2016 0630 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________



Form 10-Q

_____________________



 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)



OF THE SECURITIES EXCHANGE ACT OF 1934



For the Quarterly Period Ended June 30, 2016

or



 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)



OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number: 000-29959

_______________



Pain Therapeutics, Inc.

(Exact name of registrant as specified in its charter)





 

Delaware

91-1911336

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)



7801 N. Capital of Texas Highway, Suite 260, Austin, TX 78731

 (512) 501-2444

 (Address, including zip code, of registrant's principal executive offices and

telephone number, including area code)



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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange Act.  (Check one):



 



Large accelerated filer 

Accelerated filer 



Non-accelerated filer 

Smaller reporting Company 



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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



 

Common Stock, $0.001 par value

46,141,935



Shares Outstanding as of July 19, 2016



 

1


 









PAIN THERAPEUTICS, INC.



TABLE OF CONTENTS





 

 



 

Page No.

PART I.

FINANCIAL INFORMATION

 



 

 

  Item 1.

Financial Statements

 



 

 



Condensed Balance Sheets – June 30, 2016 and December 31, 2015

3



 

 



Condensed Statements of Operations – Three and Six Months Ended June 30, 2016 and June 30, 2015

4



 

 



Condensed Statements of Comprehensive Loss – Three and Six Months Ended June 30, 2016 and June 30, 2015 

5



 

 



Condensed Statements of Cash Flows – Six Months Ended June 30, 2016 and June 30, 2015

6



 

 



Notes to Condensed Financial Statements

7



 

 

  Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13



 

 

  Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19



 

 

  Item 4.

Controls and Procedures

19



 

 

PART II.

OTHER INFORMATION

 



 

 

  Item 1.

Legal Proceedings

20



 

 

  Item 1A

Risk Factors

20



 

 

  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40



 

 

  Item 3.

Defaults Upon Senior Securities

40



 

 

  Item 4.

Mine Safety Disclosures

40



 

 

  Item 5.

Other Information

40



 

 

  Item 6.

Exhibits

40



 

 

Signatures

42









2

 


 



PART I.  FINANCIAL INFORMATION



Item 1. Financial Statements







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED BALANCE SHEETS

(Unaudited, in thousands)



 

 

 

 

 





 



June 30,

 

December 31,



2016

 

2015(1)



 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents 

$

24,626 

 

$

31,299 

Other current assets

 

115 

 

 

392 

Total current assets

 

24,741 

 

 

31,691 

Property and equipment, net

 

187 

 

 

215 

Other assets

 

12 

 

 

12 

Total assets

$

24,940 

 

$

31,918 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

378 

 

$

1,034 

Accrued development expense

 

641 

 

 

894 

Accrued compensation and benefits

 

934 

 

 

623 

Total current liabilities

 

1,953 

 

 

2,551 

Noncurrent liabilities

 

 

 

Total liabilities

 

1,953 

 

 

2,551 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock

 

 

 

Common stock

 

46 

 

 

46 

Additional paid-in capital

 

162,389 

 

 

159,959 

Accumulated deficit

 

(139,448)

 

 

(130,638)

Total stockholders' equity

 

22,987 

 

 

29,367 

Total liabilities and stockholders' equity

$

24,940 

 

$

31,918 



 

 

 

 

 



 (1) Derived from the Company’s audited financial statements as of December 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.



See accompanying notes to condensed financial statements.







3


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

1,589 

 

$

1,986 

 

$

5,184 

 

$

3,124 

General and administrative

 

1,455 

 

 

1,401 

 

 

3,689 

 

 

2,858 

Total operating expenses

 

3,044 

 

 

3,387 

 

 

8,873 

 

 

5,982 

Operating loss

 

(3,044)

 

 

(3,387)

 

 

(8,873)

 

 

(5,982)

Interest income

 

29 

 

 

13 

 

 

63 

 

 

25 

Net loss

$

(3,015)

 

$

(3,374)

 

$

(8,810)

 

$

(5,957)

Net loss per share, basic and diluted

$

(0.07)

 

$

(0.07)

 

$

(0.19)

 

$

(0.13)

Weighted-average shares used in computing net loss per share,

 

 

 

 

 

 

 

 

 

 

 

basic and diluted

 

45,708 

 

 

45,356 

 

 

45,532 

 

 

45,356 



 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

4


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Net loss

$

(3,015)

 

$

(3,374)

 

$

(8,810)

 

$

(5,957)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities

 

 

 

 

 

 

 

Comprehensive loss

$

(3,015)

 

$

(3,374)

 

$

(8,810)

 

$

(5,957)



 

 

 

 

 

 

 

 

 

 

 











See accompanying notes to condensed financial statements.

5


 







 

 

 

 

 



 

 

 

 

 

PAIN THERAPEUTICS, INC.



 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



 

 

 

 

 



Six months ended



June 30,



2016

 

2015

Cash flows used in operating activities:

 

 

 

 

 

Net loss

$

(8,810)

 

$

(5,957)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Non-cash stock-based compensation

 

2,644 

 

 

1,844 

Depreciation and amortization

 

28 

 

 

18 

Non-cash net interest income

 

(3)

 

 

(2)

Changes in operating assets and liabilities:

 

 

 

 

 

Other current assets

 

323 

 

 

39 

Accounts payable

 

(656)

 

 

292 

Accrued development expense

 

(253)

 

 

423 

Accrued compensation and benefits

 

311 

 

 

248 

Net cash used in operating activities

 

(6,416)

 

 

(3,095)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

Purchases of property and equipment

 

 

 

(195)

Purchases of marketable securities

 

(1,497)

 

 

(2,948)

Maturities of marketable securities

 

1,500 

 

 

2,000 

Net cash provided by (used in) investing activities

 

 

 

(1,143)

Cash flows used in financing activities:

 

 

 

 

 

Cash used for statutory taxes for net exercise of Performance Awards

 

(214)

 

 

Deferred financing costs

 

(46)

 

 

Net cash used in financing activities

 

(260)

 

 

Net decrease in cash and cash equivalents

 

(6,673)

 

 

(4,238)

Cash and cash equivalents at beginning of the period

 

31,299 

 

 

40,590 

Cash and cash equivalents at end of the period

$

24,626 

 

$

36,352 



 

 

 

 

 











See accompanying notes to condensed financial statements.

6


 

PAIN THERAPEUTICS, INC.



Notes to Condensed Financial Statements

(Unaudited)



Note 1.  General



Pain Therapeutics, Inc. develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system, such as chronic pain.



In the course of our development activities, we have sustained cumulative operating losses. There are no assurances that additional financing will be available on favorable terms, or at all.



We have prepared the accompanying unaudited condensed financial statements of Pain Therapeutics, Inc. in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the year 2016.  For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2015.



We have evaluated subsequent events through the date of filing this Form 10-Q.





