terminate the agreement in the event of an uncured material breach by the other party.  We may terminate the agreement at any time upon 90 days prior written notice to AnaptysBio.

 

Competition

 

Our industry is highly competitive and subject to rapid and significant technological change.  While we believe that our development experience and scientific knowledge provide us with competitive advantages, we may face competition from large pharmaceutical and biotechnology companies, smaller pharmaceutical and biotechnology companies, including specialty pharmaceutical companies and generic drug companies, academic institutions, government agencies and research institutions, and others.

 

The acquisition or licensing of pharmaceutical products is also very competitive, and several other companies, including more established companies, have acknowledged strategies to in-license or acquire products.  Other companies taking similar or different approaches to product acquisitions, including more established companies, may have competitive advantages.  The more established companies may have competitive advantages due to their size, cash flows and institutional experience.

 

Compared to TESARO, many of our competitors may have significantly greater financial, technical and human resource capabilities.  Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors.  Our commercial opportunity could be reduced or eliminated if our competitors develop or market products or other novel technologies that are more effective, safer or less costly than any that will be commercialized by us, or obtain regulatory approval for their products more rapidly than we may obtain approval for ours.  Our success will be based in part on our ability to identify, develop, and manage a portfolio of drugs that are safer and more effective in the treatment and support of cancer patients.

 

Rolapitant Competition

 

In addition to VARUBI, there are currently two other commercially available branded NK-1 receptor antagonists and one commercially available generic NK-1 receptor antagonist.  Oral aprepitant and its IV pro-drug fosaprepitant, which are both known by the brand name EMEND®, are marketed by Merck.    We believe the IV formulation of EMEND accounted for a significant majority of all EMEND usage in the U.S. in 2016.  A combination of netupitant and palonosetron, which is known by the brand name AKYNZEO®, is marketed by Helsinn Healthcare, or Helsinn, as a combination of NK-1 and 5-HT 3 receptor antagonists.  Helsinn introduced AKYNZEO in capsule form in October 2014, and has an IV formulation in Phase 3 development.  We are also aware that Sandoz launched a generic version of aprepitant in late 2016, which competes with oral VARUBI.

 

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Niraparib Competition

 

There are currently two commercially available PARP inhibitors.  AstraZeneca Plc’s LYNPARZA TM (olaparib) was approved in December 2014 by the FDA for use in ovarian cancer patients with a germline BRCA mutation who have been treated with three or more prior lines of chemotherapy, and also by the European Commission following a positive opinion by the EMA for use as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed BRCA-mutated (germline and/or somatic) high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.  Clovis Oncology, Inc.’s RUBRACA TM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies.  We believe the additional products in clinical development targeting the PARP pathway consist of: Pfizer’s talazoparib (MDV3800) and AbbVie’s ABT-888 (veliparib), both currently in Phase 3 clinical trials; Eisai, Inc.’s E-7016 and E-7449, currently in Phase 2 and Phase 1/2 clinical trials, respectively; and AbbVie’s ABT-767, BeiGene/EMD Serono (Merck KGaA)’s BGB-290, Checkpoint Therapeutics’ CK-102 (formerly CEP-9722) and Hengrui’s fluzoparib, each currently in Phase 1 clinical trials.  Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval.

 

Immuno-Oncology Competition

 

We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our immuno-oncology programs.  There are currently two anti-PD-1 antibody products being marketed.  In 2014, Bristol-Myers Squibb received approval for OPDIVO® (nivolumab) and Merck received approval for KEYTRUDA® (pembrolizumab) for injection, for use by patients with melanoma who have progressed on YERVOY® (ipilimumab).  KEYTRUDA and OPDIVO have also been approved for the treatment of non-small cell lung cancers.  KEYTRUDA is also indicated for patients with PD-L1 high expressing non-small cell lung cancer who have not been previously treated, and previously treated squamous cell head and neck cancer.  Additional approvals for OPDIVO include previously treated renal cancer, previously treated classical Hodgkin Lymphoma, and previously treated squamous cell head and neck cancer.  In 2016, the FDA approved Roche’s anti-PD-L1 antibody TECENTRIQ (atezolizumab) in both previously treated bladder cancer and non-small cell lung cancer.  We are aware of several companies that are developing or co-developing anti-PDL-1 and/or anti-PD-1 modulators for various indications, including Pfizer, Roche, Medimmune (AstraZeneca), EMD Serono (Merck KGaA), Novartis, Eli Lilly, Hengrui/Incyte, Boehringer Ingelheim, BeiGene and Regeneron/Sanofi.

 

There are currently no anti-TIM-3 antibody products or anti-LAG-3 antibody products being marketed.  We are aware that one company, Novartis, has an anti-TIM-3 modulator antibody in Phase 1/2 clinical development for various indications.  We are also aware of several companies that have anti-LAG-3 modulators in development for various indications, including Bristol-Myers Squibb, which has an anti-LAG-3 antibody in Phase 2 clinical development, Novartis, which has an anti-LAG-3 antibody that is in Phase 1/2 clinical development, and Merck and Regeneron Pharmaceuticals, each of which has an anti-LAG-3 antibody in Phase 1 clinical development.  We are also aware of several other companies with immuno-oncology antibodies or programs in the preclinical or research phase.

 

For more information on the market for cancer therapeutics and oncology supportive care products, our competitors and the products that may compete with our product candidates, see “—Overview of the Market for Cancer Therapeutics and Oncology Supportive Care Products”, “—Our Current Marketed Product”, “—Our Product Candidates—Rolapitant—Intravenous Formulation”, “—Our Product Candidates—Niraparib—Poly (ADP-ribose) Polymerase (PARP) Inhibitor” and “—Our Product Candidates—   Immuno-Oncology Platform.”

 

Commercial Operations

 

Our U.S.-based commercial operations team, hired primarily in 2015 and expanded during 2016, consists of approximately 120 employees.  Our European commercial operations, established in 2016, consists of approximately 20 employees in six countries including those at our international headquarters office in Zug, Switzerland.  The commercial infrastructure includes a targeted, oncology sales force to establish relationships with a focused group of oncologists, oncology nurses and pharmacists.  Personnel in sales management, internal sales training, sales operations, marketing, marketing operations and distribution support the sales force.  Additionally, the sales, marketing and market access teams manage relationships with key accounts such as managed care organizations, group purchasing organizations, hospital systems, oncology group networks, and government accounts.  To further develop our commercial infrastructure in the event that any

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other product candidates receive regulatory approval, we expect to invest significant financial and management resources, much of which will be committed at the risk that any such product candidate may not be approved by any regulatory agency.

 

Government Regulation

 

As a biopharmaceutical company that operates in the United States, we are subject to extensive regulation by the FDA and other federal, state, and local regulatory agencies.  The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and the Public Health Service Act, or PHSA, and their implementing regulations set forth, among other things, requirements for the testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record keeping, reporting, distribution, import, export, advertising and promotion of our products and product candidates.  Although the discussion below focuses on regulation in the United States, we are also beginning to seek approval for, and anticipate marketing, our products in other countries.  Generally, our activities in other countries will be subject to regulation that, although similar in nature and scope in some respects to that imposed in the United States, includes important differences.  Additionally, some significant aspects of regulation in the European Union, or the EU, are addressed in a centralized way through the EMA and the European Commission, but the specific regulation of EU Member States remains essential in many respects for certain types of authorization processes, pricing and reimbursement and promotional activities.

 

Development and Approval

 

Under the FDC Act, FDA approval of an NDA is required before any new drug can be marketed in the United States.  Under the PHSA, FDA licensure of a biologics license application, or BLA, is required before a biologic can be marketed in the United States.  NDAs and BLAs require extensive studies and submission of a large amount of data by the applicant.

 

Preclinical Testing.  Before testing any compound in human subjects in the United States, a company must generate extensive preclinical data.  Preclinical testing generally includes laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological studies in several animal species to assess the quality and safety of the product.  Animal studies must be performed in compliance with the FDA’s Good Laboratory Practice, or GLP, regulations and the U.S. Department of Agriculture’s Animal Welfare Act.

 

IND Application.  Human clinical trials in the United States cannot commence until an IND application is submitted and becomes effective.  A company must submit preclinical testing results to the FDA as part of the IND, and the FDA must evaluate whether there is an adequate basis for testing the drug in initial clinical studies in human volunteers.  Unless the FDA raises concerns, the IND becomes effective 30 days following its receipt by the FDA.  Once human clinical trials have commenced, the FDA may stop the clinical trials by placing them on “clinical hold” because of concerns about the safety of the product being tested, or for other reasons.

 

Clinical Trials.  Clinical trials involve the administration of the drug to healthy human volunteers or to patients, under the supervision of a qualified investigator.  The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and Good Clinical Practice, or GCP, requirements, which establish standards for conducting, recording data from, and reporting the results of, clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being of study participants are protected.  Clinical trials must be conducted under protocols that detail the study objectives, parameters for monitoring safety, and the efficacy criteria, if any, to be evaluated.  Each protocol is reviewed by the FDA as part of the IND.  In addition, each clinical trial must be reviewed and approved by, and conducted under the auspices of, an institutional review board, or IRB.  Companies sponsoring the clinical trials, investigators, and IRBs also must comply with applicable regulations and guidelines for obtaining informed consent from the study subjects, following the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting of adverse events.  Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the United States.  Data from a foreign study not conducted under an IND may be submitted in support of an NDA or BLA if the study was conducted in accordance with GCP and the FDA is able to validate the data.

 

A study sponsor is required to publicly post certain details about active clinical trials and clinical trial results on government or independent websites (e.g., http://clinicaltrials.gov).  Human clinical trials typically are conducted in three sequential phases, although the phases may overlap with one another:

 

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Phase 1 clinical trials include the initial administration of the investigational drug to humans, typically to a small group of healthy human subjects, but occasionally to a group of patients with the targeted disease or disorder. 

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Phase 1 clinical trials generally are intended to determine the metabolism and pharmacologic actions of the drug, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.

 

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Phase 2 clinical trials generally are controlled studies that involve a relatively small sample of the intended patient population, and are designed to develop data regarding the product’s effectiveness, to determine dose response and the optimal dose range, and to gather additional information relating to safety and potential adverse effects.

 

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Phase 3 clinical trials are conducted after preliminary evidence of effectiveness has been obtained, and are intended to gather the additional information about safety and effectiveness necessary to evaluate the drug’s overall risk-benefit profile, and to provide a basis for physician labeling.  Generally, Phase 3 clinical development programs consist of expanded, large-scale studies of patients with the target disease or disorder to obtain statistical evidence of the efficacy and safety of the drug at the proposed dosing regimen, or the safety, purity, and potency of a biological product.

 

The sponsoring company, the FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk.  Further, success in early-stage clinical trials does not assure success in later-stage clinical trials.  Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or prevent regulatory approval.

 

NDA/BLA Submission and Review.  After completing clinical testing of an investigational drug or biologic, a sponsor must prepare and submit an NDA or BLA for review and approval by the FDA.  The NDA is a comprehensive, multi-volume application that includes, among other things, the results of preclinical and clinical studies, information about the drug’s composition, and our plans for manufacturing, packaging, and labeling the drug.  For certain candidates, such as immunotherapeutic antibodies, this information is submitted in a BLA.  When an NDA or BLA is submitted, the FDA conducts a preliminary review to determine whether the application is sufficiently complete to be accepted for filing.  If it is not, the FDA may refuse to file the application and request additional information, in which case the application must be resubmitted with the supplemental information, and review of the application is delayed.

 

FDA performance goals generally provide for action on an application within 12 months of submission, but that deadline is extended in certain circumstances.  Moreover, the review process is often significantly extended by FDA requests for additional information or clarification.  The FDA also has programs intended to expedite the development and review of new drugs intended to address unmet medical needs for serious or life-threatening conditions.  Through priority review designation, for example, the FDA can expedite the target action date to eight months from application submission, if the agency finds that a drug is intended to treat a serious condition and, if approved, would provide a significant improvement in safety or effectiveness.  Another example is fast-track designation, which the FDA may grant to a drug that is intended to treat a serious condition and that demonstrates the potential to address an unmet medical need.  Under the fast track program, the FDA allows a sponsor to submit completed portions of an NDA on a rolling basis, rather than requiring the entire application to be submitted before review begins.  Product candidates with fast-track designation also may be eligible for more frequent meetings or correspondence with the agency during the development process.

 

As part of its review, the FDA may refer an NDA or BLA to an advisory committee for evaluation and a recommendation as to whether the application should be approved.  Although the FDA is not bound by the recommendation of an advisory committee, the agency usually has followed such recommendations.  The FDA may determine that a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to ensure that the benefits of a new product outweigh its risks, and the product can therefore be approved.  A REMS may include various elements, ranging from a medication guide or patient package insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of the drug.  Under the Pediatric Research Equity Act, certain applications for approval must include an assessment, generally based on clinical study data, of the safety and effectiveness of the subject drug or biological product in relevant pediatric populations.  We have an agreed-upon pediatric plan to assess the effectiveness of rolapitant in the pediatric population.

 

After review of an NDA or BLA, the FDA may decide to not approve the application or issue a complete response letter outlining the deficiencies in the submission.  The complete response letter also may request additional information, including additional preclinical or clinical data.  Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval.  Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor.  Obtaining regulatory approval often takes a number of years, involves the

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expenditure of substantial resources, and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials.  Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug or require post-approval commitments, including the completion within a specified time period of additional clinical studies, which often are referred to as “Phase 4” or “post-marketing” studies.

 

Post-approval modifications to the drug or biologic product, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical or clinical trials, to be submitted in a new or supplemental NDA or BLA, which would require FDA approval.

 

Post-Approval Regulation

 

Once approved, products are subject to continuing regulation by the FDA.  If ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market, the FDA may at any time withdraw product approval or take actions that would limit or suspend marketing. Additionally, the FDA may require post-marketing studies or clinical trials if new safety information develops.

 

Good Manufacturing Practices.  Companies engaged in manufacturing drug products or their components must comply with applicable current Good Manufacturing Practice, or cGMP, requirements and product-specific regulations enforced by the FDA and other regulatory agencies.  Compliance with cGMP includes adhering to requirements relating to organization and training of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, quality control and quality assurance, packaging and labeling controls, holding and distribution, laboratory controls, and records and reports.  The FDA regulates and inspects equipment, facilities, and processes used in manufacturing pharmaceutical or biologic products, prior to approval.  If, after receiving approval, a company makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA or BLA), additional regulatory review and approval may be required.  The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product.  Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure or recall of products, and criminal prosecution.  Although we periodically monitor the FDA compliance of our third-party manufacturers, we cannot be certain that our present or future third-party manufacturers will consistently comply with cGMP and other applicable FDA regulatory requirements.

 

Advertising and Promotion.  The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs and biologics through, among other things, standards and regulations for direct-to-consumer advertising, advertising and promotion to healthcare professionals, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet.  A product cannot be commercially promoted before it is approved.  After approval, product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA.  Healthcare providers are permitted to prescribe drugs and biologics for “off-label” uses—that is, uses not approved by the FDA and therefore not described in the product’s labeling—because the FDA does not regulate the practice of medicine.  However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses.  Broadly speaking, a manufacturer may not promote a drug or biologic for off-label use, but under certain conditions may engage in non-promotional, balanced, scientific communication regarding off-label use.  Failure to comply with applicable FDA requirements and restrictions in this area may subject a company to adverse publicity and enforcement action by the FDA, the Department of Justice, or the Office of Inspector General of the Department of Health and Human Services, as well as state authorities.  This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug or biological products.

 

Other Requirements.  In addition, companies that manufacture or distribute drug or biological products or that hold approved NDAs or BLAs must comply with other regulatory requirements, including submitting annual reports, reporting information about adverse drug experiences, and maintaining certain records.

 

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Hatch-Waxman Act

 

The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, establishes two abbreviated approval pathways for pharmaceutical products that are in some way follow-on versions of already approved products.

 

Generic Drugs.  A generic version of an approved drug is approved by means of an abbreviated new drug application, or ANDA, by which the sponsor demonstrates that the proposed product is the same as the approved, brand-name drug, which is referred to as the “reference listed drug,” or RLD.  Generally, an ANDA must contain data and information showing that the proposed generic product and RLD (1) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of administration, (2) are intended for the same uses, and (3) are bioequivalent.  This is instead of independently demonstrating the proposed product’s safety and effectiveness, which are inferred from the fact that the product is the same as the RLD, which the FDA previously found to be safe and effective.

 

505(b)(2) NDAs.  If a product is similar, but not identical, to an already approved product, it may be submitted for approval via an NDA under FDC Act section 505(b)(2).  Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposed product’s safety and effectiveness.  Rather, the sponsor is permitted to rely to some degree on the FDA’s finding that the RLD is safe and effective, and must submit its own product-specific data of safety and effectiveness to an extent necessary because of the differences between the products.

 

RLD Patents.  An NDA sponsor must identify to the FDA patents that claim the drug substance or drug product or a method of using the drug.  When the drug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations , which is referred to as the Orange Book .  The sponsor of an ANDA or 505(b)(2) application seeking to rely on an approved product as the RLD must make one of several certifications regarding each listed patent.  A “Paragraph III” certification is the sponsor’s statement that it will wait for the patent to expire before obtaining approval for its product.  A “Paragraph IV” certification is an assertion that the patent does not block approval of the later product, either because the patent is invalid or unenforceable or because the patent, even if valid, is not infringed by the new product.

 

Regulatory Exclusivities.  The Hatch-Waxman Act provides periods of regulatory exclusivity for products that would serve as RLDs for an ANDA or 505(b)(2) application.  If a product is a “new chemical entity,” or NCE—generally meaning that the active moiety has never before been approved in any drug—there is a period of five years from the product’s approval during which the FDA may not accept for filing any ANDA or 505(b)(2) application for a drug with the same active moiety.  An ANDA or 505(b)(2) application may be submitted after four years, however, if its sponsor makes a Paragraph IV certification.

