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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 001-35599

 

 

Durata Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		27-1247903
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
500 West Monroe Street, Suite 3300 Chicago, Illinois		60661
(Address of Principal Executive Offices)		(Zip Code)

(312) 219-7000

(Registrant’s Telephone Number, Including Area Code)

200 South Wacker Drive, Suite 2550

Chicago, Illinois 60606

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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  x    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  x    No  ¨

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

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		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  x

As of October 31, 2014, there were 26,793,419 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

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Durata Therapeutics, Inc. and Subsidiaries

INDEX

PART I

FINANCIAL INFORMATION

Item 1.		Financial Statements			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4.		Controls and Procedures			37
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			39
Item 1A.		Risk Factors			40
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			67
Item 6.		Exhibits			67
Signatures					68
Exhibit Index					69

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

•

the ability to achieve the projected benefits of the planned acquisition of our company by Actavis W.C. Holding Inc., or Actavis W.C. Holding, including future financial and operating results, our or Actavis W.C. Holding’s plans, and the ability to consummate the transactions contemplated by the agreement and plan of merger among us, Actavis W.C. Holding and Delaware Merger Sub, Inc.;

 

•

our financial performance, including revenues, expenses, income taxes, and our anticipated available cash;

 

•

the receipt of revenues from sales of dalbavancin;

 

•

the potential advantages of dalbavancin;

 

•

the rate and degree of market acceptance and clinical utility of dalbavancin;

 

•

our estimates regarding the potential market opportunity for dalbavancin;

 

•

the timing of and our ability to obtain U.S. and foreign marketing approval of product candidates we develop and the ability of our products to meet existing or future regulatory standards;

 

•

our plans to pursue development of dalbavancin for additional indications other than acute bacterial skin and skin structure infections, or ABSSSI, and new dosing strategies and formulations;

 

•

our ability to in-license or acquire additional clinical stage product candidates or approved products in our areas of focus;

 

•

our sales, marketing and distribution capabilities and strategy, including entering into arrangements with third parties to commercialize our product;

 

•

our ability to establish and maintain arrangements for manufacture of dalbavancin and any other product candidates we develop;

 

•

our intellectual property position;

 

•

the impact of government laws and regulations; and

 

•

our competitive position.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section of this Quarterly Report on Form 10-Q, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Unless expressly stated otherwise, the statements contained in this Quarterly Report on Form 10-Q have been prepared as if we were going to remain an independent company.

 

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You should read this Quarterly Report on Form 10-Q, the documents that we reference and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013 completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

 

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Durata Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheet

(in thousands, except share data)

(Unaudited)

Item 1. Financial Statements

 

		September 30, 2014				December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	27,669			$	36,853
Short-term investments			7,802				22,880
Trade receivables, less allowance of $238 in 2014			192				—
Inventory			3,156				—
Prepaid expenses and other current assets			5,523				3,367
Total current assets			44,342				63,100
Intangible assets, net of amortization			14,782				15,292
Goodwill			5,811				5,811
Property and equipment, net			1,746				897
Restricted cash			2,024				1,147
Deferred charge, net			9,750				10,081
Other assets			3,668				3,816
Total assets		$	82,123			$	100,144
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable		$	12,058			$	5,275
Accrued expenses			7,732				7,116
Current portion of long-term debt			1,500				—
Deferred revenue			11,250				—
Income taxes payable			125				1,609
Total current liabilities			32,665				14,000
Long-term debt			63,500				25,000
Non-current income tax payable			1,426				1,377
Contingent liability			—				20,889
Other liabilities			612				299
Total liabilities		$	98,203			$	61,565
Commitments and contingencies (note 10)
Stockholders’ equity (deficit):
Common stock, $0.01 par value; 125,000,000 shares authorized at September 30, 2014 and December 31, 2013, respectively; 26,787,903 and 26,625,749 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively			268				266
Additional paid-in capital			211,055				207,754
Preferred stock, $0.01 par value; 5,000,000 shares authorized at September 30, 2014 and December 31, 2013; no shares issued and outstanding at September 30, 2014 or December 31, 2013			—				—
Accumulated deficit			(227,403	)			(169,441	)
Total stockholders’ equity (deficit)		$	(16,080	)		$	38,579
Total liabilities and stockholders’ equity (deficit)		$	82,123			$	100,144

See accompanying notes to the consolidated financial statements.