Note 2.  Significant Accounting Policies



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. Actual results could differ from those estimates.



Cash, Cash Equivalents and Concentration of Credit Risk



We consider all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash maintained at one financial institution and in money market funds. We believe the financial risks associated with these instruments are minimal. We have not experienced material losses from our investments in these securities.



Marketable Securities and Fair Value Measurements



We invest in interest bearing marketable securities, generally consisting of corporate and government securities. We may elect to sell these investments before they mature. Therefore, we hold these investments as “available for sale” and include these investments in our balance sheets as current assets, even though the contractual maturity of a particular investment may be beyond one year. We report our marketable securities at fair value, which may include unrealized gains and losses. Our unrealized gains and losses on investments are recorded as a separate component of stockholders’ equity as accumulated other comprehensive income or loss. We recognize all realized gains and losses on our marketable securities on a specific identification basis in interest income in our Statements of Operations. We report changes in net unrealized gains or losses on marketable securities in our Statements of Comprehensive Income. Our marketable securities are maintained at one financial institution and are governed by our investment policy as approved by our Board of Directors.

7


 



To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. We would recognize an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including any adverse changes in the investees’ financial condition, how long the fair value has been below the amortized cost and whether it is more likely than not that we would elect to or be required to sell the marketable security before its anticipated recovery.



We measure our cash equivalents and marketable securities at fair value on a recurring basis. We use significant observable inputs where there are identical or comparable assets in the market to use in establishing our fair value measurements, including but not limited to benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We consider these inputs to be Level 2 inputs. Generally, the types of instruments we invest in are not traded on a market such as the NASDAQ Global Market, which we would consider to be Level 1 inputs. We do not have any investments that would require inputs considered to be Level 3. We use the bid price to establish fair value where a bid price is available.



Proceeds from Grants



During the first half of 2016, we received $0.9 million pursuant to a grant from the National Institutes of Health, or NIH, that we recorded as a reduction to our research and development expenses.



Stock-based Compensation 



We recognize expense for the fair value of all share-based payments, including grants of employee stock options and other share-based awards, in our Statements of Operations. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-line attribution method. Using this approach, the compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years. We estimate forfeitures and adjust this estimate periodically based on the extent to which future actual forfeitures differ, or are expected to differ, from such estimates.



We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance criteria. We estimate an implicit service period for achieving these performance criteria. Performance Awards vest and common stock is issued on achieving performance criteria. We recognize stock-based compensation expense for Performance Awards when we conclude that achieving performance criteria is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance criteria.



8


 

Net Loss per Share



We compute basic net loss per share on the basis of the weighted-average number of common shares outstanding for the reporting period. We compute diluted net loss per share on the basis of the weighted-average number of common shares outstanding plus dilutive potential common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding stock options and Performance Awards.



The numerators and denominators in the calculation of basic and diluted net loss per share were as follows (in thousands except per share data):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(3,015)

 

$

(3,374)

 

$

(8,810)

 

$

(5,957)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing net loss per share,

 

 

 

 

 

 

 

 

 

 

 

basic and diluted

 

45,708 

 

 

45,356 

 

 

45,532 

 

 

45,356 

Net loss per share, basic and diluted

$

(0.07)

 

$

(0.07)

 

$

(0.19)

 

$

(0.13)



 

 

 

 

 

 

 

 

 

 

 

We excluded weighted options outstanding to purchase common stock of 18.2 million for the second quarter of 2016,  17.7 million for the second quarter of 2015, 18.4 million for the first half of 2016 and 17.7 million for the first half of 2015 from the calculation of diluted net loss per share because the effect of including these shares in this calculation would be anti-dilutive.



Income Taxes 



We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. In 2016, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  The adoption of this standard had no impact on our financial statements for 2016.



We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance.



We may in the future determine that certain deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. 



We classify interest recognized pursuant to our deferred tax assets as interest expense, when appropriate. 



9


 

Note 3.  Cash, Cash Equivalents and Marketable Securities and Assets Measured at Fair Value



Our cash, cash equivalents and marketable securities are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Cash, Cash Equivalents and Marketable Securities



Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 

Estimated Fair Value

 

Accrued Interest

 

Total Value

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

291 

 

$

 

$

 

$

291 

 

$

 

$

291 

Cash equivalents

 

20,853 

 

 

 

 

 

 

20,853 

 

 

 

 

20,853 

Commercial paper

 

3,482 

 

 

 

 

 

 

3,482 

 

 

 

 

3,482 



$

24,626 

 

$

 

$

 

$

24,626 

 

$

 

$

24,626 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

24,626 

 

 

 

 

 

$

24,626 

 

$

 

$

24,626 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 



$

24,626 

 

$

 

$

 

$

24,626 

 

$

 

$

24,626 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

24,626 

 

$

 

$

 

$

24,626 

 

$

 

$

24,626 

Matures one to three years

 

 

 

 

 

 

 

 

 

 

 



$

24,626 

 

$

 

$

 

$

24,626 

 

$

 

$

24,626 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

273 

 

$

 

$

 

$

273 

 

$

 

$

273 

Cash equivalents

 

22,630 

 

 

 

 

 

 

22,630 

 

 

 

 

22,630 

Commercial paper

 

8,396 

 

 

 

 

(1)

 

 

8,396 

 

 

 

 

8,396 



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 

$

31,299 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 

$

31,299 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 

$

31,299 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matures in one year or less

$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 

$

31,299 

Matures one to three years

 

 

 

 

 

 

 

 

 

 

 



$

31,299 

 

$

 

$

(1)

 

$

31,299 

 

$

 

$

31,299 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We did not realize any gains or losses on our investments in marketable securities during the first half of 2016 or 2015. To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.



Our assets measured at fair value on a recurring basis are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Level 1

 

Level 2

 

Level 3

 

Total

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

21,144 

 

$

 

$

 

$

21,144 

Commercial paper

 

 

 

3,482 

 

 

 

 

3,482 



$

21,144 

 

$

3,482 

 

$

 

$

24,626 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

22,903 

 

$

 

$

 

$

22,903 

Commercial paper

 

 

 

8,396 

 

 

 

 

8,396 



$

22,903 

 

$

8,396 

 

$

 

$

31,299 



 

 

 

 

 

 

 

 

 

 

 

























10


 









Note 4.  Equity and Stock-Based Compensation Expense



Our stock option and Performance Award activity during 2016 was as follows:





 

 

 

 



 

 

 

 



Number of Options

 

 

Number of Performance Awards

Outstanding as of December 31, 2015

18,515,254 

 

 

1,889,465 

Granted

315,000 

 

 

150,000 

Exercised

 

 

(485,000)

Cancelled

(1,707,332)

 

 

Outstanding as of June 30, 2016

17,122,922 

 

 

1,554,465 



 

 

 

 



Our non-cash stock-based compensation expenses  were as follows (in thousands):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Research and development

$

354 

 

$

289 

 

$

1,109 

 

$

623 

General and administrative

 

580 

 

 

592 

 

 

1,535 

 

 

1,221 



$

934 

 

$

881 

 

$

2,644 

 

$

1,844 



 

 

 

 

 

 

 

 

 

 

 

Non-cash stock-related compensation expense related to Performance Awards associated with the March 2016 resubmission of the NDA for REMOXY® ER (oxycodone capsules CII) was $0.8 million in the first half of 2016.