 

A product that is not an NCE may qualify for a three-year period of exclusivity if the NDA contains new clinical data, derived from studies conducted by or for the sponsor, that were necessary for approval.  In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD.  Additionally, the exclusivity applies only to the conditions of approval that required submission of the clinical data.  For example, if an NDA is submitted for a product that is not an NCE, but that seeks approval for a new indication, and clinical data were required to demonstrate the safety or effectiveness of the product for that use, the FDA could not approve an ANDA or 505(b)(2) application for another product with that active moiety for that use.

 

Once the FDA accepts for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days provide notice to the RLD NDA holder and patent owner that the application has been submitted, and provide the factual and legal basis for the applicant’s assertion that the patent is invalid or not infringed.  If the NDA holder or patent owner files suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the ANDA or 505(b)(2) application for a period of 30 months or the resolution of the underlying suit, whichever is earlier.  If the RLD has NCE exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval.  The FDA may approve the proposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to cooperate in expediting the litigation.  At present, rolapitant is an NCE with five-year NCE exclusivity and, if approved, niraparib will qualify for five-year NCE exclusivity.

 

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Patent Term Restoration.  A portion of the patent term lost during product development and FDA review of an NDA or BLA is restored if approval of the application is the first permitted commercial marketing of a drug containing the active ingredient.  The patent term restoration period is generally one-half the time between the effective date of the IND or the date of patent grant (whichever is later) and the date of submission of the NDA or BLA, plus the time between the date of submission of the NDA or BLA and the date of FDA approval of the product.  The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of FDA approval of the product.  Only one patent claiming each approved product is eligible for restoration and the patent holder must apply for restoration within 60 days of approval.  The U.S. Patent and Trademark Office, or the USPTO, in consultation with the FDA, reviews and approves the application for patent term restoration.  When any of our products is approved, we intend to seek patent term restoration for an applicable patent when it is appropriate.  At present, we anticipate that rolapitant and, if approved, niraparib will qualify for patent term restoration.  We have applied for patent term restoration for rolapitant.

 

The Biologics Price Competition and Innovation Act

 

The Biologics Price Competition and Innovation Act, or BPCI Act, authorizes the FDA to license a biological product that is biosimilar to an FDA-licensed biologic through an abbreviated pathway.  The BPCI Act establishes criteria for determining that a product is biosimilar to an already-licensed biologic, or reference product, and establishes a process by which an abbreviated BLA for a biosimilar product is submitted, reviewed and approved.  The BPCI Act provides periods of exclusivity that protect a reference product from biosimilars competition.  Under the BPCI Act, the FDA may not accept a biosimilar application for review until four years after the date of first licensure of the reference product, and the biosimilar may not be licensed until at least 12 years after the reference product’s approval.  Additionally, the BPCI Act establishes procedures by which the biosimilar applicant provides information about its application and product to the reference product sponsor, and by which information about potentially relevant patents may be shared and litigation over patents may proceed in advance of approval.  The BPCI Act also provides a period of exclusivity for the first biosimilar determined by the FDA to be interchangeable with the reference product.

 

We anticipate that the contours of the BPCI Act will continue to be defined as the statute is implemented over a period of years.  This likely will be accomplished by a variety of means, including decisions related to the statute by the relevant federal courts, FDA issuance of guidance documents, and FDA decisions in the course of considering specific applications.  The FDA has to date issued various guidance documents and other materials indicating the agency’s thinking regarding a number of issues implicated by the BPCI Act.  Additionally, the FDA’s approval of several biosimilar applications in recent years has helped define the agency’s approach to certain issues.

 

America Invents Act

 

As part of the passage of the America Invents Act in 2011, new post-grant review proceedings were added to U.S. patent law. Among these procedures are post-grant reviews and inter partes reviews, which allow any member of the public to file a petition with the USPTO seeking to review the patentability of one or more claims in an issued U.S. patent.  Post-grant review proceedings are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in Federal District Court.  In addition, the challenged patents are not accorded a presumption of validity as they are in Federal District Court.

 

Other Exclusivities

 

Pediatric Exclusivity.  Section 505A of the FDC Act provides for six months of additional exclusivity and patent protection if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data does not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted.  If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months.  This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve an ANDA or 505(b)(2) application owing to regulatory exclusivity or listed patents.  The BPCI Act incorporates by reference many provisions of section 505A of the FDC Act, such that if pediatric studies for a biological product fairly respond to a written request from the FDA, are completed in a timely fashion, and otherwise comply with applicable requirements, the 12-year exclusivity period will be deemed to be 12 and a half years, and the four year period will be deemed to be four and a half years.  However, six-month pediatric exclusivity does not attach to patents for a biological product under the BPCI Act.  When any of our products is approved, we anticipate seeking pediatric exclusivity when it is appropriate.

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Orphan Drug Exclusivity.  The Orphan Drug Act provides incentives for the development of drugs and biological products intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals in the United States.  If a sponsor demonstrates that a drug or biologic is intended to treat a rare disease or condition, the FDA grants orphan drug designation to the product for that use.  The benefits of orphan drug designation include research and development tax credits and exemption from user fees.  A drug or biologic that is approved for the orphan drug designated indication is granted seven years of orphan drug exclusivity.  During that period, the FDA generally may not approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity.  We intend to seek orphan drug designation and exclusivity for our products whenever it is available.

 

21st Century Cures Act

 

In December 2016, the United States Congress passed the 21 st Century Cures Act, or the Cures Act, which includes a number of provisions designed to speed development of innovative therapies, provide funding authorization to the National Institutes of Health, or NIH, and provide funding for certain oncology-directed research.  Because the Cures Act was enacted recently, it is difficult to know whether or how it will directly affect our business.  However, it also includes a provision which requires us to post our policies on the availability of certain expanded access programs.  In addition, the Cures Act includes provisions that may be beneficial to us in the future, including a requirement that the FDA assess and publish guidance on the use of novel clinical trial designs, the use of real world evidence in applications, the availability of summary level review for supplemental applications for certain indications, and the qualification of drug development tools.  Because these provisions allow the FDA several years to develop these policies, their effects on us, if any, could be delayed.

 

The Cures Act also authorizes $1.8 billion in funding for the “Cancer Moonshot” initiative.  The Cancer Moonshot initiative’s strategic goals encourage inter-agency cooperation and fund research and innovation to catalyze new scientific breakthroughs, bring new therapies to patients, and strengthen prevention and diagnosis.  This initiative aims to stimulate drug development through the creation of a public-private partnership with 20 to 30 pharmaceutical and biotechnology companies to expedite cancer researchers’ access to investigational agents and approved drugs.  This partnership is designed to permit researchers to obtain drugs and other technologies from a preapproved “formulary” list without having to negotiate with each company for individual research projects.  We will continue to monitor these developments to assess their potential impacts on our business.

 

Foreign Regulation

 

In addition to laws and regulations in the United States, we are subject to a variety of laws and regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products.

 

Whether or not we obtain FDA approval for a product, we must obtain the requisite marketing authorizations from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of a product in those countries.  Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application, or CTA, much like an IND, prior to the commencement of clinical trials.  In the EU, for example, a CTA must be submitted to the national health authority of each EU Member State in which the clinical trial is to be conducted and to an independent ethics committee, much like the FDA and an IRB, respectively.  Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.

 

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country.  In all cases in EU Member States, for example, the clinical trials must be conducted in accordance with GCP, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki.

 

In the EU, a marketing authorization for a medicinal product can be obtained through a centralized, mutual recognition, decentralized procedure, or national procedure (single EU Member State).  In accordance with the centralized procedure, the applicant can submit a single application for marketing authorization to the EMA that will provide a positive opinion regarding the application if it meets certain quality, safety, and efficacy requirements.  Following the opinion of the EMA, the European Commission makes a final decision to grant a centralized marketing authorization that permits the marketing of a product in all 28 EU Member States and three of the four European Free Trade Association, or EFTA, States, Iceland, Liechtenstein and Norway.  The centralized procedure is mandatory for certain medicinal products, including

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orphan medicinal products, medicinal products derived from certain biotechnological processes, advanced therapy medicinal products and certain other medicinal products containing a new active substance for the treatment of certain diseases, and optional for certain other products, including medicinal products that are a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public or animal health.  Under the centralized procedure in the EU, the maximum timeframe for the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP).  Accelerated evaluation may be granted by the CHMP in exceptional cases.  These are defined as circumstances in which a medicinal product is expected to be of a “major public health interest”.  Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease, such as heavy disabling or life-threatening diseases, to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; and anticipation of high therapeutic benefit.  In these circumstances, the EMA ensures that the opinion of the CHMP is given within 150 days.

 

Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separate application to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is to be marketed.  This application is identical to the application that would be submitted to the EMA for authorization through the centralized procedure.  The reference EU Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application.  The resulting assessment report is submitted to the concerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report and related materials.  If a concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to public health, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member States.

 

The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU Member States of the marketing authorization of a medicinal product by the competent authorities of other EU Member States.  The holder of a national marketing authorization may submit an application to the competent authority of an EU Member State requesting that this authority recognize the marketing authorization delivered by the competent authority of another EU Member State.

 

A medicinal product may be granted an orphan designation in the EU if: (i) it would be used to treat or prevent a life-threatening or chronically debilitating condition and either affects no more than five in 10,000 people in the EU or for economic reasons would be unlikely to be developed without incentives; and (ii) no satisfactory method of diagnosis, prevention or treatment of the condition concerned exists, or, if such a method exists, the medicinal product would be of significant benefit to those affected by the condition.  The application for orphan designation must be submitted to the EMA and approved prior to market authorization.  Once authorized, orphan medicinal products are entitled to ten years of market exclusivity.  During this ten-year period, with limited exceptions, neither the competent authorities of the EU Member States, the EMA, nor the European Commission are permitted to accept applications or grant marketing authorization for other similar medicinal products with the same therapeutic indication.  However, marketing authorization may be granted to a similar medicinal product with the same orphan indication during that period with the consent of the holder of the marketing authorization or if the manufacturer of the product is unable to supply sufficient quantities.  Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if the latter product is safer, more effective or otherwise clinically superior to the original product.  The period of market exclusivity may be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity.

 

Once an applicant receives marketing authorization in an EU Member State, through any application route, the applicant is then required to engage in pricing discussions and negotiations with a separate pricing authority in that country.  The legislators, policymakers and healthcare insurance funds in the EU Member States continue to propose and implement cost-containing measures to keep healthcare costs down, due in part to the attention being paid to health care cost containment and other austerity measures in the EU.  Certain of these changes could impose limitations on the prices pharmaceutical companies are able to charge for their products.  The amounts of reimbursement available from governmental agencies or third-party payors for these products may increase the tax obligations on pharmaceutical companies such as ours, or may facilitate the introduction of generic competition with respect to our products.  Furthermore, an increasing number of EU Member States and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory.  Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere.  In addition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greece and Spain, have led and may continue to lead to substantial delays in payment and payment partially with government bonds rather than cash for medicinal products, which could negatively impact

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our revenues and profitability.  Moreover, in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies.  There can be no assurance that our medicinal products will obtain favorable reimbursement status in any country.

 

The sole legal instrument at the EU level governing the pricing and reimbursement of medicinal products is Council Directive 89/105/EEC, or the Transparency Directive.  The aim of this directive is to ensure that pricing and reimbursement mechanisms established in the EU Member States are transparent and objective, do not hinder the free movement and trade of medicinal products in the EU and do not hinder, prevent or distort competition on the market.  The Transparency Directive does not provide any guidance concerning the specific criteria on the basis of which pricing and reimbursement decisions are to be made in individual EU Member States.  Neither does it have any direct consequence for pricing nor reimbursement levels in individual EU Member States.  The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use.  Certain individual EU Member States adopt policies according to which a specific price or level of reimbursement is approved for the medicinal product.  Others adopt a system of reference pricing, basing the price or reimbursement level in their territories either on the pricing and reimbursement levels in other countries or on the pricing and reimbursement levels of medicinal products intended for the same therapeutic indication.  Further, some EU Member States impose direct or indirect controls on the profitability of the company placing the medicinal product on the market.

 

Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some EU Member States.  These EU Member States include the United Kingdom, France, Germany, Ireland, Italy and Sweden.  The HTA process in European Economic Area, or EEA, countries is governed by the national laws of these countries.  HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted.  HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system.  Those elements of medicinal products are compared with other treatment options available on the market.

 

The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual EU Member States.  The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary between EU Member States.

 

In 2011, Directive 2011/24/EU was adopted at the EU level.  This directive concerns the application of patients’ rights in cross-border healthcare.  This directive is intended to establish rules for facilitating access to safe and high-quality cross-border healthcare in the EU.  Pursuant to this directive, a voluntary network of national authorities or bodies responsible for HTA in the individual EU Member States was established.  The purpose of the network is to facilitate and support the exchange of scientific information concerning HTAs.  This may lead to harmonization of the criteria taken into account in the conduct of HTAs between EU Member States and in pricing and reimbursement decisions and may negatively affect price in at least some EU Member States.

 

In the EU, the advertising and promotion of our products will also be subject to EU Member States’ laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, as well as other EU Member State legislation that may apply to the advertising and promotion of medicinal products.  These laws require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities.  The SmPC is the document that provides information to physicians concerning the safe and effective use of the medicinal product.  It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product.  Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off-label promotion.  The off-label promotion of medicinal products is prohibited in the EU.  The applicable laws at the EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products.  Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.  These laws may further limit or restrict communications concerning the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with healthcare professionals.

 

Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, and EU rules governing the promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinal products, statutory

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health insurance, bribery and anti-corruption or with other applicable regulatory requirements can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.

 

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct in the individual EU Member States.  The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is prohibited in the EU.  The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States.  One example is the UK Bribery Act of 2010, or the UK Bribery Act.  This act applies to any company incorporated in or “carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs.  This act could have implications for our interactions with physicians in and outside the UK.  Violation of these laws could result in substantial fines and imprisonment.

 

The national laws of certain EU Member States require payments made to physicians to be publicly disclosed.  Moreover, the European Federation of Pharmaceutical Industries and Associations, or EFPIA, Code on disclosure of transfers of value from pharmaceutical companies to healthcare professionals and healthcare organizations imposes a general obligation on members of the EFPIA or related national industry bodies to disclose transfers of value to healthcare professionals.  In addition, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or the competent authorities of the individual EU Member States.  These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the EU Member States.

 

For other countries outside of the EU, such as countries in Eastern Europe, Central and South America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country.  In all cases, again, the clinical trials are conducted in accordance with GCP, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki.

 

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, warning letters or untitled letters, injunctions, civil, administrative, or criminal penalties, monetary fines or imprisonment, suspension or withdrawal of regulatory approvals, suspension of ongoing clinical studies, refusal to approve pending applications or supplements to applications filed by us, suspension or the imposition of restrictions on operations, product recalls, the refusal to permit the import or export of our products or the seizure or detention of products.

 

Coverage and Reimbursement

 

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we have or may obtain regulatory approval.  Sales of VARUBI and, if approved, rolapitant IV, niraparib, and any of our other product candidates, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government healthcare programs such as Medicare and Medicaid, commercial health insurers and managed care organizations.  The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved.  Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all FDA-approved products for a particular indication.

 

In order to secure coverage and reimbursement for VARUBI, rolapitant IV, niraparib, or any other product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals.  Our product candidates may not be considered medically necessary or cost-effective.  A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved.  Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development.

 

In the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price, or ASP, average manufacturer price, or AMP, and actual acquisition cost.  The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates.  The Centers

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for Medicare and Medicaid Services, or CMS, surveys and publishes retail pharmacy acquisition cost information in the form of National Average Drug Acquisition Cost, or NADAC, files to provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates.  It may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products for which we receive regulatory approval.

 

Our participation in the Medicaid rebate program established by the Omnibus Budget Reconciliation Act of 1990 and under multiple subsequent amendments of that law, including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the ACA, requires us to pay a rebate for each unit of drug reimbursed by Medicaid.  The amount of the “basic” portion of the rebate for each product is set by law as the larger of: (i) 23.1% of quarterly AMP, or (ii) the difference between quarterly AMP and the quarterly best price available from us to any commercial or non-governmental customer, or Best Price.  AMP must be reported on a monthly and quarterly basis and Best Price is reported on a quarterly basis only.  In addition, the rebate also includes the “additional” portion, which adjusts the overall rebate amount upward as an “inflation penalty” when the drug’s latest quarter’s AMP exceeds the drug’s AMP from the first full quarter of sales after launch, adjusted for increases in the Consumer Price Index—Urban.  The upward adjustment in the rebate amount per unit is equal to the excess amount of the current AMP over the inflation-adjusted AMP from the first full quarter of sales.  The rebate amount is required to be recomputed each quarter based on our report to CMS of current quarterly AMP and Best Price for our drug.  The terms of our participation in the program impose a requirement for us to report revisions to AMP or Best Price within a period not to exceed 12 quarters from the quarter in which the data was originally due.  Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision.  The ACA and subsequent legislation also changed the definition of AMP.  In February 2016, final guidance and regulations were issued by the federal government clarifying these and certain other ACA changes and which relate to the calculation of AMP and the related rebate liability for pharmaceutical products.

 

Federal law also requires that a company that participates in the Medicaid rebate program report ASP information each quarter to CMS for certain categories of drugs that are paid under Part B of the Medicare program.  Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS.  CMS uses these submissions to determine payment rates for drugs under Medicare Part B and the resulting Medicare payment rate.

 

Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012.  Subsequent legislation extended the 2% reduction, on average, to 2025.  This may cause Medicare Part D plans to seek lower prices from manufacturers.  Other legislative or regulatory cost containment provisions, as described below, could have a similar effect.