 

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Durata Therapeutics, Inc. and Subsidiaries

Consolidated Statement of Operations

(in thousands, except share and per share data)

(Unaudited)

 

		Three month period ended September 30,								Nine month period ended September 30,
		2014				2013				2014				2013
Revenue:
Product revenue, net		$	6,331			$	—			$	6,331			$	—
Contract revenue			3,750				—				3,750				—
Total revenue			10,081				—				10,081				—
Operating expenses:
Amortization of intangible assets			382				—				510				—
Research and development expenses			11,267				5,928				26,460				30,198
Selling, general and administrative expenses			16,696				4,823				34,997				13,388
Acquisition related charges, net			—				266				4,111				839
Total operating expenses			28,345				11,017				66,078				44,425
Operating loss			18,264				11,017				55,997				44,425
Other (income) expense
Interest expense			1,607				648				3,543				1,410
Interest income			(5	)			(23	)			(32	)			(49	)
Other (income) expense			18				—				(97	)			—
Total other (income) expense			1,620				625				3,414				1,361
Loss before income tax expense (benefit)			19,884				11,642				59,411				45,786
Income tax expense (benefit)			207				257				(1,449	)			715
Net loss		$	(20,091	)		$	(11,899	)		$	(57,962	)		$	(46,501	)
Net loss per common share—Basic and Diluted		$	(0.75	)		$	(0.45	)		$	(2.17	)		$	(1.99	)
Weighted-average common shares—Basic and Diluted			26,780,298				26,620,497				26,690,668				23,416,091

See accompanying notes to the consolidated financial statements.

 

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Durata Therapeutics, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

(in thousands, except share data)

(Unaudited)

 

		Nine month period ended September 30,
		2014				2013
Cash flows from operating activities:
Net loss		$	(57,962	)		$	(46,501	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			706				187
Stock based compensation expense			3,018				1,901
Acquisition related charges, net			4,111				839
Non-cash interest expense			70				479
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(1,369	)			2,849
Inventory			(3,156	)			—
Deferred charge			331				930
Other assets			118				—
Trade receivables			(192	)			—
Accounts payable			6,783				(5,617	)
Accrued expenses			616				(4,364	)
Income taxes payable/receivable			(1,970	)			(2,008	)
Deferred revenue			11,250				—
Other liabilities			313				259
Net cash used in operating activities			(37,333	)			(51,046	)
Cash flows from investing activities:
Purchases of property and equipment			(1,046	)			(439	)
Purchases of short-term investments			(3,998	)			(19,058	)
Proceeds from sale of short-term investments			19,000				9,997
Other investing activities			(1,051	)			(291	)
Net cash provided by (used in) investing activities			12,905				(9,791	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net			—				54,104
Payment of offering costs			—				(444	)
Proceeds from issuance of long-term debt			15,000				20,000
Payment of debt financing fees			(41	)			(651	)
Proceeds from stock options exercised			280				56
Excess tax benefit on stock-based awards			5				—
Net cash provided by financing activities			15,244				73,065
Net (decrease) increase in cash			(9,184	)			12,228
Cash and cash equivalents, beginning of year and period			36,853				32,257
Cash and cash equivalents, end of year and period		$	27,669			$	44,485
Supplemental Disclosures of Cash Flow Information
Non-cash financing activities:
Conversion of contingent liability to long-term promissory note		$	25,000			$	—
Cash paid for interest		$	3,473			$	931
Cash paid for income taxes		$	197			$	1,619

See accompanying notes to the consolidated financial statements.

 

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Durata Therapeutics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

(Unaudited)

 

(1)	Nature of Business

Durata Therapeutics, Inc. and its subsidiaries (the Company) is a Delaware corporation and has its principal place of business in Chicago, Illinois. The Company is a pharmaceutical company focused on the development and commercialization of novel therapeutics for patients with infectious diseases and acute illnesses. The Company was incorporated on November 4, 2009. In December 2009, the Company entered into an agreement with Pfizer Inc. (Pfizer) to acquire Vicuron Pharmaceuticals Inc. (Vicuron) (see note 5, Acquisition-Milestone Payment).