In December 2015 we established an at-the-market equity program for the sale of up to 10.0 million shares of our common stock. We have not yet issued any shares and have deferred financing costs of $0.1 million at June 30, 2016 paid in connection with this program.























Note 5.  Income Taxes 



We did not provide for income taxes in the second quarter or first half of 2016 because we have projected a net loss for the full year 2016.    





Note 6.  Commitments



We conduct our product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations that are cancelable. Our obligations under these contracts are largely based on services performed.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2017.  Minimum lease payments are as follows (in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2016

 

2017

 

Total

Minimum lease payments

$

146 

 

$

147 

 

$

293 



 

 

 

 

 

 

 

 















11


 

Note 7.  Legal Proceedings



KB Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy.



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011. In a July 7, 2015 order, the Court directed plaintiffs to file an amended complaint and set a new trial date, if necessary, for March 2017. The Court has ordered a preliminary settlement conference for August 26, 2016 to consider a proposed settlement.





Note 8.  Recently Issued Accounting Pronouncements



We reviewed recently issued accounting pronouncements and have adopted or plan to adopt those that are applicable to us. We do not expect the adoption of these pronouncements to have a material impact on our financial position, results of operations or cash flows. 

12


 







Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this quarterly report. Operating results are not necessarily indicative of results that may occur in future periods.



This quarterly report contains certain statements that are considered forward-looking statements within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.



The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:



·

the timing of the review and potential approval by the U.S. Food and Drug Administration, or FDA, of the New Drug Application, or NDA, for REMOXY® ER (oxycodone capsules CII);

·

development activities to potentially support obtaining approval of REMOXY by the FDA;

·

our plans to rely on third parties, including Durect Corporation, or Durect, Noramco, Inc., or Noramco, and Mallinckrodt, Inc., or Mallinckrodt, to supply us with excipients and active pharmaceutical ingredients and to manufacture REMOXY;

·

discussions with potential strategic partners for the development and commercialization of REMOXY;

·

expectations with regard to the data, materials and information provided to us by Pfizer Inc., or Pfizer, related to Pfizer’s development activities with respect to REMOXY;

·

the outcome of research and development activities, including, without limitation, development activities for FENROCK™ and potential formulation of additional dosage forms of our drug candidates;

·

the potential benefits of our drug candidates;

·

the utility of protection of our intellectual property;

·

expected future sources of revenue and capital and increasing cash needs;

·

potential competitors or competitive products;

·

market acceptance of our drug candidates and potential drug candidates;

·

expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions;

·

expenses increasing, interest income decreasing or fluctuations in our operating results;

·

operating losses and anticipated operating and capital expenditures;

·

expected uses of capital resources;

·

expectations regarding the issuance of shares of common stock to employees pursuant to equity compensation awards net of employment taxes;

·

anticipated hiring and development of our internal systems and infrastructure;

·

the sufficiency of our current resources to fund our operations over the next twelve months; and

·

assumptions and estimates used for our disclosures regarding stock-based compensation.



Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:



·

the quantity, quality or sufficiency of the data, materials and information transferred to us by Pfizer regarding the REMOXY development program;

13


 

·

difficulties or delays in potentially obtaining regulatory approval of the NDA for REMOXY, including the potential for requests by the FDA for additional data which may require an extended period of time to obtain and submit;

·

having or obtaining sufficient resources for the successful development and commercialization of REMOXY;

·

continuing discussions with potential strategic partners for the development and commercialization of REMOXY;

·

the successful development of other drug candidates, independently as well as pursuant to our other collaboration agreements, and the continuation of such agreements;

·

difficulties or delays in development, testing, clinical trials (including patient enrollment), regulatory authorization or approval, production and commercialization of our drug candidates;

·

unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials) or potential post-approval market acceptance;

·

the uncertainty of protection of our intellectual property rights or trade secrets;

·

potential infringement of the intellectual property rights of third parties;

·

pursuing in-license and acquisition opportunities;

·

maintenance or third party funding of our collaboration and license agreements;

·

legislation or regulatory actions affecting product pricing, reimbursement or access;

·

significant breakdown or interruption of our information technology and infrastructure;

·

significant issues that may arise related to outsourcing certain preclinical studies, clinical trials and formulation and manufacturing activities;

·

hiring and retaining personnel; and

·

our financial position and our ability to obtain additional financing if necessary.



In addition, such statements are subject to the risks and uncertainties discussed in the "Risk Factors" section and elsewhere in this document. 





Overview



Pain Therapeutics, Inc. develops proprietary drugs that offer significant improvements to patients and healthcare professionals. We generally focus our drug development efforts on disorders of the nervous system, such as chronic pain.



Our expertise consists of developing new drug candidates and guiding these through various regulatory and development pathways in preparation for their eventual commercialization. By necessity, the conduct of drug development is complex, lengthy, expensive and risky. The FDA has not yet established the safety or efficacy of our drug candidates.

 

For over a decade, we have pioneered technology, tools and techniques that enable the development of Abuse-Deterrent Formulations, or ADFs. ADFs are intended to make opioid drugs difficult to abuse yet provide steady pain relief when used appropriately by patients. ADFs are intended to help in the fight against prescription drug abuse.



Opioid drugs, such as oxycodone, are an important treatment option for patients with severe chronic pain. However, misuse, abuse and diversion of these prescription drugs remains a serious, persistent problem. Nearly 19,000 people died from opioid overdose in 2014, according to the NIH’s National Institute on Drug Abuse.



Our lead drug candidate is called REMOXY, a proprietary, abuse-deterrent, oral, extended-release formulation of oxycodone (CII). We developed REMOXY to make oxycodone difficult to abuse yet provide 12 hours of steady pain relief when used appropriately by patients.

In particular, REMOXY’s thick, sticky, high-viscosity formulation may deter unapproved routes of drug administration, such as injection, snorting or smoking. REMOXY targets the $2.5 billion marketplace for long-acting formulations of oxycodone. We own exclusive, worldwide rights to REMOXY.



In March 2016, we  resubmitted to the FDA the NDA for REMOXY. This NDA has priority review status with

14


 

the FDA.  In April 2016, the FDA determined that the NDA for REMOXY is sufficiently complete to permit a substantive review.