 

The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort.  Government healthcare programs and other third-party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy.  If these payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit.  The U.S. government, state legislatures and foreign governments also have shown significant interest in implementing cost-containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs.  Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for products such as VARUBI, rolapitant IV, niraparib, and any other product candidates that we are developing and could adversely affect our net revenues and operating results.

 

The marketability of VARUBI, rolapitant IV, niraparib, and any other products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement.  In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on drug pricing.  Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time.

 

In the United States, most outpatient prescription drugs may be covered under Medicare Part D.  Medicare Part D is a voluntary prescription drug benefit, through which Medicare beneficiaries may enroll in prescription drug plans offered by private entities for coverage of outpatient prescription drugs.  Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans provided for under Medicare Part C.

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Coverage and reimbursement for covered outpatient drugs under Part D are not standardized.  Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level.  Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.  Although Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, they have some flexibility to establish those categories and classes and are not required to cover all of the drugs in each category or class.  Medicare Part D prescription drug plans may use formularies to limit the number of drugs that will be covered in any therapeutic class and/or impose differential cost sharing or other utilization management techniques.

 

The availability of coverage under Medicare Part D may increase demand for VARUBI and for products for which we receive marketing approval.  However, in order for the products that we market to be included on the formularies of Part D prescription drug plans, we likely will have to offer pricing that is lower than the prices we might otherwise obtain.  Changes to Medicare Part D that give plans more freedom to limit coverage or manage utilization, and/or other cost reduction initiatives in the program could decrease the coverage and price that we receive for any approved products and could seriously harm our business.

 

In the physician office setting, Medicare Part B generally pays for covered drugs, which would include any eventual IV formulation of rolapitant and in limited circumstances could also include the oral formulation, at a rate of 106% of the drug’s ASP.  ASP is defined by statute based on sales and price concession data, including rebates and chargebacks, for a defined period of time and manufacturers submit the required information to CMS on a quarterly basis.  Prior to the quarter in which the payment rate will go into effect, CMS calculates and publishes the ASP-based payment rate.  Under this methodology, payment rates change on a quarterly basis, and significant downward fluctuations in ASP, and therefore reimbursement rates, could negatively impact sales of a product.  Because the ASP-based payment rate is defined by statute, changes to Medicare payment methodologies generally require a legislative change.  While the statute requires Medicare Part B payments for most drugs furnished in the physician office setting to be at 106% of ASP, the statute does not have a similar requirement for hospital outpatient departments.  For that setting, the Medicare payment for many covered Part B drugs also is at 106% of ASP, provided that the product exceeds a per day cost threshold.  For those products that do not meet the threshold, as is true for many oral anti-emetic products, there is no separate payment for the drug when furnished in a hospital outpatient department.  For those products that meet the threshold, the current 106% of ASP payment rate could be changed by CMS in future years through regulations, without any intervening legislation.  The 106% of ASP payment rates for the physician office and hospital outpatient settings are subject to the 2% sequestration cuts mandated by federal statute as described above.

 

Further, the ACA substantially changes the way healthcare is financed by both governmental and private insurers, and contains provisions that may reduce the profitability of drug products.  The ACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms.  The ACA expanded manufacturers’ rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well, increased the minimum Medicaid rebate due for most innovator drugs in general from 15.1% of AMP to 23.1% of AMP, and capped the total rebate amount for innovator drugs at 100% of AMP.  The ACA and subsequent legislation also changed the definition of AMP.  CMS regulations to implement the changes to the Medicaid drug rebate program under the ACA became effective on April 1, 2016.

 

The ACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.  Each such manufacturer pays a prorated share of the branded prescription drug fee of $4.0 billion in 2017, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.  The ACA also expanded the Public Health Service’s 340B drug pricing program, or the 340B program (described below), to include additional types of covered entities.  Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners, and a number of provisions have only recently become effective.  It appears likely that the ACA will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.  Legislative changes to the ACA remain possible, and appear likely in the 115th United States Congress and under the Trump Administration.  Even if we obtain favorable coverage and reimbursement status for VARUBI, rolapitant IV, niraparib, or any other products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

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We participate in the 340B program.  Federal law requires that any company that participates in the Medicaid rebate program also participate in the 340B program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B.  The 340B program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs.  In addition, in order to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by certain federal grantees and agencies, a manufacturer also must participate in the Department of Veterans Affairs Federal Supply Schedule, or FSS, pricing program, established by Section 603 of the Veterans Health Care Act of 1992.  Under this program, the manufacturer is obligated to make products available for procurement on an FSS contract and charge a price to four federal agencies —the Department of Veterans Affairs, the Department of Defense, the Public Health Service and the Coast Guard that is at least 24% less than the Non-Federal Average Manufacturing Price, or non-FAMP, for the prior fiscal year.  The requirements under the 340B and FSS programs could reduce the revenue we may generate from VARUBI, rolapitant IV, niraparib, and any other products that we commercialize in the future and could adversely affect our business and operating results.

 

Fraud and Abuse Laws

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years.  These laws include anti-kickback and false claims statutes.

 

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare programs.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other.  Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain discounts, or engaging consultants as speakers or consultants, may be subject to scrutiny if they do not fit squarely within the exemption or safe harbor.  Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.  Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs.

 

The federal civil False Claims Act prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds, or knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government.  In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product.  Other companies have faced enforcement actions for causing false claims to be submitted because of the company’s marketing the product for unapproved, and thus non-reimbursable, uses.  Federal enforcement agencies also have showed increased interest in pharmaceutical companies’ product and patient assistance programs, including reimbursement and co-pay support services, and a number of investigations into these programs have resulted in significant civil and criminal settlements.  In addition, the ACA amended federal law to provide that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.  Criminal prosecution is possible for making or presenting a false or fictitious or fraudulent claim to the federal government.

 

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created several new federal crimes, including healthcare fraud and false statements relating to healthcare matters.  The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors.  The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

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The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.  Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states.  Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers.  In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes.

 

The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires certain manufacturers of drugs, devices, biologics and medical supplies to engage in extensive tracking of payments and other transfers of value to physicians and teaching hospitals, including physician ownership and investment interests, and public reporting of such data.  Pharmaceutical and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required to track such payments, and must submit a report on or before the 90th day of each calendar year disclosing reportable payments made in the previous calendar year.

 

In addition, the U.S. Foreign Corrupt Practices Act, or the FCPA, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity.  It is illegal to pay, offer to pay or authorize the payment of anything of value to any official of another country, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in that capacity.  In many other countries, healthcare providers who prescribe pharmaceuticals are employed by government entities, and the purchasers of pharmaceuticals are government entities.  Our dealings with these prescribers and purchasers may be subject to the FCPA.

 

Other countries, including a number of EU Member States, have laws of similar application, including anti-bribery or anti-corruption laws such as the UK Bribery Act.  The UK Bribery Act prohibits giving, offering, or promising bribes to any person, as well as requesting, agreeing to receive, or accepting bribes from any person.  Under the UK Bribery Act, a company that carries on a business or part of a business in the United Kingdom may be held liable for bribes given, offered or promised to any person in any country by employees or other persons associated with the company in order to obtain or retain business or a business advantage for the company.  Liability under the UK Bribery Act is strict, but a defense of having in place adequate procedures designed to prevent bribery is available.

 

Because of the breadth of these various fraud and abuse laws, it is possible that some of our business activities could be subject to challenge under one or more of such laws.  Such a challenge could have material adverse effects on our business, financial condition and results of operations.  In the event governmental authorities conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations, they may impose sanctions under these laws, which are potentially significant and may include civil monetary penalties, damages, exclusion of an entity or individual from participation in government health care programs, criminal fines and imprisonment, as well as the potential curtailment or restructuring of our operations.  Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our financial condition and divert the attention of our management from operating our business.

 

Patents and Proprietary Rights

 

We have in-licensed three patent portfolios, one each for our rolapitant, niraparib, and immunotherapeutic antibodies programs.

 

Our NK-1 receptor antagonist portfolio, which relates to rolapitant, consists of patent families currently being prosecuted or maintained, including applications and patents directed to compositions of matter, formulations (including oral and IV), solid forms, methods of treatment (including both delayed and acute onset nausea and/or vomiting and timing of administration in relation to chemotherapy) and methods of preparing rolapitant.  Rolapitant is a NK-1 receptor antagonist being developed for the prevention of chemotherapy induced nausea and/or vomiting.  The portfolio licensed for rolapitant consists of a number of issued U.S. patents and issued non-U.S. patents across the in-licensed families.

 

Our PARP inhibitor portfolio includes patent families relating to niraparib and patent families relating to MK-2512.  The patent families in-licensed from Merck are being prosecuted or maintained by Merck in consultation with us.  The patent families relating to niraparib include applications and patents directed to compositions of matter, methods of treatment

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(including treatment of cancer and other diseases), particular salts of niraparib and methods of preparing niraparib.  The portfolio for niraparib comprises of a number of issued United States and non-United States patents.

 

Our immunotherapeutic antibodies portfolio presently consists of patent applications pending in multiple jurisdictions, which cover particular antibodies to identified targets of interest.  We have rights to all patents owned or controlled by our collaborator, AnaptysBio, to the extent that they claim the manufacture, composition, or use of an antagonist antibody developed under the program.

 

Intellectual Property Protection Strategy

 

We seek and intend to continue seeking patent protection whenever available for any patentable aspects of our existing products or product candidates and related technology or any new products or product candidates we acquire in the future.  Where our intellectual property is not protectable by patents, we seek to protect this through other means, including maintenance of trade secrets and careful protection of our proprietary information.  Our license from Merck for niraparib requires Merck to, subject to certain exceptions, prosecute and maintain, upon consultation with us, its patent rights as they relate to the licensed compounds.  If Merck decides to cease prosecution of the licensed patent rights, we have the right to take over such prosecution activities.  Our license from OPKO for rolapitant grants us the right to control all prosecution and maintenance activities for the licensed compounds, at our sole discretion.

 

The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions.  In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance.  Consequently, we do not know whether any of the product candidates we in-license or acquire will be protectable or remain protected by enforceable patents.  We cannot predict whether the patent applications we are pursuing will issue as patents in any particular jurisdiction, and furthermore, we cannot determine whether the claims of any issued patents will provide sufficient proprietary protection to protect us from competitors, or will be challenged, circumvented or invalidated by third parties.  Even where we succeed in obtaining patents covering our products, third parties may challenge or seek to invalidate or circumvent our patents.

 

As part of the passage of the America Invents Act in 2011, new post-grant review proceedings were added to U.S. patent law.  Post-grant reviews and inter partes reviews allow any member of the public to file a petition with the USPTO seeking to review the patentability of one or more claims in an issued U.S. patent.  Post-grant review procedures are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in Federal District Court.  In addition, the challenged patents are not accorded a presumption of validity as they are in Federal District Court. The patents covering our products may become involved in such post-grant review proceedings in the U.S. and/or in other jurisdictions (such as oppositions in the European Patent Office) that challenge the patentability of our patents.  Such proceedings could result in a finding of unpatentability or invalidity of our patents. They could also result in substantial cost, even if the eventual outcome is favorable to us.

 

Because patent applications in the United States and certain other jurisdictions are maintained in secrecy for at least 18 months from their earliest filing date, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications.  In March 2013, the United States transitioned to a ‘first to file’ system in which the first inventor to file a patent application will be entitled to the patent.  Previously, in the United States, the first to make the claimed invention was entitled to the patent.  For patents or patent applications not subject to the ‘first to file’ system, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention.

 

Although we have issued patents covering a number of different attributes of our products, and pending applications on others, there can be no assurance that any issued patents would be held valid by a court of competent jurisdiction.  An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using specific compounds or technology.  To the extent prudent, we intend to bring litigation against third parties that we believe are infringing our patents.

 

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained.  In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application.  In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent, or may be shortened if a patent is terminally disclaimed over another patent.

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In the United States, the term of a patent that covers an FDA-approved drug or biological product may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during drug development and the FDA regulatory review process.  The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent.  The length of the patent term extension is related to the length of time the drug or biologic is under development and regulatory review.  A patent term cannot be extended beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended.  Patent term extension is available only if the approval of the product represents the first permitted commercial marketing of the active ingredient.  Similar provisions are available in the EU and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug.  In the future, if and when our products receive FDA approval, we expect to apply for patent term extensions on patents covering those products.  We intend to seek patent term adjustments and extensions to any of our issued patents in any jurisdiction where these are available; however, there is no guarantee that the applicable authorities, including the FDA and the USPTO in the United States, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such adjustments or extensions.  We have applied for patent term extension for rolapitant in the United States.

 

To protect our rights to any of our issued patents and proprietary information, we may need to litigate against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the scope and validity of those patents or other proprietary rights.  These types of proceedings are often costly and could be time-consuming to us, and we cannot be certain that the deciding authorities will rule in our favor.  An unfavorable decision could result in the invalidation or a limitation in the scope of our patents or forfeiture of the rights associated with our patents or pending patent applications.  Any such decision could result in our key technologies not being protectable, allowing third parties to use our technology without being required to pay us licensing fees, or may compel us to license needed technologies from third parties to avoid infringing third-party patent and proprietary rights.  Such a decision could even result in the invalidation or a limitation in the scope of our patents or could cause us to lose our rights under existing issued patents or not to have rights granted under our pending patent applications.

 

We also rely on trade secret protection for our confidential and proprietary information.  Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees and consultants, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect our trade secrets.  It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us.  These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances.  In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property.  There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information.

 

While the expiration of a composition of matter patent may result in a loss of market exclusivity for the covered pharmaceutical product, that is not always the case.  Market exclusivity may continue to be derived from, among other things: (i) patents relating to the use of the product; (ii) patents on processes to make the product; (iii) patents on intermediates of the active ingredient of such product; and (iv) patents relating to novel compositions and formulations.  The effect of composition of matter patent expiration on market exclusivity also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, and the complexities and economics of the process for manufacture of the active ingredient of the product.

 

NK-1 Receptor Antagonists

 

We have an exclusive, worldwide license from OPKO to a portfolio of patents related to rolapitant, including issued claims covering the composition of matter and certain formulations and methods of use.

 

A United States Patent claiming the composition of matter of rolapitant has been granted and, with the patent term adjustment, has a patent term until at least December 2023.  Corresponding applications and issued patents in multiple foreign jurisdictions have similar composition of matter claims.  In foreign jurisdictions, this family of patents and/or applications has a patent term until at least December 2022.  A United States patent claiming methods of treating nausea and/or emesis comprising administering an intravenous formulation of rolapitant has been granted and, with patent term adjustment, expires in July 2032.  Corresponding applications and issued patents in multiple foreign jurisdictions have similar claims directed to

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methods of treating nausea and/or emesis comprising administering an intravenous formulation of rolapitant and have patent terms until at least 2030.

 

Many jurisdictions also grant patent term extensions, typically up to five years, for post-issuance regulatory delay.  In the United States, only one patent may be extended per approved product.  We have applied for patent term extension for rolapitant in the United States, and we believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for rolapitant up to August 2028 in the United States.  With respect to Europe, we believe that supplementary protection certificates (which are issued on a country-by-country basis) could be available to extend our patent exclusivity for rolapitant in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval.  If granted, any available supplementary protection certificate extension will be capped at fifteen years from the first approval.  There is no guarantee that the maximum allowable extension will be granted in either the United States or Europe, and any extension granted may be shorter than this, or not granted at all.

 

Our license also includes additional patent families related to rolapitant, comprising patent and patent applications claiming certain compounds, forms, formulations, methods of use, and processes to make rolapitant.  These patent families have patent terms until at least 2027 to 2030, including patent term adjustment in certain patents.

 

PARP Inhibitor

 

We have an exclusive, worldwide license from Merck to a portfolio of patents related to two inhibitors of poly (ADP-ribose) polymerase: niraparib and MK-2512.  Our portfolio, including patent families in-licensed from Merck, includes patent families related to niraparib comprising patent and patent applications claiming compounds, certain salt forms, methods of use, and processes to make niraparib.

 

A United States patent claiming the composition of matter of niraparib has been granted and, with patent term adjustment, has a patent term until at least March 2030.  Corresponding patent applications and issued patents in multiple foreign jurisdictions have similar claims and have a patent term until at least January 2028.  Additional patent families claiming certain compounds, salt forms, methods of use, and processes to make niraparib have been filed in the United States and multiple foreign jurisdictions and, if granted, will have patent terms until at least 2027 to 2037.

 

We believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for niraparib in the United States.  The period of extension would depend on the timing of our first approval.  Such an extension would be available, if at all, for only one United States patent.  If granted, any available patent term extension shall not exceed five years, and overall patent expiry with patent term extension will be capped at fourteen years from the first approval.  With respect to Europe, we believe that supplementary protection certificates (which are issued on a country-by-country basis) could be available to extend our patent exclusivity for niraparib in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval.  If granted, any available supplementary protection certificate extension will be capped at fifteen years from the first approval.  There is no guarantee that any extension will be granted in either the United States or Europe, and even if granted, the extension may be less than the maximum allowable extension.

 

Immuno-Oncology

 

Pursuant to our Collaboration and Exclusive License Agreement with AnaptysBio, we have ownership and/or exclusive worldwide license rights in patent filings relating to certain antibodies that bind to PD-1, LAG-3, and/or TIM-3 developed by AnaptysBio.  Our immuno-oncology portfolio comprises patent filings covering composition of matter for the relevant antibodies and binding fragments thereof, as well as their use individually and in combination; additional filings are contemplated.

 

No patents have yet issued from the relevant patent filings, but any such patents will be expected to have terms that extend into the late 2030s.  Ultimate expiration dates, which may differ by jurisdiction, may depend on, for example, patent term extensions available for patent office and/or regulatory delays, payment of annuities and/or maintenance fees, and/or terminal disclaimers of related cases.