On May 23, 2014, the United States Food and Drug Administration, or FDA, approved Dalvance^TM (dalbavancin) for injection for the treatment of adult patients with acute bacterial skin and skin structure infections (ABSSSI) caused by susceptible gram positive bacteria, including Methicillin-resistant Staphylococcus aureus (MRSA). Dalvance is the first and only intravenous antibiotic approved for the treatment of adult patients with ABSSSI with a two-dose regimen of 1000 milligrams followed one week later by 500 milligrams, each administered over 30 minutes. Sales of dalbavancin in the United States commenced in late July 2014. Dalbavancin is designated as a Qualified Infectious Disease Product (QIDP) by the FDA. Dalbavancin’s QIDP designation qualifies it for an additional five years of marketing exclusivity to be added to certain exclusivity periods already provided by the Food, Drug and Cosmetic Act.

As further described under note 11, Subsequent Events, below, on October 5, 2014, the Company entered into an agreement and plan of merger (the Merger Agreement) with Actavis W.C. Holding Inc. (Actavis W.C. Holding) and Delaware Merger Sub, Inc., a wholly owned subsidiary of Actavis W.C. Holding (Merger Sub), pursuant to which, and on the terms and subject to the conditions thereof, among other things, Merger Sub is obligated to commence a tender offer (the Offer) on or before October 21, 2014, to acquire all of the outstanding shares of common stock of the Company at a purchase price of $23.00 per share net to the seller in cash, without interest and less any applicable withholding taxes, plus one non-transferable contractual contingent value right (CVR) per share, which represents the right to receive contingent payments of up to $5.00 in cash in the aggregate, if any, without interest and less applicable withholding taxes, if specified milestones are achieved, subject to and in accordance with the terms and conditions of a CVR Agreement to be entered into between Actavis W.C. Holding and a rights agent selected by Actavis W.C. Holding and reasonably acceptable to the Company. Following the completion of Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into us, with our company surviving as a direct wholly owned subsidiary of Actavis W.C. Holding, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without a vote of the stockholders of the Company. On October 17, 2014, Merger Sub commenced the Offer. Unless extended by Actavis W.C. Holding in accordance with the Merger Agreement, the offering period for the Offer will expire at 12:00 midnight, New York City time, on November 14, 2014. The Company expects the merger with Merger Sub to close in the fourth quarter of 2014. The outside date, after which either party may terminate the Merger Agreement if the transactions contemplated by the Merger Agreement have not been consummated, is March 5, 2015.

The Company had a net loss of $58.0 million for the nine months ended September 30, 2014. Through September 30, 2014, the Company has generated limited revenues and has financed its operations primarily through private placements of its preferred stock, its initial public offering of its common stock in July 2012 (see note 7, Stockholders’ Equity and Stock Compensation), a secured debt financing completed in March 2013 and refinanced with a new lender in October 2013 (see note 6, Long-term Debt), and a public offering of its common stock in April 2013 (see note 7, Stockholders’ Equity and Stock Compensation). Upon marketing approval of dalbavancin in the United States, the Company borrowed, as required, an incremental $15.0 million from PDL BioPharma, Inc. (PDL). The Company expects to continue to incur significant expenses to seek marketing approval for its product candidates, develop a commercial organization, manufacture product, conduct clinical trials for additional indications for dalbavancin, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations. During the second quarter of 2014, the Company began enrollment in a Phase 3b clinical trial to evaluate the efficacy and safety of a single 1500 mg dose of dalbavancin infused over 30 minutes in adult patients with ABSSSI caused by susceptible Gram-positive bacteria

 

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and in August 2014, the Company commenced the initial start-up and planning activities for a Phase 3, double-blind, randomized, multicenter trial to assess the safety and efficacy of a single 1500 mg dose of dalbavancin plus a single 500 mg dose of azithromycin in comparison to an approved antibiotic regimen of linezolid 600 mg every 12 hours for 10-14 days plus a single 500 mg dose of azithromycin for the treatment of community acquired bacterial pneumonia.

The Company estimates that our existing cash and cash equivalents and short-term investments and other sources of liquidity discussed will be sufficient to support our current and projected funding requirements for at least the next twelve months. The Company estimates that such funds will be sufficient to enable it to seek marketing approval of dalbavancin in the European Union for the treatment of adult patients with ABSSSI, to commercialize dalbavancin in the United States and, if approved in the European Union, possibly Western Europe, as well as to explore the development of dalbavancin for additional indications and new dosing strategies, including the Phase 3b clinical trial mentioned above, and formulations. The Company has based this estimate on assumptions that may prove to be wrong, and it could use its available capital resources sooner than it currently expects.