On May 19, 2016, we announced the FDA planned to hold an Advisory Committee meeting to review the NDA for REMOXY. On July 1, 2016, we announced that the FDA had determined that an Advisory Committee meeting for REMOXY was unnecessary and will not be held.  The FDA also advised us that the regulatory review of the NDA for REMOXY remained active and ongoing. The Prescription Drug User Fee Act, or PDUFA, date remains September 25, 2016. 



The NDA includes five dosage strengths of REMOXY (5, 10, 20, 30, 40 mg). The proposed indication for REMOXY is “for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. 



The safety and clinical efficacy of REMOXY is supported by multiple studies, including a successful Phase III efficacy program conducted under a FDA Special Protocol Assessment, or SPA. REMOXY’s abuse-deterrence is supported by a body of clinical and non-clinical data, including data comparing REMOXY against currently marketed oxycodone products. The NDA proposes label claims that properly characterize REMOXY’s abuse-deterrent properties, including certain routes of abuse that REMOXY may deter, such as injection, snorting or smoking. The NDA also includes stability data that we believe meet FDA guidance criteria in support of a 24-month shelf life.



We have yet to generate any revenues from product sales. We have an accumulated deficit of $139.4 million at June 30, 2016. These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.



We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:



·

conduct preclinical and clinical trials for our drug candidates;

·

seek regulatory approvals for our drug candidates;

·

develop, formulate, manufacture and commercialize our drug candidates;

·

implement additional internal systems and develop new infrastructure;

·

acquire or in-license additional products or technologies, or expand the use of our technology;

·

maintain, defend and expand the scope of our intellectual property; and

·

hire additional personnel.



Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. If our development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.



We focus substantially all of our research and development efforts in the area of neurology. The following table summarizes expenses by category for research and development efforts (in thousands):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

Compensation

$

808 

 

$

720 

 

$

2,359 

 

$

1,407 

Contractor fees and supplies

 

612 

 

 

1,073 

 

 

2,532 

 

 

1,386 

Other common costs

 

169 

 

 

193 

 

 

293 

 

 

331 

15


 



$

1,589 

 

$

1,986 

 

$

5,184 

 

$

3,124 



 

 

 

 

 

 

 

 

 

 

 

Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. 



Our technology has been applied across certain of our drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.



Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011. In a July 7, 2015 order, the Court directed plaintiffs to file an amended complaint and set a new trial date, if necessary, for March 2017. The Court has ordered a preliminary settlement conference for August 26, 2016 to consider a proposed settlement.





Critical Accounting Policies



The preparation of our financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:



·

Stock-based compensation.  We recognize expense for the fair value of all share-based payments to employees and directors, including grants of employee stock options and other share-based awards, in the Statements of Operations. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-line attribution method. Using this approach, the compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years.



We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these share-based awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance conditions. We estimate an implicit service period for achieving these performance conditions. Performance Awards vest and common stock is issued on achieving performance conditions. We recognize stock-based compensation expense for Performance Awards when we conclude that achieving a performance condition is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance conditions.



16


 



·

Income Taxes.  We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance. We may in the future determine that our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.





Results of Operations - Three and six months ended June 30, 2016 and 2015 



Research and Development Expense



Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:



·

preclinical testing,

·

clinical trials,

·

clinical supplies and related formulation and design costs, and

·

compensation and other personnel-related expenses.



Research and development expenses decreased to $1.6 million in the second quarter of 2016 from $2.0 million in the second quarter of 2015, primarily due to receipt of NIH grant funding in the second quarter of 2016 recorded as a reduction in research and development expense, offset in part by increased expenses related to the REMOXY NDA resubmission.  Research and development expenses increased to $5.2 million in the first half of 2016 from $3.1 million to the first half of 2015, primarily due to increased expenses in the first quarter of 2016 related to the REMOXY NDA resubmission, offset in part by our NIH grant funding in the first half of 2016.



Research and development expenses included non-cash stock-related compensation expense of $0.4 million in the second quarter of 2016, $0.3 million in the second quarter of 2015, $1.1 million in the first half of 2016 and, and $0.6 million in the first half of 2015. Non-cash stock-related compensation expense in the first half of 2016 included $0.4 million related to Performance Awards associated with the REMOXY NDA resubmission.



We expect research and development expenses to fluctuate over the next several years as we continue our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies. We also expect non-cash equity-related expenses to increase in the future.



General and Administrative Expense



General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expenses increased to $1.5 million in the second quarter of 2016 from $1.4 million in the second quarter of 2015 primarily due to increased pre-commercial third-party expenses. General and administrative expense increased to $3.7 million in the first half of 2016 from $2.9 million to the first half of 2015, primarily due to higher non-cash equity-related expenses. 



General and administrative expenses included non-cash equity-related compensation expense of $0.6 million in both the second quarter of 2016 and the second quarter of 2015, $1.5 million in the first half of 2016, and $1.2 million in the first half of 2015. Non-cash stock-related compensation expense in the first half of 2016 included $0.4 million related to Performance Awards associated with the REMOXY NDA resubmission.



17


 

We expect general and administrative expenses to increase over the next several years in connection with support of pre-commercialization and commercialization activities for our drug candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies. We also expect non-cash equity-related expenses to increase in the future.



Interest Income



Interest income increased to $29,000 in the second quarter of 2016 from $13,000 in the second quarter of 2015 and to $63,000 in the first half of 2016 from $25,000 in the first half of 2015, primarily due to higher prevailing interest rates on our investments.





Liquidity and Capital Resources



Since inception, we have financed our operations primarily through public and private stock offerings, payments received under collaboration agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of June 30, 2016, cash, cash equivalents and marketable securities were $24.6 million.



Net cash used in operating activities increased to $6.4 million for the first half of 2016 from $3.1 million for the first half of 2015, primarily due to higher research and development expenses in the first half of 2016 compared to the first half of 2015, offset in part by changes in other balance sheet accounts. 



Net cash provided by investing activities was $3,000 for the first half of 2016 and net cash used in investing activities was $1.1 million for the first half of 2015. Investing activities in both 2016 and 2015 consisted primarily of purchases and maturities of marketable securities, as well as purchases of equipment in 2015.



Net cash used by financing activities of $0.3 million in the first half of 2016 resulted primarily from issuing shares of our common stock to employees for vested Performance Awards net of statutory employment taxes. As a result, we issued fewer shares of common stock and used cash to pay statutory taxes on behalf of employees.



Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires in December 2017.  Minimum lease payments are as follows (in thousands):



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



2016

 

2017

 

Total

Minimum lease payments

$

146 

 

$

147 

 

$

293 



 

 

 

 

 

 

 

 



We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of June 30, 2016. Our formulation agreement with Durect Corporation, or Durect, obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones and pay royalties on related drug sales.