 

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Manufacturing

 

We contract with third parties for the manufacture of VARUBI and for the manufacture of our product candidates for preclinical studies and clinical trials, and we intend to continue to do so in the future.  We currently work with one contract manufacturing organization, or CMO, Hovione Inter Limited, or Hovione, for the production of rolapitant drug substance used for oral rolapitant drug product and rolapitant IV, and one other CMO, Patheon, Inc., or Patheon, for commercial production of oral rolapitant drug product.     We currently work with one CMO for the production of rolapitant IV drug product for our commercial needs.  We currently work with two CMOs for the production of niraparib drug substance, and one other CMO for niraparib drug product supply, for our clinical and, if niraparib is approved, our expected commercial needs.  We contract with one CMO for the manufacture of TSR-042, TSR-022, TSR-033 and other antibody products, and may contract with additional CMOs that have biologics capabilities.  For each of our product candidates, we may elect to pursue relationships with other CMOs for manufacturing clinical supplies for later-stage trials and for commercialization.  We do not own or operate manufacturing facilities for the production of clinical quantities of our product candidates.  We currently have no plans to build our own clinical or commercial scale manufacturing capabilities.  To meet our projected needs for clinical supplies to support our activities through regulatory approval and commercial manufacturing, the CMOs with whom we currently work will need to increase scale of production or we will need to secure alternate suppliers.  We have not currently qualified alternate suppliers in the event the current CMOs we utilize are unable to scale production.  We have personnel with pharmaceutical development and manufacturing experience who are responsible for the relationships with our CMOs.

 

In March 2012, we entered into a process development and manufacturing services agreement with Hovione, under which Hovione provides certain process development and manufacturing services in connection with the manufacture of rolapitant drug substance.  The agreement also provided that if Hovione was successful in implementing the manufacturing process and the agreement is not terminated by us, Hovione would also manufacture certain commercial quantities of rolapitant.  Hovione has implemented the manufacturing process successfully and is now manufacturing commercial quantities of rolapitant drug substance.  Under the agreement, we pay Hovione for services in accordance with the terms of work plans, which we enter into from time to time.  Each party to the agreement is subject to customary indemnification provisions.  Unless terminated earlier, the agreement will continue until the later of the fifth anniversary of (i) all development services under the last work plan executed in accordance with the terms of the agreement or (ii) the first launch date of the product to occur in any of the following jurisdictions: Europe; Japan; or the United States.  The agreement may be extended by agreement of the parties.  We are permitted to terminate the agreement at the end of each phase of the initial work plan and to terminate any work plan executed after the initial work plan upon at least 30 days’ prior written notice to Hovione.

 

In October 2015, we entered into a Master Manufacturing Services Agreement, or the Master Agreement, and a related Product Agreement (together with the Master Agreement, the Patheon Agreements) with Patheon.  The Master Agreement governs the general terms under which Patheon or one of its affiliates will provide manufacturing services to us for drug products specified by us from time to time, and the Product Agreement relates specifically to the manufacture of VARUBI (rolapitant) tablets for sale in the United States.

 

Under the terms of the Patheon Agreements, Patheon will manufacture VARUBI 90 mg tablets for sale in the United States and provide related quality control, packaging and raw materials inventory and storage services.  We will provide Patheon with the necessary active pharmaceutical ingredients for VARUBI.  We are not required to purchase any minimum quantity of VARUBI or any other drug product under the Patheon Agreements, but have agreed to purchase from Patheon a significant majority of our requirements in a specified territory of any drug manufactured under the Master Agreement.

 

The term of each of the Patheon Agreements extends until December 31, 2019 and will automatically renew thereafter for successive two-year periods unless terminated by either party upon prior written notice.  Each of the Patheon Agreements may also be terminated by either party for material, uncured breaches, in the event of the other party’s bankruptcy, or upon prior notice if a governmental authority prevents us from importing, exporting, purchasing or selling the underlying product (VARUBI in the case of the Product Agreement).  Patheon may terminate the Master Agreement or the Product Agreement if we assign any rights thereunder to a Patheon competitor.  We may terminate packaging services upon prior written notice to Patheon and may terminate manufacturing services upon prior written notice if a product is discontinued in its specified territory.

 

Employees

 

As of December 31, 2016, we had 446 full-time employees, 108 of whom hold Ph.D. or M.D. degrees.  Of these full-time employees, 182 were directly engaged in development activities, 134 were engaged in selling, marketing and related

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activities, 48 in medical affairs, with the remainder serving in primarily general and administrative and commercial support capacities.  None of our employees are represented by labor unions or covered by collective bargaining agreements.  We consider our relationship with our employees to be good.

 

Research and Development

 

We have dedicated a significant portion of our resources to our efforts to develop our product candidates, particularly rolapitant and niraparib.  We incurred research and development expenses, including acquired in-process research and development, of $143.3 million, $157.4 million and $254.1 million during the years ended December 31, 2014, 2015 and 2016, respectively.  We anticipate that a significant portion of our operating expenses will continue to be related to research and development in 2017 as we continue to advance our product candidates through clinical development.

 

Available Information

 

Our internet website address is http://www.tesarobio.com.  Through our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, any amendments to those reports, proxy and registration statements, and all of our insider Section 16 reports, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or the SEC.  These materials can be accessed through the “Investors” section of our website.  The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.  Paper copies of our SEC reports are available free of charge upon request in writing to Investor Relations, TESARO, Inc., 1000 Winter Street, Waltham, MA 02451.  The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

 

We currently operate in one segment.  For additional information regarding our financial results, including measures of our accumulated deficit and information on our assets, refer to the Notes to Consolidated Financial Statements included in Part II, Item 8, “ Financial Statements and Supplementary Data ”, of this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk.  You should carefully consider the following discussion of risk factors, in its entirety, in addition to the other information contained in this Annual Report on Form 10-K, including the information in our financial statements and the related notes, and the other filings we make with the Securities and Exchange Commission.  We cannot assure you that any of the events discussed in the risk factors below will not occur.  These risks, or other events that we do not currently anticipate or that we currently deem immaterial, may have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Risks Related to Our Financial Position and Capital Needs

 

We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.

 

We are a biopharmaceutical company with a limited operating history.  Investment in biopharmaceutical product development and commercialization is highly speculative because it entails substantial up-front capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or become commercially viable.  We have recognized limited revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations.  As a result, we are not profitable and have incurred losses in each period since our inception in 2010.  For the year ended December 31, 2016, we reported a net loss of $387.5 million and we had an accumulated deficit of $990.7 million as of December 31, 2016. 

 

Although we obtained approval from the U.S. Food and Drug Administration, or FDA, for VARUBI® (rolapitant) tablets in September 2015 and launched VARUBI in the U.S. market during the fourth quarter of 2015, we expect to continue to incur losses for the foreseeable future.  These losses may increase as we continue to invest in development and commercialization infrastructure for VARUBI oral, the intravenous, or IV, formulation of rolapitant and niraparib, and continue our development of, and seek regulatory approvals for, all of our product candidates.  We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.  The size of our future net losses will depend, in part, on the rate of future growth of our expenses, our ability to generate revenues from VARUBI and any product candidates for which we obtain regulatory approval, including niraparib and the IV formulation of rolapitant, and the timing and amount of milestones and other required payments to third parties in connection with such approvals.  If any of our product candidates, including rolapitant IV and niraparib, fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, we may never become profitable.  Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.  Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

We have recognized limited revenues from sales of our products, and we may never become profitable.

 

To date, we have not recognized significant product revenues from sales of VARUBI or generated any revenues from sales of our other product candidates, including rolapitant IV, niraparib, and our immuno-oncology assets, none of which have been approved for marketing and sale in any jurisdiction.  Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize our products, including VARUBI, niraparib and rolapitant IV, and any other product candidates that we have or may in-license or acquire in the future.  Even if we are able to successfully achieve regulatory approval for our product candidates, we do not know when any of these products will generate revenue for us, if at all.  Our ability to generate revenue from VARUBI and our current or future product candidates also depends on a number of additional factors, including our ability to:

 

·

successfully complete development activities, including additional clinical trials for niraparib;

 

·

complete and submit new drug applications, or NDAs, or biologic license applications, or BLAs, to the FDA and obtain regulatory approval for indications for which there is a commercial market;

 

·

complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;

 

·

set a commercially viable price for our products;

 

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·

obtain commercial quantities of VARUBI, and, if approved, of rolapitant IV, niraparib, and our other product candidates at acceptable cost levels;

 

·

find suitable partners to help us market, sell and distribute our approved products; and

 

·

obtain adequate reimbursement from third-party payors, including government payors.

 

In addition, because of the numerous risks and uncertainties associated with product development, including the risk that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability.  Even if we are able to complete the process described above, we anticipate incurring significant costs associated with commercializing these products.

 

Even if we are able to generate revenues from the sale of our products, we may not become profitable and may need to obtain additional funding to continue operations.  If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

 

We may require additional capital to fund our operations, and if we fail to obtain necessary financing, we may be unable to complete the development and commercialization of our product candidates.

 

Our operations have consumed substantial amounts of cash since inception.  We expect to continue to spend substantial amounts to advance the clinical development of our product candidates and to launch and commercialize VARUBI and any product candidates, including rolapitant IV and niraparib, for which we receive regulatory approval in both the U.S. and in certain foreign markets, including Europe.  We also expect to spend substantial amounts for any milestone obligations that may arise, and for any additional product candidates that we may in-license.  We may require additional capital for these and other needs.  If such additional funding is not obtained on a timely basis, we would be required to change our current operating plans to reduce our future expenses. 

 

Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through additional public or private equity or debt offerings and may seek additional capital through arrangements with strategic partners or from other sources.  Additional capital may not be available on reasonable terms, if at all.  If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of VARUBI, niraparib, or one or more of our other product candidates.  Raising additional funds through the issuance of debt or equity securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both.  Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.  Any of these events could significantly harm our business, financial condition and prospects.

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations is based on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.  Our future funding requirements, both short and long-term, will depend on many factors, including:

 

·

our ability to generate sufficient revenues from sales of VARUBI and if approved, our other product candidates, including niraparib and rolapitant IV, in a timely manner;

 

·

the cost of continuing to expand our development and commercial capabilities for VARUBI and all of our product candidates, both in the U.S. and in certain foreign markets, including Europe;

 

·

the outcome, timing and cost of regulatory approvals by the FDA and comparable foreign regulatory authorities, including for niraparib and rolapitant IV, and the potential that the FDA or comparable foreign regulatory authorities may require that we perform more studies than those that we currently expect;

 

·

the initiation, progress, timing, costs and results of clinical trials for our current product candidates and any future product candidates we may in-license;

 

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·

the cost and timing of completion of commercial-scale outsourced manufacturing activities, including for niraparib and rolapitant IV;

 

·

the cost and timing of preclinical and clinical development associated with our immuno-oncology platform;

 

·

the likelihood and timing of attainment of milestones and our obligations to make milestone payments, royalty payments, or both under our in-licensing agreements;

 

·

the number and characteristics of product candidates that we in-license and develop;

 

·

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights which we own or control;

 

·

the amount and timing of potential conversion requests, if any, and interest expense associated with our 3.00% convertible senior notes due October 1, 2021, or the Convertible Notes; and 

 

·

the effect of competing technological and market developments.

 

If we lack the capital to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.

 

Risks Related to Our Business and Industry

 

Our future success is dependent primarily on our ability to successfully commercialize VARUBI and to obtain regulatory approvals for and successfully commercialize niraparib, rolapitant IV, and our immuno-oncology product candidates.

 

The success of our business depends heavily upon our ability to develop and commercialize product candidates.  We have recognized only limited product revenue from sales of VARUBI, and our only other late clinical-stage product candidates, rolapitant IV and niraparib, have not been approved for marketing and sale in any jurisdiction.  Our other product candidates, including our immuno-oncology assets, are at earlier stages of development.

 

We cannot commercialize product candidates in the United States without first obtaining regulatory approval for the product from the FDA.  Similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities.  Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies, and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate.  The process to develop, obtain regulatory approval for and commercialize product candidates is long, complex and costly both inside and outside of the United States.  Even if a product candidate were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations, including use restrictions for certain patient populations; warnings, precautions or contraindications; or burdensome post-approval study or risk management requirements.

 

Despite the results reported in clinical trials for niraparib, we do not know whether the clinical trials we are continuing to conduct or may in the future conduct will demonstrate adequate efficacy and safety to result in regulatory approval for niraparib in any particular indication or in any particular jurisdiction or jurisdictions.  If we do not obtain regulatory approvals for niraparib in the various indications for which it is being developed, or do not obtain such approvals in a timely manner, it would negatively affect our ability to generate revenue in the future and our growth prospects.

 

If we are unable to obtain FDA approval of our NDA for rolapitant IV, or if we are unable to obtain approval in a timely manner, our ability to generate revenues and our future operating results and growth prospects would be adversely impacted.

 

Notwithstanding VARUBI’s FDA approval, the FDA requires approval of a separate NDA for the IV formulation of rolapitant, and there can be no assurance that we will be able to obtain regulatory approval of the IV formulation.  We filed an NDA for rolapitant IV with the FDA in March 2016, and in January 2017, the FDA issued us a complete response letter, or the Complete Response Letter, with respect to the NDA.  In the Complete Response Letter, the FDA requested additional

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information regarding the in vitro release method utilized to characterize the drug product and demonstrate comparability of drug product produced at our two proposed commercial manufacturers for rolapitant IV that were included in the NDA.  We will need to provide the additional requested information to the FDA in the form of a resubmission of the NDA, which the FDA will need to deem acceptable, in order for the NDA to be approved and for us to be allowed to market and sell rolapitant IV in the U.S.  We expect the IV formulation of rolapitant to serve what we believe is a larger portion of the market for NK-1 receptor antagonists and potentially generate more revenue than the oral formulation.  If we do not obtain FDA approval for rolapitant IV or do not obtain such approval in a timely manner, such failure would adversely affect our ability to generate revenues, our future operating results and our growth prospects.

 

Our current business plan relies heavily on our ability to successfully commercialize VARUBI, rolapitant IV, niraparib, and our immuno-oncology assets.  Our products and product candidates, if approved, may not achieve market acceptance or be commercially successful.

 

Our ability to successfully commercialize VARUBI and our product candidates, including rolapitant IV, niraparib, and our immuno-oncology assets, is critical to the execution of our business strategy.  VARUBI and, if approved, rolapitant IV, niraparib, and our immuno-oncology assets, may not achieve market acceptance among physicians, patients, and third-party payors, and may not be commercially successful.  The degree of market acceptance and commercial success of our products and product candidates, if approved, will depend on a number of factors, including the following:

 

·

the acceptance of our products by patients and the medical community and the availability, perceived advantages and relative cost, safety and efficacy of alternative and competing treatments;

 

·

the effectiveness of our marketing, sales and distribution strategy and operations;

 

·

the ability of our third-party manufacturers to manufacture commercial supplies of our products, to remain in good standing with regulatory agencies, and to develop, validate and maintain commercially viable manufacturing processes that are, to the extent required, compliant with current good manufacturing practice, or cGMP, regulations;

 

·

the degree to which the approved labeling supports promotional initiatives for commercial success;

 

·

the availability of reimbursement from managed care plans and other third-party payors and the willingness and ability of patients to pay for our products;

 

·

a continued acceptable safety profile of our products and product candidates;

 

·

any new or unexpected results from additional clinical trials or further analysis of clinical data of completed clinical trials by us or our competitors;

 

·

our ability to enforce our intellectual property rights;

 

·

our ability to avoid third-party patent interference or patent infringement claims; and

 

·

maintaining compliance with all applicable regulatory requirements.

 

As many of these factors are beyond our control, we cannot assure you that we will ever be able to generate meaningful revenue through product sales.  Any inability on our part to successfully commercialize our products in the United States or any foreign territories where they may be approved, or any significant delay in such approvals, could have a material adverse impact on our ability to execute upon our business strategy and our future business prospects.

 

If we are unable to successfully expand our existing sales, marketing and distribution capabilities for VARUBI and any future products for which we obtain marketing approval, we may be unable to generate significant revenue from sales of our products. 

 

Prior to the launch of VARUBI in late 2015, we had not commercialized any drug products as a company.  To achieve commercial success for VARUBI and any future product candidate that may be approved by the FDA or comparable foreign regulatory authorities, including rolapitant IV and niraparib, we must continue to expand our sales, marketing,

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managerial and other non-technical capabilities or make arrangements with third parties to perform these services.  We will be competing with companies that currently have extensive, well-funded, and more experienced sales and marketing operations.  We may be unable to compete successfully against these more established companies.

 

We have built a field organization and other capabilities for the sales, marketing and distribution of VARUBI, which we expect to continue to expand for the expected launches of rolapitant IV and niraparib, and there are significant risks involved with building and managing such a commercial organization.  Factors that may inhibit our efforts to effectively commercialize our current and future products include:

 

·

our inability to recruit, train, retain and incentivize adequate numbers of qualified and effective sales and marketing personnel;

 

·

the inability of sales personnel to generate sufficient sales leads and to obtain access to physicians or persuade adequate numbers of physicians to use or prescribe our products;

 

·

the lack of complementary products currently offered by our sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

·

our inability to effectively manage a geographically dispersed sales and marketing team, both in the United States and Europe.

 

If we are unable to establish and maintain effective sales, marketing and distribution capabilities for our current and future products, we may not be able to generate significant product revenue and may not become profitable.

 

We face substantial competition for VARUBI and expect to face substantial competition for our product candidates, including rolapitant IV and niraparib, if approved, which could limit our ability to generate significant product sales.