The Company also believes it has other financing alternatives available, including the option to borrow an additional $30.0 million from PDL, and anticipates the receipt of a milestone payment of $10.0 million under its license agreement with A.C.R.A.F. S.p.A. (Angelini) described in note 3, License Agreement, payable 30 days following European Medicines Agency approval which is expected in the first quarter of 2015, to fund additional activities until its operations generate adequate operating cash flows, which include additional equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. The Company also has limited fixed commitments for uses of cash and has the intent and ability, if necessary; to delay or eliminate expenditures until adequate funding is available.

 

(2)	Summary of Significant Accounting Policies

 

(a)

Basis of Presentation, Principles of Consolidation and Unaudited Interim Results

The unaudited accompanying consolidated financial statements of the Company are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC) and generally accepted accounting principles in the United States of America (GAAP) for condensed consolidated financial information. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. All intercompany accounts and transactions have been eliminated. These financial statements should be read in connection with the consolidated financial statements and notes thereto contained in

 

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the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on March 14, 2014. Through June 30, 2014, the Company had been considered a development stage company. During the third quarter of 2014, the Company commenced commercialization of Dalvance following marketing approval by the FDA on May 23, 2014 and is no longer considered a development stage company.

The results for the nine month period ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period or for any other future year.

 

(b)

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

 

(c)

New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue which depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The guidance contains a five-step model which will replace most existing revenue guidance in GAAP. ASU 2014-09 is effective for public companies for annual periods beginning after December 15, 2016. The Company is currently evaluating the impacts ASU 2014-09 will have on its financial position, results of operations and cash flows.

 

(d)

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash resources principally in money market funds.

Cash accounts with any type of restriction are classified as restricted cash. If restrictions are expected to be lifted in the next twelve months, the restricted cash account is classified as current. Included within restricted cash on the Company’s consolidated balance sheet are certificates of deposit for a total of $2.2 million as of September 30, 2014 and $1.1 million as of December 31, 2013, which are being held by a third party bank as collateral for the irrevocable letters of credit issued in connection with the Company’s office leases (see note 10, Commitments and Contingencies).

 

(e)

Revenue Recognition

Product Revenue

The Company recognizes revenue from the sale of its products when delivery has occurred, title has transferred, the selling price is fixed or determinable, collectability is reasonably assured and the Company has no further performance obligations. Dalvance is sold with no right of return. All revenue from product sales is recorded net of estimated chargebacks, rebates, discounts, and other deductions (collectivity, sales deductions) and returns. The Company records distribution fees payable to its wholesalers for distribution and inventory management services as a reduction to revenue. The fees are based on contractually stated amounts, typically as a percentage of revenue.

 

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Contract Revenue

The Company recognizes contract revenue as performance obligations are achieved. For multiple element arrangements, each product, service, and/or right to use asset is evaluated to determine whether it qualifies as a separate unit of accounting. The consideration is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The allocated consideration is recognized as the related products, services, or rights to use assets are delivered and are not contingent upon future deliverables.

 

(f)

Financial Instruments

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy is established that prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

 

Level 1:		Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2:		Inputs other than the quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
Level 3:		Unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. See note 4, Financial Instruments, for additional information.

 

(g)

Short-term Investments

As of September 30, 2014, cash equivalents and short-term investments consist of investments in money market accounts, federal agency bonds and corporate entity commercial paper and bonds that are classified as available for sale pursuant to ASC 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its balance sheet. Investments are classified as long-term assets on the balance sheet if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year. All of the Company’s investments are classified as current.

The fair value of these securities is based on quoted prices for identical or similar assets. If a decline in the fair value is considered other-than-temporary, the unrealized loss, if any, would be transferred from other comprehensive loss to the statement of operations. There were no charges taken for other-than-temporary declines in fair value of short-term investments during the three or nine month periods ended September 30, 2014. Realized gains and losses are determined using the specific identification method and are included in interest income in the statement of operations. Realized gains and losses recognized during the three and nine month periods ended September 30, 2014 were immaterial.

The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers its intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, the severity and the duration of the impairment and changes in value. As of September 30, 2014, there were no investments with a fair value that was lower than the amortized cost basis or any investments that had been in an unrealized loss position for a significant period. See note 4, Financial Instruments, for further information.