Our employees have Performance Awards that vest upon certain conditions. If these Performance Awards vest, we may issue the employees shares of our common stock net of statutory employment taxes. This net issuance would result in fewer shares of common stock issued and uses our cash to pay these taxes on behalf of employees.  The use of cash could be higher or lower, depending on the fair value of our common stock on the date the Performance Awards vest.



We have an accumulated deficit of $139.4 million at June 30, 2016. We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing,

18


 

commercializing and supporting our products and other corporate needs. We believe that our current resources should be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us. 



We continue to review potential commercialization strategies for REMOXY.  Options include a potential strategic transaction around all of our drug candidates; a  commercial collaboration for REMOXY; or establishing commercial capabilities to self-launch REMOXY. We believe we would need to add significant funding before we could self-launch REMOXY.





Off-balance Sheet Arrangements



As of June 30, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.





Item 3.    Quantitative and Qualitative Disclosures About Market Risk



The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, we expect the fair value of our investment will decline. A hypothetical 50 basis point increase in interest rates reduces the fair value of our available-for-sale securities at June 30, 2016 by approximately $2,000.  To minimize this risk, we intend to maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debt securities and/or money market funds that invest in such securities. We are not aware of holdings of derivative financial or commodity instruments.



As of June 30, 2016, our investments consisted of investments in corporate obligations, money market accounts and checking funds with variable market rates of interest.  We believe our credit risk is immaterial. We measure our cash equivalents and marketable securities at fair value on a recurring basis and have significant observable inputs where there are identical or comparable assets in the market to use in establishing our fair value measurements. We use significant observable inputs that include but are not limited to benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We consider these inputs to be Level 2 inputs. Generally, the types of instruments we invest in are not traded on a market such as the NASDAQ Global Market, which we would consider to be Level 1 inputs. We do not have any investments that would require inputs considered to be Level 3. We use the bid price to establish fair value where a bid price is available.





Item 4. Controls and Procedures



Evaluation of disclosure controls and procedures.  Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission, or SEC, rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.



19


 

Changes in internal control over financial reporting.  There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



KB Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy.



On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011. In a July 7, 2015 order, the Court directed plaintiffs to file an amended complaint and set a new trial date, if necessary, for March 2017. The Court has ordered a preliminary settlement conference for August 26, 2016 to consider a proposed settlement.





Item 1A.Risk Factors



Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline, and you could experience losses on your investment in our common stock.



Clinical and Regulatory Risks

If we fail to obtain the necessary regulatory approvals, or if such approvals are limited, we and our collaborators will not be allowed to commercialize our drug candidates, and we will not generate product revenues.



Satisfaction of all regulatory requirements for commercialization of a drug candidate typically takes many years, is dependent upon the type, complexity and novelty of the drug candidate, and requires the expenditure of substantial resources for research and development. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated that additional non-clinical data was required to support the approval of REMOXY. However, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In March 2009, King Pharmaceuticals, Inc., or King, assumed sole responsibility for the regulatory approval of REMOXY. In December 2010, King resubmitted the NDA for REMOXY. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King’s resubmission of the REMOXY NDA. The FDA’s Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Certain drug lots showed inconsistent release performance during in vitro testing. Pfizer completed work designed to address the June 2011 Complete Response Letter. On April 21, 2015, we announced that we resumed responsibility for REMOXY under the terms of a letter agreement with Pfizer. The letter agreement was entered into within the scope of the previously disclosed provisions of the Collaboration Agreement between us and Pfizer relating to the return of REMOXY.



We believe Pfizer has now transferred to us its data, materials, capital equipment and other assets related to REMOXY. Pfizer and the FDA had discussed and agreed to a regulatory plan to refile the NDA for REMOXY. The FDA has agreed that we may follow this plan for the NDA for REMOXY.



20


 

In March 2016, we  resubmitted to the FDA the NDA for REMOXY. In April 2016, the FDA determined that the NDA for REMOXY is sufficiently complete to permit a substantive review. September 25, 2016 is the PDUFA date. 



There can be no assurance that the FDA will approve an NDA for REMOXY or that the FDA will not require submission of additional clinical or non-clinical data. Obtaining data from such studies (even if completed) that is insufficient to support approval of REMOXY, or any adverse decisions by the FDA (including any decision by the FDA to require additional clinical or non-clinical data) may significantly delay or prevent the potential approval of REMOXY.



Our research and clinical approaches may not lead to drugs that the FDA considers safe for humans and effective for indicated uses we are studying. The FDA may require additional studies, in which case we or our collaborators would have to expend additional time and resources and would likely delay the date of potentially receiving regulatory approval. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals would:

·

delay commercialization of, and product revenues from, our drug candidates; and

·

diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our operating results and financial condition.

Even if we or our collaborators comply with all FDA regulatory requirements, our drug candidates may never obtain regulatory approval. If we or our collaborators fail to obtain regulatory approval for any of our drug candidates we will have fewer commercial products, if any, and corresponding lower product revenues, if any. Even if our drug candidates receive regulatory approval, such approval may involve limitations on the indications and conditions of use or marketing claims for our products. Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us or our collaborators to commit to perform lengthy Phase IV post-approval clinical efficacy or safety studies. Our expending additional resources on such trials would have an adverse effect on our operating results and financial condition.

In jurisdictions outside the United States, we must receive marketing authorizations from the appropriate regulatory authorities before commercializing our drugs. Regulatory approval processes outside the United States generally include all of the aforementioned requirements and risks associated with FDA approval.

If we are unable to design, conduct and complete preclinical and clinical trials successfully, our drug candidates will not be able to receive regulatory approval.

In order to obtain FDA approval for any of our drug candidates, we must submit to the FDA an NDA that demonstrates with substantive evidence that the drug candidate is both safe and effective in humans for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials.

Preclinical studies may not provide results we believe are sufficient to support the filing of an IND. Success in early preclinical studies does not ensure success in later preclinical or clinical studies. The FDA may disagree with the design of our preclinical studies or our interpretations of data from preclinical studies. The FDA may not accept an IND for our product candidate and may require additional preclinical studies to support the filing of an IND.

Success in preclinical studies and early clinical trials does not ensure that later clinical trials will be successful. Results from Phase I clinical programs may not support moving a drug candidate to Phase II or Phase III clinical trials. Phase III clinical trials may not demonstrate the safety or efficacy of our drug candidates. Results of later clinical trials may not replicate the results of prior clinical trials and preclinical studies. Even if the results of Phase III clinical trials are positive, we or our collaborators may have to commit substantial time and additional resources to conducting further preclinical studies and clinical trials before obtaining FDA approval for any of our drug candidates.

Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements. The clinical trial process also consumes a significant amount of time. Furthermore, if patients in clinical trials suffer drug-related adverse reactions during the course of such clinical trials, or if we, our collaborators or the FDA believe that participating patients are being exposed to unacceptable health risks, such clinical trials will have to be suspended or terminated. Failure can occur at any stage of the clinical trials, and we or our collaborators could encounter problems that cause abandonment or repetition of clinical trials.