 

The development and commercialization of new drug products is highly competitive.  We face substantial competition with respect to VARUBI and, if approved, our rolapitant IV product would also face substantial competition.  VARUBI competes with EMEND, an NK-1 receptor antagonist marketed by Merck, as well as AKYNZEO, an oral combination NK-1 receptor antagonist and 5-HT 3 receptor antagonist (netupitant plus ALOXI (palonosetron HCl)) that is marketed by Helsinn.  We are also aware that Sandoz has recently launched a generic version of aprepitant, which competes with VARUBI.  VARUBI would face additional competition if additional generic versions are introduced to the market, if other products are developed and approved for the treatment and prevention of CINV, or if an IV formulation of AKYNZEO is developed.

 

There are a number of large pharmaceutical and biotechnology companies that market and sell products or are pursuing the development of products that we expect will compete with niraparib.  There are currently two commercially available PARP inhibitors.  AstraZeneca Plc’s LYNPARZA TM (olaparib) was approved in December 2014 by the FDA for use by ovarian cancer patients with a germline BRCA mutation who have been treated with three or more prior lines of chemotherapy, and also by the European Commission following a positive opinion by the EMA for use as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed BRCA-mutated (germline and/or somatic) high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.  Clovis Oncology, Inc.’s RUBRACA TM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies.  We believe the additional products in clinical development targeting the PARP pathway consist of: Pfizer’s talazoparib (MDV3800) and AbbVie’s ABT-888 (veliparib), both currently in Phase 3 clinical trials; Eisai, Inc.’s E-7016 and E-7449, currently in Phase 2 and Phase 1/2 clinical trials, respectively; and AbbVie’s ABT-767, BeiGene/EMD Serono (Merck KGaA)’s BGB-290, Checkpoint Therapeutics’ CK-102 (formerly CEP-9722) and Hengrui’s fluzoparib, each currently in Phase 1 clinical trials.  Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval.

 

A number of pharmaceutical and biotechnology companies are also pursuing the development of cancer immunotherapies that may compete with our immunotherapy product candidates.  We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our collaboration programs with AnaptysBio, and several other companies with immuno-oncology antibodies or programs in the

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preclinical or research phase.  For further detail on the specific competition that VARUBI and our product candidates face, see Item 1, “Business – Competition”.

 

Many of the approved drugs with which our products or product candidates may compete are well-established therapies or products and are widely accepted by physicians, patients and third-party payors.  Insurers and other third-party payors may also encourage the use of generic products.  Any of our product candidates that are approved may be priced at a significant premium over competitive generic products.  This may make it difficult for us to execute our business strategy of using our product candidates in combination with existing therapies or replacing existing therapies with our product candidates.

 

Our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates.  Our competitors may also develop drugs that are more effective, more widely used and less costly than ours, and may also be more successful than us in manufacturing and marketing their products.

 

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

 

Even after regulatory approval is obtained, products are still subject to ongoing requirements of the FDA and comparable foreign regulatory authorities, including requirements related to manufacturing, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information.  The safety profile of any product will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information about any of our products or product candidates after approval, those authorities may require labeling changes or establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or similar strategy, impose restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

 

In addition, manufacturers of drug and biological products and their facilities are subject to continual review and periodic inspections by the FDA, other regulatory authorities or comparable foreign regulatory authorities for compliance with cGMP requirements.  If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with a facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.  If we, our approved products or product candidates, or the manufacturing facilities for our approved products or product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·

issue warning letters or untitled letters;

 

·

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

·

require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

·

seek an injunction or impose civil or criminal penalties or monetary fines;

 

·

suspend, vary or withdraw regulatory approval;

 

·

suspend any ongoing clinical studies;

 

·

refuse to approve pending applications or supplements to applications filed by us;

 

·

suspend or impose restrictions on operations, including costly new manufacturing requirements; and/or

 

·

seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

 

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The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.

 

Advertising and promotion of our products and any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress, and the public.  Violations of applicable advertising and promotion laws and regulations, including promotion of our products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA.  Advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities.

 

In the United States, engaging in impermissible promotion of approved products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products.  These false claims statutes include the federal civil False Claims Act, which allows the federal government, or any individual on behalf of the federal government, to bring a lawsuit against a pharmaceutical company alleging the submission of false or fraudulent claims, or causing the submission of such false or fraudulent claims, for payment of government funds, and any successful individual could share in any judgment or settlement funds.  In recent years, False Claims Act lawsuits against pharmaceutical companies have led to several substantial civil and criminal settlements based on certain sales practices promoting off-label drug uses.  This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay treble damages and penalties, or agree to comply with burdensome reporting and compliance obligations pursuant to a Corporate Integrity Agreement or other settlement agreement with the U.S. Department of Health and Human Services Office of Inspector General to avoid exclusion from the Medicare, Medicaid, and other federal and state healthcare programs.  We may become subject to such litigation and, if we are not successful in defending against such actions, those actions may have a material adverse effect on our business, financial condition and results of operations.  Equivalent laws and potential consequences exist in foreign jurisdictions.

 

Advertising and promotion of our products will be similarly subject to close scrutiny in the European Union, or the EU. Allegations of off-label promotion of our products could lead to imposition of administrative measures, fines and imprisonment and limitations or restrictions on permitted communications concerning the advertising and promotion of our products.

 

Because the results of preclinical testing or clinical studies are not necessarily predictive of future results, niraparib, or any other product candidate we advance into clinical trials may not have favorable results in later clinical trials or receive regulatory approval for any particular use, if at all.

 

Success in preclinical testing or human clinical studies does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug, or the safety, purity, and potency of an investigational biological product for any particular use, or at all.  A number of companies in the pharmaceutical and biotechnology industries, including many with greater resources and experience than us, have suffered significant setbacks in clinical trials, even after seeing promising results in prior clinical trials.  Despite the results reported in clinical trials for niraparib to date, we do not know whether the clinical trials we are currently conducting or may in the future conduct will demonstrate adequate efficacy and safety, or safety to result in regulatory approval for niraparib for any particular use or in any particular jurisdiction or jurisdictions.  If we do not obtain regulatory approval for niraparib, or do not obtain such approval in a timely manner or for anticipated patient populations, it would negatively affect our ability to generate significant revenue and our growth prospects.

 

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain.  Failure can occur at any time during the clinical trial process. 

 

We have various ongoing clinical trials related to our development programs for niraparib and our various immuno-oncology assets.  We may experience delays in our ongoing or future clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned, or be completed on schedule, if at all.  Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

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delay or failure in reaching agreement with the FDA or comparable foreign regulatory authority on a trial design that we are able to execute;

 

·

delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical study;

 

·

delay or failure in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

·

delay or failure in obtaining institutional review board, or IRB, approval or the approval of other reviewing entities, including comparable foreign entities, to conduct a clinical trial at each site;

 

·

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

 

·

delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

·

delay or failure in having subjects complete a trial or return for post-treatment follow-up;

 

·

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;

 

·

inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication;

 

·

failure of our third-party CROs, clinical sites, or clinical trial managers to satisfy their contractual duties or meet expected deadlines;

 

·

ambiguous or negative interim results, or results that are inconsistent with earlier results;

 

·

feedback from the FDA, an IRB, a data safety monitoring board, or comparable foreign entities; or results from earlier stage or concurrent preclinical and clinical studies, that might require modification to the protocol for a given study;

 

·

a decision by the FDA, an IRB, comparable foreign regulatory entities, or the Company; or a recommendation by a data safety monitoring board or comparable foreign regulatory entity, to suspend or terminate a clinical trial at any time for safety issues or for any other reason;

 

·

unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

 

·

failure to demonstrate a benefit from using a drug or biologic;

 

·

manufacturing issues, including problems with manufacturing or obtaining from third parties sufficient quantities of raw materials, active pharmaceutical ingredients or product candidates for use in clinical trials; and

 

·

changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

 

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of subjects to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, the ability to obtain and maintain patient consents, whether enrolled subjects drop out before completion, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.  Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their activities, we have limited influence over their actual performance.

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If we experience delays in the completion of, or the termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed.  In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues.  Any of these occurrences may harm our business, financial condition and prospects significantly.  In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

 

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, including niraparib and rolapitant IV, our business will be substantially harmed.

 

The time required to obtain approval by the FDA and comparable foreign regulatory authorities for a product candidate is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities.  In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions.  Although we have obtained FDA regulatory approval for VARUBI, it is possible that none of our current product candidates, including niraparib and rolapitant IV, or any other product candidates we may seek to develop in the future will ever obtain regulatory approval.

 

Our product candidates could fail to receive regulatory approval from the FDA or comparable foreign regulatory authorities for many reasons, including:

 

·

disagreement with the design or implementation of our clinical trials;

 

·

failure to demonstrate that a product candidate is safe and effective for its proposed indication;

 

·

failure of clinical trial results to meet the level of statistical significance required for approval;

 

·

failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

·

disagreement with our interpretation of data from preclinical studies or clinical trials;

 

·

the insufficiency of data collected from clinical trials of our product candidates to support the submission and filing of an NDA, BLA or other submission or to obtain regulatory approval;

 

·

disapproval of the manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; and

 

·

changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.

 

The FDA or a comparable foreign regulatory authority may require more information, including additional preclinical or clinical data, to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program.  If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that is not desirable for the successful commercialization of that product candidate.  In addition, if our product candidate produces undesirable side effects or safety issues, the FDA may require the establishment of a REMS, or a comparable foreign regulatory authority may require the establishment of similar strategies, that may, for instance, restrict distribution of our product or otherwise impose burdensome implementation requirements on us.  Any of the foregoing scenarios could materially harm the commercial prospects of our product candidates.

 

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Certain of our product candidates, including niraparib, could be approved or deemed approvable by the FDA or equivalent foreign regulatory authorities only in combination with a diagnostic test for certain uses, which could increase the risk that the product candidate does not receive approval by the relevant regulatory authorities, or receives approval under conditions that adversely impact the commercial potential of the product candidate. 

 

Certain clinical trials that we have conducted in the past, are currently conducting, or may in the future conduct for certain of our therapeutic product candidates, such as niraparib, included or may include the use of a diagnostic test to help identify patients who may be more likely to respond to the product candidate for certain uses. 

 

If the FDA or any equivalent foreign regulatory authority determines that niraparib or any of our other product candidates can be approved for use only with an approved companion diagnostic test, we may have difficulty receiving regulatory approval for such product candidate in those uses if the relevant diagnostic test is not also cleared or approved for use by the applicable regulatory authority.  Diagnostic tests, including companion diagnostics, are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and require separate regulatory clearance or approval prior to commercialization.  We do not develop diagnostic tests internally.  We are therefore dependent on the sustained cooperation and effort of third-party collaborators in developing and obtaining approval for these tests.  For example, the diagnostic tests that are being utilized in our completed and ongoing niraparib clinical studies are owned and administered by a third party.  If clearance or approval of these diagnostic tests is required by the FDA or equivalent foreign regulatory authorities, this third party may encounter difficulties in obtaining clearance or approval for the applicable tests, or may fail to support the clinical development of niraparib as we expect, or may fail to keep the test on the market even if it is cleared or approved.  Any such delay or failure could delay or prevent approval or adoption of niraparib, or other products we may later acquire with similar characteristics.

 

In addition, if niraparib or any other product candidate is approved for use only in connection with such a companion diagnostic test by the FDA or any comparable foreign regulatory agencies, the commercial opportunity for niraparib or such product candidate may be more limited, and we may have difficulty achieving adoption of the product candidate, if the diagnostic test is not commercially available or if the diagnostic test is restricted in its use by payors or other market forces.  In both the NDA and the MAA that we submitted for niraparib for use in ovarian cancer patients to the FDA and EMA, respectively, we are requesting approval of niraparib for use without any required companion diagnostic test.  There is no guarantee that niraparib will be approved for any use in the manner set forth in either the NDA or the MAA.  If the FDA or any equivalent foreign authority requires that niraparib be used only in connection with the use of a companion diagnostic test, then the commercial opportunity for niraparib may be more limited and our stock price may decline.

 

Any of our products or product candidates may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval, limit its commercial viability, or result in significant negative consequences following any marketing approval.

 

Undesirable side effects caused by any of our products or product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials, could result in a more restrictive label, or could result in the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities.  Drug-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete a clinical trial, and could result in potential product liability claims.  Any of these occurrences may harm our business, financial condition and prospects significantly.

 

Additionally, if one or more of our product candidates receives marketing approval, as VARUBI has, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

·

we may suspend marketing of such product;

 

·

we may be obliged to conduct a product recall or product withdrawal;

 

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regulatory authorities may withdraw approvals of such product;

 

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regulatory authorities may require additional warnings on the label for such product;

 

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·

we may be required to develop a REMS for such product or, if a REMS is already in place, to incorporate additional requirements under the REMS, or to develop a similar strategy as required by a comparable foreign regulatory authority;

 

·

we may be required to conduct additional post-market studies;

 

·

we could be sued and held liable for harm caused to subjects or patients; or

 

·

our reputation may suffer.

 

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product or product candidate, and could significantly harm our business, results of operations and prospects.

 

Failure to obtain regulatory approval in international jurisdictions would prevent our product candidates from being marketed abroad.

 

In order to market and sell any of our product candidates in Europe or any other foreign jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements.  The approval procedure varies among countries and can involve additional testing.  The time required to obtain approval may differ substantially from that required to obtain FDA approval.  The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval.  In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country.  In the EU, certain products or product candidates with which niraparib may compete have also received “orphan drug designation” from the EMA in an ovarian cancer indication, which provides certain benefits to such competitors, including market exclusivity for up to ten years in the approved indication post-approval.  We or our licensees may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all.  Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.  We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market.  If we are unable to obtain approval of any of our product candidates by regulatory authorities in Europe or other foreign territories, the commercial prospects of that product candidate may be diminished and our business prospects could be adversely impacted.

 

Our products and any product candidates we are able to commercialize, may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could harm our business.

 

Our ability to successfully market and commercialize our current and future products will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations.  Our future revenues and profitability will be adversely affected if these third-party payors do not sufficiently cover and reimburse the cost of our products and related procedures or services. If these entities do not provide sufficient coverage and reimbursement for VARUBI, or any future drug product we may market, including niraparib and rolapitant IV, these products may be too costly for general use, and physicians may prescribe them less frequently.

 

The Medicare program and certain government pricing programs, including the Medicaid drug rebate program, the Public Health Service’s 340B drug pricing program, or the 340B program, and the pricing program under Section 603 of the Veterans Health Care Act of 1992, or the VHCA, impact the revenues we may derive from current and future products that we may commercialize. Any future legislation or regulatory actions altering these programs or imposing new compliance requirements could have a significant adverse effect on our business. There have been, and we expect there will continue to be, a number of legislative and regulatory actions and proposals to control and reduce health care costs. These measures may, among other things: negatively impact the level of reimbursement for pharmaceutical products; require higher levels of cost-sharing by beneficiaries; change the discounts required to be provided by pharmaceutical manufacturers to government payors and/or providers; extend government discounts to additional government programs and/or providers; or reduce the level of reimbursement for health care services and other non-drug items. Any such measures could indirectly impact demand for pharmaceutical products because they can cause payors and providers to apply heightened scrutiny and/or austerity actions to their entire operations, including pharmacy budgets.

 

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Also, the trend toward managed health care in the U.S., as well as the implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the ACA, and the concurrent growth of organizations such as managed care organizations, accountable care organizations and integrated delivery networks, may result in increased pricing pressures for pharmaceutical products, including any products that may be offered by us in the future.  Moreover, legislative changes to the ACA remain possible and appear likely in the 115th United States Congress and under the Trump Administration.  Cost-cutting measures that health care providers are instituting, and the implementation of health care reform, could materially adversely affect our ability to sell any drug products that are successfully developed or acquired by us.  In addition, third-party payors, in an effort to control costs, are increasingly making patients responsible for a higher percentage of the total cost of drugs in the outpatient setting.  This can lower the demand for our products if the increased patient cost sharing obligations are more than they can afford.  Individual states’ responses to ongoing financial pressures could also result in measures designed to limit reimbursement, restrict access, or impose broader or deeper discounts on branded pharmaceutical products utilized for Medicaid patients, including VARUBI, or any future drug product we may market, including niraparib and rolapitant IV.  We are unable to predict what changes in legislation or regulation relating to the health care industry or third-party coverage and reimbursement, including possible repeal of the ACA, may be enacted in the future or what effect such legislation or regulation would have on our business.

 

There may be significant delays in obtaining coverage and reimbursement for any drug product for which we obtain approval, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities.  Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacturing, selling and distribution costs.  Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary. 

 

If we fail to comply with our reporting and payment obligations under U.S. governmental pricing and contracting programs, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 

 

Pricing and rebate calculations vary among products and programs.  The calculations are complex and are often subject to interpretation by manufacturers, governmental or regulatory agencies, and the courts.  We will be required to submit a number of different pricing calculations, and failure to comply with our reporting and payment obligations under U.S. governmental pricing and contracting programs may have material adverse effects on our company.

 

The Medicaid rebate amount for each manufacturer is computed each quarter based on the manufacturer’s submission to the Centers for Medicare and Medicaid Services, or CMS, of its current average manufacturer price, or AMP, and, in the case of innovator products like VARUBI, best price figures, for the quarter.  If we become aware that our AMP or best price reporting for a prior quarter was incorrect, or has changed, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the data originally were due.  Such restatements and recalculations would increase our costs for complying with the laws and regulations governing the Medicaid drug rebate program.  Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction.  Price recalculations also may affect the ceiling price at which we would be required to offer our products to certain covered entities, such as safety-net providers, under the 340B program.

 

We are liable for errors associated with our submission of average sales price, or ASP, pricing data under Medicare Part B.  In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP, ASP, or best price information to the government, we may be liable for civil monetary penalties in the amount of $178,156 per item of false information.  If we are found to have made a misrepresentation in the reporting of our ASP, the Medicare statute provides for civil monetary penalties of up to $12,856 for each misrepresentation for each day in which the misrepresentation was applied.  Our failure to submit monthly/quarterly AMP, ASP, and best price data on a timely basis could result in a civil monetary penalty of $17,856 per day for each day the information is late beyond the due date.  Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program.  In the event that CMS terminates our rebate agreement, federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.  Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. 