 

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(h)

Inventory

Inventory, which is recorded at the lower of cost or market, is consumed using the first-in, first-out method. The Company capitalizes inventory produced in preparation for commercial launch when it becomes probable that the related product candidate will receive regulatory approval and that the related costs will be recoverable through commercial sale of the product. Costs incurred prior to FDA approval of Dalvance have been recorded in the statement of operations as research and development expense and as a result there was no cost of sales associated with sales during the third quarter 2014.

Inventory is evaluated for impairment based on consideration of such factors as the net realizable value, lower of cost or market, obsolescence, and product expiry. Inventory does not have carrying values that exceed either cost or net realizable value.

 

(i)

Deferred Financing Costs

The Company capitalizes certain legal, accounting and other fees that are directly associated with in-process debt and equity financings as current assets until such financings occur. In the case of an equity financing, after occurrence, these costs are recorded in equity, net of proceeds received. In the case of a debt financing, these costs are recorded as other assets and amortized to interest expense over the term of the debt.

As of September 30, 2014, the Company recorded debt financing costs of $0.4 million in connection with the debt financing completed in October 2013. The debt financing costs recorded in connection with the debt financing completed in March 2013 were expensed at the time the debt was repaid (see note 6, Long-term Debt, for more information). The Company also incurred offering costs of $0.4 million in connection with the public offering of its common stock that closed in April 2013. The debt financing costs are recorded in other assets on the consolidated balance sheet, net of accumulated amortization. The offering costs are recorded in equity as an offset to the proceeds received from the sale of the shares.

 

(j)

Other Intangible Assets

The Company had an acquired in-process research and development (IPR&D) intangible asset of $15.3 million as of December 31, 2013. Acquired IPR&D intangible assets represent the right to develop, use, sell or offer for sale intellectual property that the Company has acquired with respect to processes that have not been completed. These assets are required to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the date of acquisition, these assets were not amortized until their processes were completed and the Company received regulatory approval from a major market to allow for the commencement of commercial marketing activities. Following the FDA approval of dalbavancin in May 2014, the Company determined the useful life of the asset to be 10 years based largely on the 10-year marketing exclusivity period and reclassified the asset out of in-process research and development and began amortization. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The estimate of an intangible asset’s useful life should be based on relevant factors. After the 10-year marketing exclusivity period, generic drugs, comparable to dalbavancin, will enter the market, reducing our cash flows accordingly. Amortization for the nine month period ended September 30, 2014 totaled $0.5 million and the carrying value of the finite-lived intangible asset as of September 30, 2014 was $14.8 million.

Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment at least annually or if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment resulted from the Company’s most recent impairment evaluation of this asset as of December 31, 2013.

 

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(k)

Goodwill

Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. The Company had goodwill of $5.8 million as of both September 30, 2014 and December 31, 2013. The Company tests its goodwill for impairment annually as of December 31 each year unless indicators, events, or circumstances would require immediate review. No impairment resulted from the Company’s impairment evaluation as of December 31, 2013.

 

(l)

Property and Equipment

Property and equipment are recorded at cost, net of depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. The following table shows the estimated useful lives of the Company’s property and equipment:

 

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Repairs and maintenance costs are expensed as incurred.

 

(m)

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

(n)

Operating Leases

Rent expense related to leases is recorded on a straight-line basis over the term of the lease, including any rent free periods. The difference between actual rent payments and straight-line rent expense is recorded as deferred rent and included in other liabilities in the accompanying consolidated balance sheet.

 

(o)

Research and Development Costs

Research and development costs are expensed as incurred and are primarily comprised of the following types of costs incurred in performing research and development activities:

 

•

employee-related expenses, including salaries, benefits, travel and share-based compensation expense;

 

•

external research and development expenses incurred under arrangements with third parties, such as contract research organizations (CROs), manufacturing organizations and consultants, including our scientific advisory board; and

 

•

facilities and laboratory and other supplies.

 

(p)

Income Taxes

In accordance with ASC 740, Income Taxes, each interim period is considered integral to the annual period and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its annual effective tax rate estimated for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, adjusted for discrete taxable events that occur during the interim period. If, however, the entity is unable to reliably estimate its annual effective tax rate, then the actual

 

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effective tax rate for the year-to-date period may be the best annual effective tax rate estimate. For the three and nine month periods ended September 30, 2014, the Company utilized the actual year-to-date effective tax rate. See note 9, Income Taxes, for additional information.