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Clinical trials with REMOXY and our potential future clinical trials for other drug candidates for treatment of pain measure clinical symptoms, such as pain and physical dependence, that are not biologically measurable. The success in these clinical trials depends on reaching statistically significant changes in patients’ symptoms based on clinician-rated scales. Due in part to a lack of consensus on standardized processes for assessing clinical outcomes, these scores may or may not be reliable, useful or acceptable to regulatory agencies.

In addition, completion of clinical trials can be delayed by numerous factors, including:

·

delays in identifying and agreeing on acceptable terms with prospective clinical trial sites;

·

slower than expected rates of patient recruitment and enrollment;

·

unanticipated patient dropout rates;

·

increases in time required to complete monitoring of patients during or after participation in a clinical trial; and

·

unexpected need for additional patient-related data.

Any of these delays could significantly impact the timing, approval and commercialization of our drug candidates and could significantly increase our overall costs of drug development.

Even if clinical trials are completed as planned, their results may not support expectations or intended marketing claims. The clinical trials process may fail to demonstrate that our drug candidates are safe and effective for indicated uses. Such failure would cause us to abandon a drug candidate and could delay development of other drug candidates.

Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.

We discuss with and obtain guidance from regulatory authorities on certain of our clinical development activities. With the exception of our SPA, these discussions are not binding obligations on the part of regulatory authorities.

Regulatory authorities may revise previous guidance or decide to ignore previous guidance at any time during the course of our clinical activities or after the completion of our clinical trials. Even with successful clinical safety and efficacy data, including such data from a clinical trial conducted pursuant to an SPA, we or our collaborators may be required to conduct additional, expensive clinical trials to obtain regulatory approval.

Developments by competitors may establish standards of care that affect our ability to conduct our clinical trials as planned.

We have conducted clinical trials of our drug candidates comparing our drug candidates to both placebo and other approved drugs. Changes in standards related to clinical trial design could affect our ability to design and conduct clinical trials as planned. For example, regulatory authorities may not allow us to compare our drug candidates to placebo in a particular clinical indication where approved products are available. In that case, both the cost and the amount of time required to conduct a clinical trial could increase.

The U.S. Drug Enforcement Agency, or DEA, limits the availability of the active ingredients in certain of our current drug candidates and, as a result, quotas for these ingredients may not be sufficient to complete clinical trials, or to meet commercial demand, or may result in clinical delays.

The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Certain active ingredients in our current drug candidates, such as oxycodone, are listed by the DEA as Schedule II under the Controlled Substances Act of 1970. Consequently, their manufacture, research, shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription. Furthermore, the amount of Schedule II substances that can be obtained for clinical trials and commercial distribution is limited by the DEA and quotas for these substances may not be sufficient to complete clinical trials or meet commercial demand. There is a risk that DEA regulations may interfere with the supply of the drugs used in clinical trials for our product candidates, and, in the future, the ability to produce and distribute our products in the volume needed to meet commercial demand.

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Conducting clinical trials of our drug candidates or potential commercial sales of a drug candidate may expose us to expensive product liability claims, and we may not be able to maintain product liability insurance on reasonable terms or at all.

The risk of product liability is inherent in the testing of pharmaceutical products. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or terminate testing of one or more of our drug candidates. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of our drug candidates. We currently carry clinical trial insurance but do not carry product liability insurance. If we successfully commercialize one or more of our drug candidates, we may face product liability claims, regardless of FDA approval for commercial manufacturing and sale. We may not be able to obtain such insurance at a reasonable cost, if at all. Even if our agreements with any current or future corporate collaborators entitle us to indemnification against product liability losses, such indemnification may not be available or adequate should any claim arise.

If our drug candidates receive regulatory approval, we and our collaborators will be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and limit our and our collaborators’ ability to commercialize our potential drugs.

Any regulatory approvals that our drug candidates receive may also be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drug, including but not limited to adverse events of unanticipated severity or frequency, or the discovery that adverse events previously observed in preclinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing our drugs and our business could suffer.

We may not be able to successfully develop or commercialize FENROCK, a proprietary abuse-deterrent transdermal pain patch (fentanyl), designed to prevent common methods of abuse of fentanyl.

We have no history of developing transdermal patches. We do not know whether any of our planned development activities for FENROCK will result in approval of such drug candidate by the FDA, or, if FENROCK is approved, it will be a commercially viable product.





Risks Relating to our Collaboration Agreements

If Pfizer did not transfer to us all data and documentation or the quality of the data and documentation transferred is insufficient, our ability to achieve approval of the NDA for REMOXY will be negatively impacted and our business will suffer.



In April 2015, we announced that we resumed responsibility for REMOXY under the terms of a letter agreement with Pfizer. The letter agreement was entered into within the scope of the previously disclosed provisions of the Collaboration Agreement between us and Pfizer relating to the return of REMOXY.



We believe Pfizer has transferred to us data, materials, capital equipment and other assets related to REMOXY. In preparing to resubmit the NDA for REMOXY, we may find that there are additional data, materials or agreements that Pfizer should have transferred to us. If Pfizer did not meet its obligations to transfer all such materials or if the quality of the data and documentation transferred is insufficient, we would be significantly delayed in our ability to achieve FDA approval of the NDA for REMOXY, and may need to conduct further development activities or clinical

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trials to prepare any potential resubmission. As a result, any further development, regulatory approval and product introduction for REMOXY would be delayed or prevented and our business would suffer.

If outside collaborators fail to devote sufficient time and resources to drug development programs related to our product candidates, or if their performance is substandard, regulatory submissions and introductions for our products may be delayed.

We rely on Durect as the sole-source provider of certain components of REMOXY. Durect’s failure for any reason to provide these components could result in delays or failures in product testing or delivery, cost overruns or other problems that could materially harm our business.

We depend on independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These investigators and collaborators are not our employees, and we cannot control the amount or timing of resources that they devote to our programs. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such activities ourselves. If these investigators or collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, the approval of our regulatory submissions and our introductions of new drugs will be delayed or prevented.

Our collaborators may also have relationships with other commercial entities, some of which may compete with us. If outside collaborators assist our competitors to our detriment, the approval of our regulatory submissions will be delayed and the sales from our products, if any are commercialized, will be less than expected.

If we fail to enter into or maintain collaboration agreements and licenses for REMOXY and other drugs designed to reduce potential risks of unintended use, we may have to reduce or delay our drug candidate development.