We are required to calculate and report certain pricing data to the U.S. federal government in connection with federal drug pricing programs. Compliance with these federal drug pricing programs is a pre-condition to: (i) the availability of federal

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funds to pay for our products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs, or the VA, and by covered entities under the 340B program.  The pricing data reported are used as the basis for establishing Federal Supply Schedules, or FSS, drug pricing program and 340B program contract pricing and payment and rebate rates under the Medicare Part B and Medicaid programs, respectively. Pharmaceutical manufacturers have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government, which has resulted in overcharges or underpayments under these programs.  The rules governing the calculation of certain reported prices are highly complex.  Although it is our intention to maintain and follow strict procedures to ensure the maximum possible integrity for our federal price calculations, the process for making the required calculations involves subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws.  We cannot assure you that our pricing submissions will not be found to be incomplete or incorrect.  If we become subject to investigations or other inquiries concerning our compliance with price reporting laws and regulations, and our methodologies for calculating federal prices are found to include flaws or to have been incorrectly applied, we could be required to pay or be subject to additional reimbursements, penalties, sanctions or fines, which could have a material adverse effect on our business, financial condition and results of operations.

To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies and certain federal grantees, we also must participate in the VA FSS pricing program. To participate, we are required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs” available to the “Big Four” federal agencies—the VA, the Department of Defense, the Public Health Service, and the Coast Guard—at pricing that is capped pursuant to a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the VHCA. The FCP is based on a weighted average wholesaler price known as the Non-FAMP, which manufacturers are required to report on a quarterly and annual basis to the VA. If we misstate Non-FAMPs or FCPs, we must restate these figures.  Additionally, pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject us to penalties of $178,156 for each item of false information. If we overcharge the government in connection with our FSS contract or the Tricare Retail Pharmacy Program, whether due to a misstated FCP or otherwise, we are required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, transparency and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, specialty distributors, specialty pharmacies, physicians and third-party payors play a primary role in the distribution, recommendation and prescription of any pharmaceutical product for which we obtain marketing approval.  Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements through which we market, sell and distribute VARUBI and any other products for which we obtain marketing approval, including rolapitant IV and niraparib.  Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

·

the federal healthcare Anti-Kickback Statute prohibits any person from, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchasing, leasing, ordering or arranging for or recommending of any good or service for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid.  The term “remuneration” has been broadly interpreted to include anything of value.  The Anti-Kickback Statute is subject to evolving interpretation and has been applied by government enforcement officials to a number of common business arrangements in the pharmaceutical industry.  The government can establish a violation of the Anti-Kickback Statute without proving that a person or entity had actual knowledge of the statute or specific intent to violate it.  There are a number of statutory exemptions and regulatory safe harbors protecting some common activities from prosecution; however, those exceptions and safe harbors are drawn narrowly.  Failure to meet all of the requirements of a particular statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute, but the legality of the arrangement will be evaluated on a case-by-case basis based on the totality of the facts and circumstances.    We seek to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. 

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Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs; 

 

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the federal civil False Claims Act imposes civil penalties, and provides for whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment of government funds that are false or fraudulent, or knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim to avoid, decrease, or conceal an obligation to pay money to the federal government.  In recent years, several pharmaceutical and other healthcare companies have faced enforcement actions under the federal False Claims Act for, among other things, allegedly submitting false or misleading pricing information to government health care programs and providing free product to customers with the expectation that the customers would bill federal programs for the product.  Other companies have faced enforcement actions for causing false claims to be submitted because of the company’s marketing the product for unapproved, and thus non-reimbursable, uses.  Federal enforcement agencies also have shown increased interest in pharmaceutical companies’ product and patient assistance programs, including reimbursement and co-pay support services, and a number of investigations into these programs have resulted in significant civil and criminal settlements.  In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.  False Claims Act liability is potentially significant in the healthcare industry because the statute provides for treble damages and mandatory penalties of $5,500 to $11,000 per false claim or statement, increasing to $10,781 to $21,563 per false claim or statement for penalties assessed after August 1, 2016 for violations occurring after November 2, 2015.  Because of the potential for large monetary exposure, healthcare and pharmaceutical companies often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages and per claim penalties that may be awarded in litigation proceedings. Companies may be required, however, to enter into corporate integrity agreements with the government, which may impose substantial costs on companies to ensure compliance.  Criminal prosecution is also possible for making or presenting a false or fictitious or fraudulent claim to the federal government;

 

·

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, among other things, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.  HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services;

 

·

the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, imposes annual reporting requirements on certain manufacturers of drugs, devices, or biologics for payments and other transfers of value by them, directly or indirectly, to physicians (including physician family members) and teaching hospitals, as well as ownership and investment interests held by physicians.  A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.”  Manufacturers must submit reports by the 90th day of each calendar year;  

 

·

analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.  Several states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states.  Some of these states also prohibit certain marketing-related activities, including the provision of gifts, meals, or other items to certain health care providers.  In addition, several states require pharmaceutical companies to implement compliance programs or marketing codes; and

 

·

similar restrictions imposed on the promotion and marketing of medicinal products in Europe and other foreign territories, including restrictions prohibiting the promotion of a compound prior to its approval. Laws (including

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those governing promotion and marketing and anti-kickback provisions), industry regulations and professional codes of conduct often are strictly enforced. Even in those countries where we may decide not to directly promote or market our products, inappropriate activity by our any international distribution partners could have implications for us.

 

The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail to comply fully with one or more of these requirements.  Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs.  It is possible that governmental authorities will conclude that our business practices do not comply with applicable fraud and abuse or other healthcare laws and regulations or guidance.  If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.  If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.  Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our financial condition and divert resources and the attention of our management from operating our business.

Our ability to successfully commercialize our products and generate revenues outside of the U.S. depends heavily on the availability of adequate pricing and reimbursement from government and other third-party payors.

Outside the U.S., certain countries, including a number of EU Member States and other European countries, set prices and reimbursement for pharmaceutical products, or medicinal products as they are commonly referred to in the EU, with limited participation from the marketing authorization holders. We cannot be sure that such prices and reimbursement will be acceptable to us or our collaborators. If the regulatory authorities in these foreign jurisdictions set prices or reimbursement levels that are not commercially attractive for us or our collaborators, our revenues from sales by us or our collaborators, and the potential profitability of our drug products, in those countries would be negatively affected. An increasing number of countries are taking initiatives to attempt to reduce large budget deficits by focusing cost-cutting efforts on pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regions of the world, but have been most drastic in the EU.

Reimbursement for medicinal products in the EU Member States is governed by complex mechanisms established on a national level in each country.  These mechanisms vary widely among the EU Member States and are constantly evolving, reflecting the efforts of the EU Member States to reduce public spending on healthcare.  The EU Member States have broad discretion to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and reimbursement levels for medicinal products.  An EU Member State may approve a specific price or level of reimbursement for medicinal products, or alternatively adopt a system of direct or indirect controls on the profitability of the company marketing the medicinal product, including volume-based arrangements.  Further, an increasing number of EU Member States and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory.  Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere.

In addition, a Health Technology Assessment, or HTA, of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in a number of EU Member States, and the outcome of an HTA will often influence the pricing and reimbursement status granted to a medicinal product by the competent authorities of individual EU Member States.  A negative HTA of any of our medicinal products by a leading and recognized HTA body could not only undermine our ability to obtain reimbursement for our medicinal product in the EU Member State in which such negative assessment was issued, but also in other EU Member States and elsewhere.  For example, EU Member States that have not yet developed HTA mechanisms could rely to some extent on the HTA performed in countries with a developed HTA framework when adopting decisions concerning the pricing and reimbursement of a specific medicinal product.  Moreover, as part of the HTA process or in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies.  There can be no assurance that our medicinal products will obtain favorable reimbursement status in any country.  If

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our medicinal products fail to be reimbursed in any of the EU Member States or other foreign countries for these and other reasons, our future revenues and profitability would be adversely affected.

Additionally, some countries require approval of the sale price of a product before it can be marketed.  In many countries, the pricing review period begins after marketing or product licensing approval is granted.  As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of the product in that particular country.

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and may affect the prices we may obtain.

 

In the United States and foreign jurisdictions, legislative and regulatory changes and proposed changes regarding the healthcare system could affect our ability to profitably sell any product candidates for which we obtain marketing approval.

 

In recent years, Congress has considered reductions in Medicare reimbursement levels for drugs administered by physicians.  CMS also has authority to revise reimbursement rates and to implement coverage restrictions for some drugs.  Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price we can receive for those products.  While Medicare regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates.  Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private payors.

 

The ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry.  The ACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms.  The ACA expanded manufacturers’ rebate liability under the Medicaid program from fee-for-service Medicaid utilization to include the utilization of Medicaid managed care organizations as well; increased the minimum Medicaid rebate due for most innovator drugs in general from 15.1% of AMP to 23.1% of AMP; and capped the total rebate amount for innovator drugs at 100% of AMP.  The ACA and subsequent legislation also changed the definition of AMP.  The ACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.  Each such manufacturer pays a prorated share of the branded prescription drug fee of $4.0 billion in 2017, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.  Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners.  The ACA also expanded the 340B program to include additional types of covered entities.  Final CMS regulations to implement the changes to the Medicaid drug rebate program under the ACA became effective on April 1, 2016.  If not repealed or amended, it is likely that the ACA will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.

 

In addition, other legislative changes have been proposed and adopted since the ACA was enacted.  Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012.  Subsequent legislation extended the 2% reduction, on average, to 2025.  This could cause Medicare Part D plans to seek lower prices from manufacturers. Moreover, legislative changes to the ACA remain possible and appear likely in the 115th United States Congress and under the Trump Administration, which could adversely affect our business.  Even if favorable coverage and reimbursement status is attained for our products, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

We cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes (or in some instances current regulations, guidance or interpretations) on the marketing approvals of our product candidates, if any, may be.

 

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If we breach the license agreements for our products or product candidates, we could lose the ability to continue the development and commercialization of our product candidates.

 

Our agreements with our licensors, including OPKO, Merck, and AnaptysBio, require us, among other things, to use diligent or commercially reasonable efforts to develop and commercialize the products and product candidates licensed thereunder, make timely milestone, royalty and other payments, provide certain information regarding our activities with respect to such products and product candidates, maintain the confidentiality of information we receive thereunder, and indemnify our licensors with respect to our development and commercialization activities under the terms of the agreements.  If we fail to meet these obligations, our licensors have the right to terminate our exclusive licenses and re-obtain the licensed technology as well as aspects of any intellectual property controlled by us and developed during the period the agreements were in force that relate to the licensed technology.  This means that our licensors could effectively take control of the development and commercialization of our products and product candidates after an uncured, material breach of our license agreements by us.  This would also generally be the case if we voluntarily terminated the agreements.  While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all.  Any uncured, material breach under the licenses could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization efforts for the applicable product or product candidate.

 

We may not be successful in obtaining necessary rights to additional product candidates for our development pipeline through acquisitions and in-licenses.

 

We generally do not intend to develop product candidates from our own original research.  Our business model is predicated, in part, on our ability to successfully identify and acquire or in-license product candidates for the treatment and support of cancer patients.  However, we may be unable to acquire or in-license any product candidates from third parties for various reasons, including because we are focusing on a specific area of care, and we may be unable to identify product candidates that we believe are an appropriate strategic fit for our company.

 

The in-licensing and acquisition of product candidates is a competitive area, and many more established companies are also pursuing strategies to in-license or acquire product candidates that we may consider attractive.  These established companies may have a competitive advantage over us due to their size, financial resources and greater clinical development and commercialization capabilities.  Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us.  We also may be unable to in-license or acquire the relevant product candidate on terms that would allow us to generate an appropriate return on our investment.

 

In addition, we expect that competition for the in-licensing or acquisition of product candidates that are attractive to us may increase in the future, which may mean fewer suitable opportunities for us as well as higher acquisition or licensing prices.  If we are unable to successfully obtain rights to suitable product candidates, our business, financial condition and prospects for growth could suffer.

 

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any products that we may develop.

 

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk with the commercialization of VARUBI, rolapitant IV, niraparib, or any of our current or future product candidates.  Product liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products.  If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities.  Regardless of merit or eventual outcome, liability claims may result in:

 

·

decreased demand for any product candidates or products that we may develop;

 

·

termination of clinical trial sites or entire trial programs;

 

·

injury to our reputation and significant negative media attention;

 

·

withdrawal of clinical trial participants;

 

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·

significant costs to defend the related litigation;

 

·

substantial monetary awards to trial subjects or patients;

 

·

loss of revenue;

 

·

diversion of management and scientific resources from our business operations; and

 

·

the inability to commercialize any products that we may develop.

 

We currently hold what we believe to be a commercially reasonable amount of product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive.  We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.  Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects.  A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could consume significant amounts of our cash and adversely affect our business.

 

We have limited experience operating internationally, we intend to market our products outside of the United States, and we will be subject to the risks of doing business outside of the United States.

 

We currently have limited operations outside of the United States and have a relatively small number of international employees.  Because we intend to market VARUBI, rolapitant IV, niraparib and our other product candidates, if approved, outside of the United States, we will need to grow our international operations significantly over the next several years.  Accordingly, our business is subject to risks associated with doing business outside of the United States.  Our business and financial results in the future could be adversely affected due to a variety of factors related to our international operations, including:

 

·

the fact that we have limited experience operating internationally;

 

·

efforts to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s attention from the acquisition or development of product candidates or cause us to forgo profitable licensing opportunities in these geographies;

 

·

changes in a specific country’s or region’s political and cultural climate or economic condition;

 

·

unexpected changes in foreign laws and regulatory requirements;

 

·

difficulty of effective enforcement of contractual provisions in local jurisdictions;

 

·

inadequate intellectual property protection in foreign countries;

 

·

trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges; and

 

·

significant adverse changes in foreign currency exchange rates.

 

In addition to FDA and related regulatory requirements in the U.S. and abroad, we are subject to extensive additional federal, state and foreign anti-bribery regulation, which include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other countries outside of the U.S. We have developed and implemented a corporate compliance program based on what we believe are current best practices in the pharmaceutical industry for companies similar to ours, but we cannot guarantee that we, our employees, our consultants or our third-party contractors are or will be in compliance with all federal, state and foreign regulations regarding bribery and corruption. Moreover, our partners and third-party contractors located outside the U.S. may have inadequate compliance programs or may fail to respect the laws and guidance of the territories in which they operate.  Even if we are not determined to have violated these laws, government investigations into these issues

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typically require the expenditure of significant resources and generate negative publicity, which could also have an adverse effect on our business, financial condition and results of operations.

 

Our ability to use our net operating loss carryforward and certain other tax attributes may be limited.

 

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or tax liabilities may be limited.  We have completed several financings since our inception, which we believe have resulted in a change in control as defined by IRC Section 382.  We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership.  As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.  In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

 

Taxing authorities could challenge our historical and future tax positions or our allocation of taxable income among our subsidiaries, and tax laws to which we are subject could change in a manner adverse to us.

 

We operate through various subsidiaries in a number of countries throughout the world.  Consequently, we are subject to tax laws, treaties, and regulations in the countries in which we operate, and these laws and treaties are subject to interpretation.  We have taken, and will continue to take, tax positions based on our interpretation of such tax laws.  Our transfer pricing arrangements are not generally binding on applicable tax authorities.  The price charged for products, services, or the royalty rates and other amounts paid for intellectual property rights, could be challenged by the various tax authorities, resulting in additional tax liability, interest, and/or penalties.  There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes.  If we are assessed with additional taxes, this may result in a material adverse effect on our results of operations and/or financial condition.  For further discussion related to income taxes, refer to Note 10, “ Income Taxes, ” in the Notes to Consolidated Financial Statements included in Part II, Item 8, “ Financial Statements and Supplementary Data ” in this Annual Report on Form 10-K.

 

Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in our reported results of operations or affect how we conduct our business.

 

A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective.  New accounting pronouncements, taxation rules and varying interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future.  The change to existing rules, future changes, if any, or the need for us to modify a current tax or accounting position may adversely affect our reported financial results or the way we conduct our business.

 

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

 

We are exposed to the risk of employee fraud or other misconduct.  Misconduct by employees could include intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, failure to provide accurate information to the FDA or comparable foreign regulatory authorities, failure to comply with manufacturing standards, failure to comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, failure to report financial information or data accurately, violations of anti-bribery laws, or failure to disclose unauthorized activities to us.  In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices.  These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.  Employee misconduct could also involve the improper use of confidential information obtained in the course of our business, which could result in civil or criminal legal actions, regulatory sanctions, or serious harm to our reputation.  We have adopted a Code of Business Conduct and Ethics and other corporate policies, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.  If any such actions are instituted against us, and we

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are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.

 

We will need to continue to grow the size of our organization, and we may experience difficulties in managing this growth.

 

As of December 31, 2016, we had 446 full-time employees compared to 286 at the end of December 2015.  As our development and commercialization plans and strategies develop, and as a result of any in-licenses or acquisitions of new product candidates, we will need to continue to add managerial, operational, sales, marketing, financial and other resources.  The management, personnel and systems that we currently have in place may not be adequate to support our recent or future growth.  Such growth will impose significant added responsibilities on members of management, including:

 

·

expanding and maintaining a sales and marketing organization and developing our distribution capabilities in both the United States and in foreign territories, including Europe;

 

·

identifying, recruiting, maintaining, motivating and integrating additional employees;

 

·

managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties;

 

·

improving our managerial, development, operational and finance systems; and

 

·

expanding our facilities.