Our plan for developing, manufacturing and commercializing REMOXY currently requires us to successfully maintain our license from Durect. If we are unable to meet the obligations necessary to maintain our license with Durect for one or more potential products we may lose the rights to utilize Durect’s technology for such potential products, our potential future revenues may suffer and we may have to reduce or delay development of our other drug candidates. In addition, we expect to seek a new corporate collaborator with respect to REMOXY. If we do not enter into a new collaboration with respect to the continued development and potential commercialization of REMOXY, we will be required to undertake and fund such activities ourselves and may need to seek additional capital (which may not be available on acceptable terms, if at all), personnel or other resources. If we are not successful in such efforts, development and commercialization of REMOXY and our other drug candidates would be delayed or prevented, and our business would suffer.

We may not succeed at in-licensing drug candidates or technologies to expand our product pipeline.

We may not successfully in-license drug candidates or technologies to expand our product pipeline. The number of such candidates and technologies is limited. Competition among large pharmaceutical companies and biopharmaceutical companies for promising drug candidates and technologies is intense because such companies generally desire to expand their product pipelines through in-licensing. If we fail to carry out such in-licensing and expand our product pipeline, our potential future revenues may suffer.

Our collaborative agreements may not succeed or may give rise to disputes over intellectual property, disputes concerning the scope of collaboration activities or other issues.

Our collaborative agreements with third parties, such as our license agreement with Durect, are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property under collaborations or disputes concerning the scope of collaboration activities. Such disputes can delay or prevent the development of potential new drug products, or can lead to lengthy, expensive litigation or arbitration. Other factors relating to collaborative agreements may adversely affect our business, including:

·

the development of parallel products by our collaborators or by a competitor;

·

arrangements with collaborative partners that limit or preclude us from developing certain products or technologies;

·

premature termination of a collaborative or license agreement; or

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·

failure by a collaborative partner to provide required funding, to devote sufficient resources to the development of or legal defense of our potential products or to provide data or other information to us as required by our collaborative agreements.





Risks Relating to Commercialization

If physicians and patients do not accept and use our drugs, we will not achieve sufficient product revenues and our business will suffer.

Even if the FDA approves our drugs, physicians and patients may not accept and use them. Acceptance and use of our drugs will depend on a number of factors including:

·

when the drug is launched into the market and related competition;

·

approved label claims;

·

perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drugs, and, in particular, the effectiveness of REMOXY in reducing potential risks of unintended use;

·

perceptions by physicians regarding the cost benefit of REMOXY in reducing potential risks of unintended use;

·

published studies demonstrating the cost-effectiveness of our drugs relative to competing products;

·

availability of reimbursement for our products from government or healthcare payers;

·

our or our collaborators’ ability to implement a risk management plan prior to the distribution of any Schedule II drug; and

·

effectiveness of marketing and distribution efforts by us and other licensees and distributors.

Because we expect to rely on sales generated by our current lead drug candidates for substantially all of our revenues for the foreseeable future, the failure of any of these drugs to find market acceptance would harm our business and could require us to seek additional financing.

We currently have no in-house capabilities to commercialize our drug products and if we are unable to develop our own sales, marketing and distribution capabilities, or if we are not successful in contracting with third parties for these services on favorable terms, or at all, our product revenues could be disappointing.

We currently have no sales, marketing or distribution capabilities. We have not established commercial strategies regarding any of our product candidates, including REMOXY. In order to commercialize our products, if any approved by the FDA, we will either have to develop such capabilities internally or collaborate with third parties who can perform these services for us.

If we decide to commercialize any of our drugs ourselves, we may not be able to

·

hire and retain the necessary experienced personnel;

·

build sales, marketing and distribution operations in a cost effective manner which are capable of successfully launching new drugs;

·

obtain access to adequate numbers of physicians to prescribe our products; or

·

generate sufficient product revenues.

In addition, establishing such operations on our own will take time and involve significant expense. If our commercial operations lack complementary products, we may not be able to compete in a cost effective manner with competitors with more products to sell. If we engage third-party collaborators to perform any commercial operations, our future revenues may depend significantly upon the performance of those collaborators.

If we decide to enter into new co-promotion or other licensing arrangements with third parties, we may be unable to locate acceptable collaborators because the number of potential collaborators is limited and because of competition from others for similar alliances with potential collaborators. Even if we are able to identify one or more acceptable new collaborators, we may not be able to enter into any collaborative arrangements on favorable terms, or at all.

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In addition, due to the nature of the market for our drug candidates, it may be necessary for us to license all or substantially all of our drug candidates to a single collaborator, thereby eliminating our opportunity to commercialize these other products independently. If we enter into any such new collaborative arrangements, our revenues are likely to be lower than if we marketed and sold our products ourselves.

In addition, any revenues we receive would depend upon our collaborators’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, change of strategic focus, business combinations or other factors outside of our control. Depending upon the terms of our collaboration, the remedies we have against an under-performing collaborator may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement collaborator on acceptable terms, or at all.

The science of abuse-deterrence is relatively new.

The analytical, clinical, and statistical methods for evaluating abuse-deterrent technologies and study results are new and rapidly evolving. Although we believe the FDA will take a flexible, adaptive approach to the evaluation and labeling of potentially abuse-deterrent products, such as REMOXY, we cannot be certain that our interpretation of abuse-deterrent data for REMOXY is consistent with the views of the FDA. In our opinion, the FDA has limited data correlating the potentially abuse-deterrent properties of certain opioid drug products, such as REMOXY, with actual reduction in abuse or adverse events associated with abuse. In addition, the FDA has stated it is not able to provide specific guidance on the magnitude of effect that would be sufficient to support any particular type of label claim for abuse-deterrence.

In the United States, our ability to market and promote REMOXY and its abuse-deterrent features will be determined by FDA-approved labeling.

The commercial success of REMOXY and certain of our other product candidates will depend upon our ability to obtain FDA-approved labeling describing their abuse-deterrent features. Our failure to achieve FDA approval of product labeling containing such information will prevent us from advertising and promoting the abuse-deterrent features of our product candidates in order to differentiate them from other similar products. This would make our products less competitive in the market.

Abuse-deterrent label claims for our products may not be broad enough to demonstrate a substantial benefit to health care providers and patients.

FDA approval is required in order to make claims that a product has an abuse-deterrent effect. In April 2015, the FDA published final guidance with regard to the evaluation and labeling of abuse-deterrent opioids. The guidance provides direction as to the studies and data required for obtaining abuse-deterrent claims in a product label. FDA guidance describes three categories of pre-market studies that may lead to an abuse-deterrent claim:

Category 1 – laboratory manipulation and extraction studies;

Category 2 – pharmacokinetic studies; and

Category 3 – human abuse potential studies.



According to FDA guidance, label claims for abuse-deterrence should describe the product’s specific abuse-deterrent properties as well as the specific routes of abuse that the product has been developed to deter. When data predict or show that a product’s potentially abuse-deterrent properties can be expected to, or actually do, result in a significant reduction in that product’s abuse potential, these data, together with an accurate characterization of what the data mean, may be included in product labeling.



If a product is approved by the FDA to include such claims in its label, the applicant may use the approved labeling information about the abuse-deterrent features of the product in its marketing efforts to physicians.

Although we intend to provide data to the FDA to support approval of abuse-deterrence label claims for REMOXY, there can be no assurance that REMOXY or any of our other product candidates will receive FDA-approved labeling that describes the abuse-deterrent features of such products. The FDA may find that our studies and data do not support abuse-deterrent labeling or that our product candidates do not provide substantial abuse-deterrence because, for example, their deterrence mechanisms do not address the way they are most likely to be abused. Further, the FDA is not required to follow its guidance and could change this guidance, which could require us to conduct additional studies or generate additional data. If the FDA does not approve abuse-deterrent labeling, we will not be able to promote such products based on their abuse-deterrent features and our business may suffer.

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Even if we do receive FDA approval for abuse-deterrent claims, the claims may not be broad enough to demonstrate a substantial benefit to health care providers and patients. For instance, the claims may not encompass the more common forms of abuse for products like our product candidates. Moreover, continued investigation in Phase 4 studies following product approval, if required, is expensive and may not support the continued use of abuse-deterrent claims.

If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.

The market for our drug candidates is characterized by intense competition and rapid technological advances. If our drug candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products are unable to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

We and our collaborators will compete for market share against fully integrated pharmaceutical companies or other companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have drugs already approved or drug candidates in development that will or may compete against our approved drug candidates. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

·

developing drugs;

·

conducting preclinical testing and human clinical trials;

·

obtaining FDA and other regulatory approvals of drugs;

·

formulating and manufacturing drugs; and

·

launching, marketing, distributing and selling drugs.

If we fail to obtain acceptable prices or an adequate level of reimbursement for our products from healthcare payers, our ability to generate product revenues will be diminished.

Our ability to commercialize drugs we (alone or with other collaborators) may develop will depend in part on the extent to which reimbursement can be obtained for such drugs from:

·

government and health administration authorities;

·

private health maintenance organizations and health insurers; and

·

other healthcare payers.

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, health maintenance organizations and managed care organizations, are challenging the prices charged for medical products and services and/or are seeking pharmacoeconomic data to justify formulary acceptance and reimbursement practices. We currently have not generated pharmacoeconomic data on any of our drug candidates. Government and other healthcare payers increasingly are attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs, and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has or has not granted labeling approval. Adequate third-party insurance coverage may not be available to patients for any products we discover and develop, alone or with collaborators. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our products, market acceptance of our drug candidates could be limited.

Enacted and future legislation may increase the difficulty and cost for us to commercialize our product candidates and may reduce the prices we are able to obtain for our product candidates.

Legislative and regulatory changes and future changes regarding the healthcare system could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities or affect our ability to profitably sell any product candidates for which we obtain marketing approval.

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In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the Medicare Modernization Act, established the Medicare Part D program and provided authority for limiting the number of drugs that will be covered in any therapeutic class thereunder. The Medicare Modernization Act, including its cost reduction initiatives, could limit the coverage and reimbursement rate that we receive for any of our approved products. Private payors may follow Medicare coverage policies and payment limitations in setting their own reimbursement rates resulting in similar limits in payments from private payors.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, among other things, imposes a significant annual fee on companies that manufacture or import branded prescription drug products. It also contains substantial provisions intended to, among other things, broaden access to health insurance, reduce or constrain the growth of health care spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, and impose additional health policy reforms, any of which could have a material adverse effect on our business. A significant number of provisions are not yet, or have only recently become, effective, but the Affordable Care Act may result in downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

The Affordable Care Act, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may compromise our ability to generate revenue, attain profitability or commercialize our products.

The Affordable Care Act is a highly complex piece of legislation that continues to evolve. We do not and cannot understand or anticipate the full impact and potential implications of the Affordable Care Act on our business or on our drugs.

Even if we are able to commercialize any of our product candidates, our products may become subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, which could have a material adverse effect on our business.

Our ability to commercialize any products successfully will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be and whether it will be satisfactory. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or 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, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also be insufficient to cover our costs and may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved

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products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

Public concern over the abuse of opioids, including law enforcement concerns over diversion of opioid and regulatory efforts to combat abuse, could decrease the potential market for our product candidates.

Media stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are commonplace. Law enforcement and regulatory agencies may apply policies that seek to limit the availability of opioids. Such efforts may inhibit our ability to commercialize our product candidates. Aggressive enforcement and unfavorable publicity regarding, for example, the use or misuse of oxycodone or other opioid drugs; the limitations of ADFs; the ability of drug abusers to discover previously unknown ways to abuse our products; public inquiries and investigations into prescription drug abuse; litigation; or regulatory activity regarding sales, marketing, distribution or storage of opioid drugs could have a material adverse effect on our reputation. Such negative publicity could reduce the potential size of the market for our product candidates and decrease the revenues we are able to generate from their sale. To the extent opioid abuse becomes less prevalent or less urgent of a public health issue, regulators and third party payers may not be willing to pay a premium for ADFs of opioids.

Efforts by the FDA and other regulatory bodies to combat abuse of opioids may negatively impact the market for our product candidates. For example, on September 10, 2013, the FDA announced its intention to effect labeling changes to all approved long-acting opioid formulations. In particular, the FDA announced its intention to update the indication for long-acting opioid formulations so that long-acting opioid formulations will be indicated only for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. On April 16, 2014, the FDA updated these indications. It is possible that such changes could reduce the number of prescriptions for opioids written by physicians and negatively impact the potential market for our product candidates.

If the FDA or other applicable regulatory authorities approve generic products with abuse-deterrent claims that compete with any of our product candidates, it could reduce our sales of those product candidates.

Once an NDA, including a Section 505(b)(2) application, is approved, the product covered thereby becomes a "listed drug" which can, in turn, be cited by potential competitors in support of approval of an abbreviated NDA, or ANDA. Potential competitors may create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes. These competitors might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredients, dosage form, strength, route of administration, and conditions of use, or labeling, as our products and that the generic product is absorbed in the body at the same rate and to the same extent as, or is bioequivalent to, our products. These generic equivalents would be significantly less costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product are typically lost to the generic product. Accordingly, competition from generic equivalents to our products would substantially limit our ability to generate revenues and therefore to obtain a return on the investments we have made in our product candidates.

Our relationships with customers and 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 from government healthcare programs, contractual damages, reputational harm, administrative burdens, and diminished profits and future earnings.

Healthcare providers, physicians and payors play a primary role in the recommendation and prescription of any product candidates for which we may obtain marketing approval. Our future arrangements with 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 and relationships through which we market, sell and distribute any product candidates for which we may obtain marketing approval. Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients' rights are and will be applicable to our business. Restrictions under applicable federal, state and foreign healthcare laws and regulations may affect our ability to operate and expose us to areas of risk, including:

·

the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward

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either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

·