 

As our operations expand, we will need to manage additional relationships with various strategic partners, suppliers and other third parties in both the United States and in foreign territories, including Europe.  Our future financial performance and our ability to commercialize our current and future products and product candidates and to compete effectively will depend, in part, on our ability to manage our growth effectively.  To that end, we must be able to manage our development and commercialization efforts, including our clinical trials, effectively and hire, train and integrate additional management, administrative, sales, and marketing personnel.  We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

 

If we are unable to attract and retain highly qualified personnel, we may not be able to grow effectively.

 

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees.  Because of the specialized scientific nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel.  Our ability to compete and grow depends in large part upon the continued service of our senior management team.  In particular, the loss of one or more of our senior executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner.  The competition for qualified personnel in the biopharmaceutical field is intense and as a result, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.

 

Our future success depends on our ability to retain our co-founding executive officers.

 

We are highly dependent on Leon O. Moulder, Jr., our Chief Executive Officer, and Mary Lynne Hedley, Ph.D., our President and Chief Operating Officer.  Although we have offer letter agreements with Mr. Moulder and Dr. Hedley, these agreements are at-will and do not prevent them from terminating their employment with us at any time.  We do not maintain “key person” insurance for any of our executives or other employees.  The loss of the services of either of these persons could impede the achievement of our research, development and commercial objectives.

 

In addition to in-licensing or acquiring product candidates, we may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our financial condition and operating results.

 

From time to time, we evaluate acquisition opportunities and may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or commercial fit with our current product

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candidates and business or otherwise offer opportunities for our company.  In connection with these acquisitions or investments, we may:

 

·

issue stock that would dilute our stockholders’ percentage of ownership;

 

·

incur debt and assume liabilities; and/or

 

·

incur amortization expenses related to intangible assets or incur large and immediate write-offs.

 

We may be unable to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all.  If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position or that it will not be viewed negatively by customers, financial markets or investors.  Further, future acquisitions could also pose numerous additional risks to our operations, including:

 

·

problems integrating the purchased business, products or technologies;

 

·

increases to our expenses;

 

·

the failure to have discovered undisclosed liabilities of the acquired asset or company;

 

·

diversion of management’s attention from their day-to-day responsibilities;

 

·

harm to our operating results or financial condition;

 

·

entrance into markets in which we have limited or no prior experience; and

 

·

potential loss of key employees, particularly those of the acquired entity.

 

We may not be able to complete one or more acquisitions or effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.

 

Our business and operations would suffer in the event of system failures.

 

Despite the implementation of security measures, our internal computer systems, and those of our collaborators, our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.  If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs.  For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts for our product candidates and significantly increase our costs to recover or reproduce the data.  To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.

Our failure to comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.

We are subject to U.S. data protection laws and regulations (i.e., laws and regulations that address privacy and data security) at both the federal and state levels.  The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues which may affect our business.  Numerous federal and state laws and regulations, including state security breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, disclosure and protection of health-related and other personal information.  Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation, and/or adverse publicity that could negatively affect our business.  In addition, we may obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject to privacy and security requirements under HIPAA.  Although we are not directly subject to HIPAA (other than potentially with respect to providing certain employee benefits), we

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could be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.  Finally, a data breach affecting sensitive personal information, including health information, could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

EU Member States, Switzerland and other countries have also adopted data protection laws and regulations, which impose significant compliance obligations. For example, the collection and use of personal health data in the EU is governed by the provisions of the EU Data Protection Directive, or the Directive.  The Directive and the national implementing legislation of the EU Member States impose strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting.  In particular, these obligations and restrictions concern the consent of the individuals to whom the personal data relates, the information provided to the individuals, notification of data processing obligations to the competent national data protection authorities and the security and confidentiality of the personal data.  Data protection authorities from the different EU Member States may interpret the Directive and national laws differently and impose additional requirements, which add to the complexity of processing personal data in the EU.

 

Guidance on implementation and compliance practices are often updated or otherwise revised.  For example, the Directive prohibits the transfer of personal data to countries outside of the European Economic Area, or EEA, that are not considered by the European Commission to provide an adequate level of data protection.  These countries include the United States.  A recent judgment by the Court of Justice of the European Union determined the U.S.-EU Safe Harbor Framework, which was relied upon by many U.S. entities as a basis for transfer of personal data from the EU to the U.S., to be invalid.  U.S. entities therefore had to rely on alternate procedures provided in the Directive.

 

In February 2016, the European Commission announced an agreement with the U.S. Department of Commerce, or the DOC, to replace the invalidated U.S.-EU Safe Harbor Framework with a new EU-U.S “Privacy Shield”, or the Privacy Shield.  In July 2016, the European Commission adopted a decision on the adequacy of the protection provided by the Privacy Shield.  The Privacy Shield imposes more stringent obligations on companies, provides stronger monitoring and enforcement by the DOC and the U.S. Federal Trade Commission, and includes commitments on the part of public authorities regarding access to information.  U.S. companies have been able to certify to the DOC their compliance with the privacy principles of the Privacy Shield since August 2016 and rely on the Privacy Shield certification to transfer of personal data from the EU to the U.S.

 

In addition, the EU Data Protection Regulation, intended to replace the current Directive, entered into force in May 2016 and will apply from May 2018.  The EU Data Protection Regulation will introduce new data protection requirements in the EU and substantial fines for breaches of the data protection rules. The EU Data Protection Regulation will increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules.

 

Our failure to comply with these laws, or changes in the way in which these laws are implemented, could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.

 

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

 

In June 2016, a majority of voters in the United Kingdom, or the UK, elected to withdraw from the EU in a national referendum.  The UK government is expected to initiate the formal withdrawal procedure by late March 2017.  The procedure involves a two-year negotiation period in which the UK and the EU must agree to terms of the UK’s withdrawal and arrangements for the UK’s future relationship with the EU.  This negotiation period could be extended by a unanimous decision of the European Council, in agreement with the UK.  The referendum has created significant uncertainty about the future relationship between the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate in the event of a withdrawal.  From a regulatory perspective, the UK’s withdrawal could bear significant complexity and risks.  A basic requirement related to the grant of a marketing authorization for a medicinal product in the EU is that the applicant is established in the EU.  Following the withdrawal of the UK from the EU, marketing authorizations previously granted to applicants established in the UK may no longer be valid.  Moreover, depending upon the exact terms of the UK’s withdrawal, the scope of a marketing authorization for a medicinal product granted by the European Commission pursuant to the centralized procedure might not, in the future, include the UK.  In these circumstances, an authorization granted by competent UK authorities would be required to place medicinal products on the UK market.  In addition, the laws and regulations that will apply after the UK withdraws from the EU would affect the 

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manufacturing sites that hold a certification issued by the UK competent authorities.  Our capability to rely on these manufacturing sites for products intended for the EU market would also depend upon the exact terms of the UK withdrawal.  The referendum has also given rise to calls for the governments of other EU Member States to consider withdrawal from the EU.  These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.  Any of these factors could significantly increase the complexity of our activities in the EU and in the UK, could depress our economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common stock.

 

We derive, and may continue to derive, a substantial amount of our product revenue from a limited number of customers and the loss of one or more of these customers or a decline in revenue from one or more of these customers could have an adverse impact on our results of operations and financial condition.

 

In the United States, we currently sell VARUBI primarily to wholesalers and specialty distributors and therefore a significant portion of our net product revenue is generated by a small number of customers.  Two customers accounted for 95 % of our net product revenue during 2016 and five customers accounted for 99 % of our accounts receivable balance at December 31, 2016.  In addition, a significant portion of our VARUBI end-user demand in 2016 was generated by members of a single group purchasing organization with whom we have contracted.  The loss of, material reduction in sales volume to, or a significant adverse change in our relationship with any of our key wholesalers or customers could have a material adverse effect on our revenue in any given period and may result in significant annual or quarterly revenue fluctuations.

 

Wholesaler and distributor buying patterns and other factors may cause our quarterly results to fluctuate, and these fluctuations may adversely affect our short-term results.

 

Our results of operations, including, in particular, net product revenues, may vary from period to period due to a variety of factors, including the buying patterns of our U.S. wholesalers and distributors, which vary from quarter to quarter.  In the event wholesalers and distributors with whom we do business determine to limit their purchases, product sales could be adversely affected.  For example, in advance of an anticipated price increase or a reduction in expected rebates or discounts, customers may order product in larger than normal quantities, which could cause product sales of to be lower in subsequent quarters than they would have been otherwise.  Further, any changes in purchasing patterns, inventory levels, increases in returns, delays in purchasing products or delays in payment for products by one of our wholesalers or distributors could also have a negative impact on our revenue and results of operations.

 

Risks Related to Our Dependence on Third Parties

 

We have no manufacturing facilities, and we are dependent on a limited number of third-party manufacturers for the manufacture and supply of VARUBI, rolapitant IV, niraparib and our other product candidates. If we experience problems with any of these third parties, the manufacturing of VARUBI, rolapitant IV, niraparib, or our other product candidates could be delayed, which could harm our ability to generate revenues from our approved products, our ability to obtain regulatory approval for our product candidates, and our results of operations.

 

We do not own or operate facilities for the manufacture of VARUBI, rolapitant IV, niraparib, or our other product candidates.  We currently have no plans to build our own clinical or commercial scale manufacturing capabilities.  We currently work with one contract manufacturing organization, or CMO, Hovione, for the production of rolapitant drug substance used for VARUBI and rolapitant IV, and one other CMO, Patheon, for commercial production of VARUBI.     We currently work with one CMO for the production of rolapitant IV drug product, which we anticipate will supply our commercial needs.  We currently work with two CMOs for the production of niraparib drug substance, and one other CMO for niraparib drug product supply, for our clinical and expected commercial needs. 

 

As our drug development pipeline matures and we continue to commercialize VARUBI and, if approved, our other product candidates, including niraparib and rolapitant IV, we will have a greater need for clinical study and commercial manufacturing capacity.  We have limited experience manufacturing pharmaceutical products on a commercial scale, and some of our suppliers will need to increase their scale of production to meet our projected needs for commercial manufacturing.  The development of commercial-scale manufacturing capabilities may require our third-party manufacturers to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience.  Our third-party manufacturers may not successfully complete any required increase to existing manufacturing capacity in a timely manner, or

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at all.  Because of the complex nature of our compounds, our manufacturers may not be able to manufacture our compounds at an acceptable cost or in sufficient quantities or in a timely manner necessary to make commercially successful products, or may require us to pay significant costs, including for capital improvements to their facilities.  Therefore, our ability to successfully commercialize VARUBI or any of our product candidates, including niraparib and rolapitant IV, will require us to establish large-scale commercial manufacturing capabilities.  If our contract manufacturers or other third parties fail to deliver VARUBI and our potential future products, including niraparib and rolapitant IV, for commercial sale on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend commercialization of VARUBI, rolapitant IV, niraparib, or our other potential future products. 

 

Existing inventory for niraparib drug substance and drug product from Merck provided the initial clinical trial material needed for our niraparib clinical program.  We have agreements in place with CMOs for the further production of niraparib to meet our clinical supply needs.  For development of our immuno-oncology antibody product candidates, we currently work with one CMO for the production of biologics.  For each of our product candidates, we may elect to pursue arrangements with other CMOs for manufacturing clinical supplies for later-stage trials and for commercialization.  We have not yet qualified alternate suppliers in the event the current CMOs we utilize are unable to scale production, or if we otherwise experience any problems with them.  If we are unable to arrange for alternative third-party manufacturing sources, or to do so on commercially reasonable terms or in a timely manner, we may not be able to complete development of our product candidates, or market or distribute them.

 

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates or any products we may eventually commercialize in accordance with our specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.  In addition, the FDA and similar foreign authorities require that our product candidates and approved products, such as VARUBI, be manufactured according to cGMP and similar foreign standards.  Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.  In addition, such failure could be the basis for the FDA or an equivalent foreign regulatory authority to issue a warning or untitled letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction, or imposition of civil and criminal penalties.

 

Any significant disruption in our supplier relationships could harm our business.  We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers.  There are a small number of suppliers for certain capital equipment and key materials that are used to manufacture our drug products and product candidates.  Such suppliers may not sell these key materials to our manufacturers at the times we need them or on commercially reasonable terms.  We do not have any control over the process or timing of the acquisition of these key materials by our manufacturers.  Moreover, we currently do not have agreements for the commercial production of a number of these key materials which are used in the manufacture of our products and product candidates.  Any significant delay in the supply of a product or product candidate or its key materials for an ongoing clinical study could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates.  If our manufacturers or we are unable to purchase these key materials for VARUBI, rolapitant IV, niraparib or our other product candidates after regulatory approval, the commercial launch of our product candidates could be delayed or there could be a shortage in supply, which would impair our ability to generate revenues from the sale of our products and product candidates.

 

We rely on third parties to conduct our preclinical and clinical trials.  If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for, or commercialize, our product candidates, and our business could be substantially harmed.

 

We have relied upon, and plan to continue to rely upon, AnaptysBio, MD Anderson and other third parties to discover and conduct preclinical research and development with respect to certain of our product candidates, including our antibody product candidates targeting PD-1, TIM-3 and LAG-3.  Although we participate in the planning of these programs, we do not directly control the amount or timing of resources devoted by these third parties to activities related to these product candidates.  Our third-party collaborators may not commit sufficient resources to our research and development programs for these

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candidates.  If our third-party collaborators fail to commit sufficient resources to any of our antibody product candidates, our preclinical programs related to any particular product candidate could be delayed, terminated, or unsuccessful.  Furthermore, if we fail to make required payments to these third-party collaborators, including up-front, milestone, reimbursement or royalty payments, or to observe other obligations in our agreements with them, these third parties may not be required to perform their obligations under our respective agreements with them and may have the right to terminate such agreements.

 

We also have relied upon and plan to continue to rely upon third-party CROs to monitor and manage data for our ongoing preclinical and clinical programs.  We rely on these parties for execution of our preclinical and clinical trials, and we control only certain aspects of their activities.  Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on collaborators and CROs does not relieve us of our regulatory responsibilities.  We also rely on these third parties to assist in conducting our preclinical studies in accordance with good laboratory practices and Animal Welfare Act requirements.  We and our collaborators and CROs are required to comply with good clinical practices, or GCP, which are regulations and guidelines enforced by the FDA, the competent authorities of the member countries of the EEA, and comparable foreign regulatory authorities for all of our products in clinical development.  Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites.  If we or any of our collaborators or CROs fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.  We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials complies with GCP requirements.  In addition, our clinical trials must be conducted with product produced under cGMP requirements.  Failure to comply with these regulations may require us to repeat preclinical and clinical trials, which would delay the regulatory approval process and our ability to generate and grow revenues.

 

The individuals at our third-party collaborators and CROs who conduct work on our behalf are not our employees, and except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs.  If our collaborators and CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our preclinical and clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.  As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.

 

Because we have relied and plan to continue to rely on third parties for the foregoing preclinical and clinical functions, our internal capacity to perform these functions is limited.  Outsourcing these functions involves risks that third parties may not perform to our standards, may not produce results in a timely manner, or may fail to perform at all.  In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated.  We have a limited number of employees, which limits the internal resources we have available to identify and monitor our third-party providers.  To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected.  Although we carefully manage our relationships with our third-party collaborators and CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

 

If we lose our relationships with CROs, our drug development efforts could be delayed.

 

We rely on third-party vendors and CROs for preclinical studies and clinical trials related to our drug development efforts.  Switching or adding additional CROs involves additional cost, requires management time and focus, and could result in substantial delays in our development programs.  Our CROs have the right to terminate their agreements with us in the event of an uncured material breach.  In addition, some of our CROs have an ability to terminate their respective agreements with us if it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors, or if we are liquidated.  Identifying, qualifying and managing the performance of third-party service providers can be difficult, time consuming and cause delays in our development programs.  In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider.  If any of our relationships with our third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms.

 

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Risks Related to Our Intellectual Property

 

If we are unable to protect our intellectual property rights, our competitive position could be harmed, and we could be required to incur significant expenses to enforce our rights.

 

We depend on our ability to protect our proprietary technology.  We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection.  Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products.  Patents may cover the composition of matter of products, pharmaceutical formulations, processes for or intermediates useful in the manufacture of products or the uses of products.  Protection for individual products extends for varying periods in accordance with the legal life of patents in the various countries.  The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.  We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business.  The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject of much litigation.  As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those patent rights licensed to us by third parties, are highly uncertain.

 

The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States.  The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking.  If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.  Further, under our agreement with Merck for niraparib, Merck is responsible, subject to certain exceptions, for prosecuting the licensed patents, and we are reliant on them to do so in a diligent fashion, subject to our right to review and approve their prosecution activities.  If Merck fails to conduct such activities diligently, does not take approved actions, or otherwise fails to adequately protect our licensed patent rights, we may not obtain or maintain broad proprietary protection for niraparib.

 

With respect to patent rights, we do not know whether any of the pending patent applications for any of our licensed compounds will result in the issuance of patents that protect our technology or products, or whether they will effectively prevent others from commercializing competitive technologies and products.  Although we have a number of issued patents under our licensing agreements covering our technology, our pending applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications.  Further, our licensors may be responsible, subject to certain exceptions, for prosecuting the patents covering our products, and we are reliant on them to do so in a diligent fashion, subject to our right to review and approve their prosecution activities.  If they fail to conduct such activities diligently, do not take approved actions, or otherwise fail to adequately protect our licensed patent rights, we may not obtain or maintain broad proprietary protection for our products.  Further, the examination process may require us or our licensors (where applicable) to narrow the claims, which may limit the scope of patent protection that may be obtained.  As the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices in the United States and abroad.  Such challenges may result in the loss of patent protection, the narrowing of claims in such patents, or the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection for our technology and products.  Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult and, may in some cases not be possible.  In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more difficult.

 

The patent prosecution process is expensive and time-consuming, and we or our licensors (where applicable) may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.  It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them.  Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.  We expect to seek extensions of patent terms where they are available in any countries where we are prosecuting patents.  This includes in the United States under the Drug Price

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Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, which permits a patent term extension of up to five years beyond the expiration of the patent.  However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request.  If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.  Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.  The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and these foreign laws may also be subject to change.  Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions typically are not published until 18 months after filing, or in some cases not at all.  Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

 

Previously, in the United States, assuming the other requirements for patentability are met, the first to make the claimed invention was entitled to the patent.  Outside the United States, the first to file a patent application is entitled to the patent.  In March 2013, the United States transitioned to a ‘first to file’ system in which the first inventor to file a patent application will be entitled to the patent.  Under either the previous or current system, third parties will be allowed to submit prior art prior to the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, post-grant review proceedings or interference proceedings challenging our patent rights or the patent rights of others.  An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position with respect to third parties.

 

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights.  To counter infringement or unauthorized use, litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others.  This can be expensive and time consuming.  Many of our current and potential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rights than we can.  Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.  Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results.  In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question.  An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly.  Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.  In the U.S., the Hatch-Waxman Act provides generic companies valuable incentives to seek to invalidate patents for human pharmaceutical products approved under an NDA.  As a result, it is likely that our U.S. patents covering approved drugs such as rolapitant and niraparib, if approved, will be challenged in Hatch-Waxman litigation and administrative proceedings, and may not be upheld.  We may face generic manufacturer challenges to our patents outside the U.S. as well.  The entry of generic competitors typically results in a rapid decline in sales.

 

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

 

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates, and to use our proprietary technologies without infringing the proprietary rights of third parties.  The patent landscape for our products and product candidates is continuously evolving due in part to the fact that patent applications in the United States and many other jurisdictions are maintained in secrecy for at least 18 months following their earliest filing date.  We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the USPTO.  Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future.  For example, we are aware of third-party patents that contain claims potentially relevant to certain therapeutic uses of immune checkpoint inhibitors, and we are also aware of ongoing litigation involving third parties in the area.  If we are found to infringe

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a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and commercializing our products and technology, which could impact the profitability of our products.  However, we may not be able to obtain any required license on commercially reasonable terms or at all.  Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us.  We could be forced, including by court order, to cease commercializing the infringing technology or product.  In addition, in any such proceeding or litigation, we could be found liable for monetary damages.  A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.  Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.

 

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Many of our employees, including our senior management, were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors.  Some of these employees, including members of our senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous employment.  Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer.  We are not aware of any threatened or pending claims related to these matters or concerning the agreements with our senior management, but in the future litigation may be necessary to defend against such claims.  If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.  Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

 

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical personnel, management personnel, or both, from their normal responsibilities.  In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock.  Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.  We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings.  Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources.  Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

 

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

 

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position.  We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties.  We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants.  Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.  Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable.  In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets.  If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

 

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Risks Related to Ownership of Our Common Stock

 

The price of our stock has been, and may continue to be, volatile, and you could lose all or part of your investment.

 

The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.  Since our initial public offering in June 2012, the price of our common stock on the NASDAQ Global Select Market has ranged from $11.05 per share to $192.94 per share.  In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, these factors include:

 

·

the success of competitive products or technologies;

 

·

regulatory actions with respect to our products or our competitors’ products;

 

·

actual or anticipated changes in our growth rate relative to our competitors;

 

·

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

 

·

results of clinical trials of our product candidates or those of our competitors;

 

·

regulatory or legal developments in the United States and other countries;

 

·

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

·

the recruitment or departure of key personnel;

 

·

the level of expenses related to any of our product candidates or clinical development programs;

 

·

the results of our efforts to in-license or acquire additional product candidates or products;

 

·

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

·

variations in our financial results or those of companies that are perceived to be similar to us;

 

·

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

·

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

·

announcement or expectation of additional financing efforts;

 

·

sales of our common stock by us, our insiders or our other stockholders;

 

·

changes in the structure of healthcare payment systems;

 

·

market conditions in the pharmaceutical and biotechnology sectors; and

 

·

general economic, industry and market conditions.

 

In addition, the stock market in general, and the NASDAQ Global Select Market and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.  Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.  The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of our common stock.

 

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Forecasting sales of VARUBI and if approved, rolapitant IV and niraparib, may be difficult, and if our revenue projections are inaccurate, our business may be harmed and our stock price may decline.

 

Our sales of VARUBI, rolapitant IV and niraparib will be difficult to forecast.  Factors that increase the difficulty of forecasting sales of each of our current and future products include the following:

 

·

the cost and availability of reimbursement for the product;

 

·

treatment guidelines issued by government and non-government agencies;

 

·

the timing of market entry relative to competitive products;

 

·

the availability of alternative therapies;

 

·

the price of the product relative to alternative therapies, including generic versions of products that compete with our product;

 

·

the rates of returns and rebates;

 

·

uncertainty about the pace of acceptance of the product;

 

·

the ability of our third-party manufacturers to manufacture and deliver the product in commercially sufficient quantities;

 

·

the ability of our third-party distributors and wholesalers to process orders in a timely manner and satisfy their obligations to us;

 

·

the extent and success of our marketing efforts; and

 

·

potential side effects or unfavorable publicity concerning our product or similar products.

 

The extent to which any of these or other factors individually or in the aggregate may impact future sales of our products is uncertain and difficult to predict.  Our management must make forecasting decisions regarding future revenue in the course of business planning despite this uncertainty, and actual results of operations may deviate materially from projected results.  If our revenues from product sales are lower than we anticipate, we will incur costs in the short term that will result in losses that are unavoidable.  A shortfall in revenue would have a direct impact on our expected cash flow, our stock price and on our business generally.  Furthermore, to the extent that any projections we disclosed publicly regarding future product sales or our financial performance are incorrect, including as a result of the challenges in forecasting such sales, our stock price could be adversely affected, and we could be subject to an increased risk of litigation.  In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock may be volatile, and in the past, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation.  We may be the target of this type of litigation in the future.  Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

Our principal stockholders and management own a significant percentage of our stock and are collectively able to exert significant control over matters subject to stockholder approval.

 

Our executive officers, directors and their or our respective affiliates beneficially owned approximately 31.4% of our voting stock as of December 31, 2016.  This group of stockholders has the potential ability to control us through their ownership position.  Acting together, these stockholders may be able to determine the outcomes of certain matters requiring stockholder approval.  For example, this group may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.  This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our

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stockholders.  The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

 

If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures.  We are required, under Section 404 of the Sarbanes-Oxley Act, to furnish an annual report by management on, among other things, the effectiveness of our internal control over financial reporting.  This assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.  A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.  Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. 

 

Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts.  We have limited experience complying with Section 404, and if in the future we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.  Furthermore, we cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future.  Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows.  If our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the NASDAQ, the U.S. Securities and Exchange Commission, or the SEC, or other regulatory authorities.  Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

 

We are incurring increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives.

 

We incur significant legal, accounting and other expenses as a public company, and these expenses will increase even more as our compliance obligations increase, including as a result of the requirement to obtain an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NASDAQ Stock Market.  Our management and other personnel need to devote a substantial amount of time to these compliance initiatives.  Moreover, these rules and regulations have substantially increased, and will continue to increase , our legal and financial compliance costs and have made and will make some activities more time-consuming and costly.  These costs have increased, and will continue to increase, our consolidated net loss.  For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain sufficient coverage.  We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.  The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never declared or paid cash dividends on our capital stock.  We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business.  In addition, the terms of any future debt agreements may preclude us from paying dividends.  As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

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Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall. 

 

As of December 31, 2016, we have 53,621,679 shares of common stock outstanding.  Sales of a substantial number of shares of our common stock or other securities in the public market or in private placements could occur at any time.  These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.  Of these outstanding shares,16,849,036 are currently held by directors, executive officers and other parties that may be deemed to be their or our affiliates and are available for sale subject to volume limitations, other restrictions under securities laws and, in some cases, vesting schedules.  We also have registered shares of common stock that we may issue under our equity compensation plans.  These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.

 

Furthermore, certain persons who were stockholders prior to our initial public offering are entitled to registration rights under the Securities Act of 1933, or the Securities Act, with respect to shares they hold, which includes 12,727,272 shares held by our directors, executive officers and other parties that may be deemed to be their or our affiliates.  Registration of these shares under the Securities Act would result in such shares becoming freely tradable without restrictions under the Securities Act, except with respect to shares purchased by affiliates.  Any sales of shares by these stockholders could have a material adverse effect on the trading price of our common stock.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

We are subject to the periodic reporting requirements of the Exchange Act.  We design our disclosure controls and procedures to reasonably assure that information we are required to disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.  We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.    These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls.  Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosure due to error or fraud may occur and we may not detect them.

 

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

We expect that we may need additional capital in the future to continue our planned operations.  To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock.  These future issuances of common stock or common stock-related securities, together with the exercise of outstanding stock options, the vesting of outstanding restricted stock units, and any additional shares issued in connection with acquisitions, if any, may result in material dilution to our investors.  Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to those of holders of our common stock.

 

Pursuant to our equity incentive plans, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiaries and affiliates.  The initial number of shares of our common stock available for future grant under our 2012 Omnibus Incentive Plan, or the 2012 Incentive Plan, which became effective in April 2012, was 1,428,571 plus the number of shares of our common stock reserved for issuance under our 2010 Stock Incentive Plan, or the 2010 Incentive Plan, as of the effective date of the 2012 Incentive Plan (which was an additional 6,857 shares).  As of December 31, 2016, there were 694,923 shares of our common stock reserved for issuance under our 2012 Incentive Plan.  On May 14, 2015, our stockholders approved our 2015 Non-Employee Director Stock Incentive Plan, or the 2015 Director Plan.  On May 11, 2016, our stockholders approved certain amendments to the 2015 Director Plan to limit the number of shares of the Company's common stock subject to awards granted in a calendar year to any non-employee director to 50,000 shares, and to affirm the 500,000 shares reserved for issuance under the plan.  The number of shares of our common stock available for future grant under our 2015 Director Plan is 297,544.  Future stock option grants and issuances of common stock under our equity plans may have an adverse effect on the market price of our common stock.

 

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Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management.  These provisions include:

 

·

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

·

prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;

 

·

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

 

·

eliminating the ability of stockholders to call a special meeting of stockholders; and

 

·

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management.  Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders.  Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction.  Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.  If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline.  If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

Risks Related to Our Indebtedness

Servicing our debt will require significant amounts of cash, and we may not have sufficient cash flow from our business to pay our debt.

Our ability to make scheduled payments of the principal of, to pay interest on, to pay any cash due upon conversion of, or to refinance, our indebtedness, including the Convertible Notes , depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control.  Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures.  If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.  Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.  We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

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Despite our current debt levels, we may still incur additional debt. If we incur substantial additional debt, these higher levels of debt may affect our ability to pay the principal of and interest on the Convertible Notes.

 

We and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt.  The indenture governing the Convertible Notes does not restrict our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity.  If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on the Convertible Notes, or to make payments in connection with any fundamental change or pay any cash due upon conversion.

 

The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.

 

In the event the conditional conversion feature of the Convertible Notes is triggered, holders of notes will be entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity.  In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

 

The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.

 

Pursuant to Accounting Standards Codification Subtopic 470-20, Debt with Conversion and Other Options , which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.  The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital caption of stockholders’ equity on our consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes.  As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes.  We will report greater losses in our financial statements because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and the trading price of the Convertible Notes.

 

In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount.  Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued.  We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.

 

To the extent we issue shares of our common stock to satisfy all or a portion of our conversion obligation, conversions of the Convertible Notes may dilute the ownership interest of our existing stockholders.

 

Upon conversion of the Convertible Notes, we have the option to pay or deliver, as the case may be, either cash, shares of our common stock, or a combination of cash and shares of our common stock.  To the extent we issue shares of our common stock to satisfy all or a portion of our conversion obligation, the conversion of some or all of the Convertible Notes will dilute the ownership interests of our existing stockholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.  In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could depress the price of our common stock.

 

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The fundamental change purchase feature of the Convertible Notes may delay or prevent an otherwise beneficial attempt to take over our Company.

 

The terms of the Convertible Notes require us to offer to purchase the Convertible Notes for cash in the event of a fundamental change.  A non-stock takeover of our Company may trigger the requirement that we purchase the Convertible Notes.  This feature may have the effect of delaying or preventing a takeover of our Company that would otherwise be beneficial to investors.

 

ITEM 1B. UNRESOLVED STAFF COMMENT S

 

Not applicable.

 

ITEM 2.   PROPERTIE S

 

As of December 31, 2016, our principal offices were located in a facility in Waltham, Massachusetts, where we leased office space totaling 124,000 square feet, which we use primarily for corporate functions.  The term of the lease continues until June 30, 2020.  We believe our facilities are adequate for our current needs.  If we determine that additional or new facilities are needed in the future, we believe that sufficient options would be available to us on commercially reasonable terms.

 

ITEM 3.  LEGAL PROCEEDING S

 

We are not currently party to any material proceedings.

 

ITEM 4.   MINE SAFETY DISCLOSURE S

 

We are not an operator, and have no subsidiary that is an operator, of a coal or other mine.

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PART I I

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUIT Y, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information and Holders

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol “TSRO.”  Trading of our common stock commenced on June 29, 2012, following the completion of our initial public offering.  The following table sets forth, for the periods indicated, the high and low intraday sales prices of our common stock as reported on the NASDAQ Global Select Market.

 

 

 

 

 

 

 

 

 

 

    

HIGH

    

LOW

 

Year Ended December 31, 2015:

 

 

 

 

 

 

 

First quarter

 

$

62.25

 

$

36.14

 

Second quarter

 

$

64.97

 

$

50.55

 

Third quarter

 

$

66.95

 

$

38.14

 

Fourth quarter

 

$

53.84

 

$

38.01

 

Year Ended December 31, 2016:

 

 

 

 

 

 

 

First quarter

 

$

51.57

 

$

29.51

 

Second quarter

 

$

84.91

 

$

36.68

 

Third quarter

 

$

110.48

 

$

80.35

 

Fourth quarter

 

$

148.74

 

$

96.52

 

 

On February 24, 2017, the last reported sale price of our common stock was $186.90 per share.  As of the close of business on February 24, 2017, there were approximately 30 holders of record of our common stock.  Because many of the common shares are registered in “nominee” or “street” names, we believe that the total number of beneficial owners is considerably higher.

 

Dividends

 

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 our 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.  Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

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Performance Graph (1)

 

The following graph presents a comparison from June 28, 2012 through December 31, 2016 of cumulative total return on assumed investment of $100.00 in cash in our common stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index.  Such returns are based on historical results and are not intended to suggest future performance.  Data for the NASDAQ Composite Index and the NASDAQ Biotechnology Index assume reinvestment of dividends.

 

PICTURE 5


(1)

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed incorporated by reference into any filing of TESARO, Inc. under the Securities Act of 1933, as amended.

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ITEM 6. SELECTED FINANCIAL DAT A

 

The table below sets forth certain of our selected historical financial data at the dates and for the periods indicated.  The selected historical statement of operations data presented below for the years ended December 31, 2014, 2015, and 2016 and the historical balance sheet data as of December 31, 2015 and 2016, have been derived from our audited consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.  The historical statement of operations data for the years ended December 31, 2012 and 2013 and the historical balance sheet data as of December 31, 2012, 2013 and 2014 have been derived from financial statements not included in this Annual Report on Form 10-K.

 

All financial information presented has been consolidated and reflects the operations of TESARO, Inc. and its wholly-owned subsidiaries.  Our historical results are not necessarily indicative of results expected in any future period.

 

The selected historical financial data presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this Annual Report on Form 10-K.  The selected historical financial information in this section is not intended to replace our consolidated financial statements and the related notes thereto.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

2012

    

2013

    

2014

    

2015

    

2016

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Product revenue, net

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

6,877

 

     License, collaboration and other revenues

 

 —

 

 

 —

 

 

 —

 

 

317

 

 

37,946

 

Total revenues

 

 —

 

 

 —

 

 

 —

 

 

317

 

 

44,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - product

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,256

 

Cost of sales - intangible asset amortization

 

 —

 

 

 —

 

 

 —

 

 

268

 

 

1,855

 

Research and development

 

47,200

 

 

75,725

 

 

118,425

 

 

155,390

 

 

235,144

 

Selling, general and administrative

 

6,715

 

 

14,780

 

 

23,935

 

 

78,701

 

 

158,578

 

Acquired in-process research and development

 

8,000

 

 

1,940

 

 

24,900

 

 

2,000

 

 

18,940

 

Total expenses

 

61,915

 

 

92,445

 

 

167,260

 

 

236,359

 

 

415,773

 

Loss from operations

 

(61,915)

 

 

(92,445)

 

 

(167,260)

 

 

(236,042)

 

 

(370,950)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(3,776)

 

 

(15,414)

 

 

(16,487)

 

Interest income

 

152

 

 

83

 

 

24

 

 

48

 

 

1,440

 

Loss before income taxes

 

(61,763)

 

 

(92,362)

 

 

(171,012)

 

 

(251,408)

 

 

(385,997)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(61,763)

 

$

(92,362)

 

$

(171,012)

 

$

(251,408)

 

$

(387,472)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share applicable to common stockholders - basic and diluted

$

(4.51)

 

$

(2.93)

 

$

(4.79)

 

$

(6.38)

 

$

(8.13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders - basic and diluted

 

13,696

 

 

31,559

 

 

35,739

 

 

39,387

 

 

47,652

 

 

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As of December 31,

 

    

2012

    

2013

    

2014

    

2015

    

2016

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

125,445

 

$

130,310

 

$

256,861

 

$

230,146

 

$

785,877