 

(q)

Share-Based Compensation

The Company uses share-based compensation in the form of stock options and restricted stock. Compensation expense is recognized in the consolidated statement of operations based on the estimated fair value of the shares at grant date. Compensation cost to be recognized reflects an estimate of the number of shares expected to vest after taking into consideration an estimate of forfeiture. The fair values of stock option grants are estimated as of the date of grant using the Black-Scholes option valuation model. The fair value of option grants are based on the fair value of the Company’s common stock on the date of grant. See note 7, Stockholders’ Equity and Stock Compensation, for additional information.

 

(r)

Warrant Accounting

In connection with the loan agreement with Oxford Finance LLC, or Oxford, discussed in note 6, Long-term Debt, the Company granted warrants for the purchase of the Company’s common stock. In May 2014, Oxford exercised its warrants. The Company accounted for these common stock warrants in accordance with applicable accounting guidance provided in ASC 815-40, Derivatives and Hedging– Contracts in Entity’s Own Equity, as equity instruments based on the specific terms of the warrant agreements.

 

(s)

Concentrations

The Company maintains cash and cash equivalent balances with financial institutions which, at times, may exceed insurance limits established by the Federal Deposit Insurance Corporation. Management does not consider this to be a significant risk due to the long-standing reputation of these financial institutions.

The Company has entered into agreements with a contract manufacturer to manufacture clinical and commercial supplies of dalbavancin. The Company has also entered into agreements with contract manufacturers to supply the drug substance for dalbavancin in the form of injectable grade powder. The loss of any of these suppliers could have a material adverse effect upon the Company’s operations.

One of the Company’s customers comprised 97% of the Company’s consolidated net revenues for the quarter ended September 30, 2014. The loss of this customer or a significant reduction in sales to this customer would adversely affect our revenues.

 

(3)	License Agreement

On July 29, 2014, the Company entered into a license agreement and a supply agreement with A.C.R.A.F. S.p.A. (Angelini) for the purpose of allowing Angelini to commercialize dalbavancin in 36 countries, including Italy, Spain, Poland, Portugal, Greece, and certain specified countries in Eastern Europe, Russia, Turkey and the Commonwealth of Independent States. In exchange for commercialization rights in its licensed territories, Angelini paid the Company a $15.0 million upfront payment in August 2014, and will pay an additional $10.0 million upon the first approval of dalbavancin by the European Medicines Agency, and up to $56.5 million in aggregate milestone payments upon the achievement of certain regulatory and commercial milestones. Additionally, the Company will receive royalties on net sales of dalbavancin in the licensed territories, provided that Angelini achieves a specified gross margin.

The $15.0 million upfront payment is being amortized based on projected marketing authorization application (MAA) approval by the European Medicines Agency in March 2015. As of September 30, 2014, the Company recorded $11.2 million of deferred revenue and $3.8 million of contract revenue. In accordance with ASC 605-25, Multiple-Element Arrangements, this amount is allocated to the relevant performance obligations and recognized as the obligations are performed.

 

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The remaining additional aggregate milestone payments as outlined in the agreement will be recognized in accordance with ASC 605-28, Milestone Method, as contract revenue when the milestone is achieved. The royalties per the agreement will be recorded in accordance with ASC 605-25 when the unconditional right to the income exists and the amounts can be determined with reasonable accuracy.

 

(4)	Financial Instruments

The following table presents information about the Company’s financial assets and liability that have been measured at fair value at September 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation inputs used to determine such fair value (in thousands):

 

		September 30, 2014
		Fair Value				Level 1				Level 2				Level 3
Assets:
Money market fund investments		$	15,235			$	15,235			$	—			$	—
Available for sale securities:
Federal agency bonds			7,802				7,802				—				—
Total available for sale securities		$	7,802			$	7,802			$	—			$	—

 

		December 31, 2013
		Fair Value				Level 1				Level 2				Level 3
Assets:
Money market fund investments		$	27,156			$	27,156			$	—			$	—
Available for sale securities:
Federal agency bonds			14,847				14,847				—				—
Corporate commercial paper			3,998				3,998				—				—
Corporate bonds			4,035				4,035				—				—
Total available for sale securities		$	22,880			$	22,880			$	—			$	—
Liabilities:
Contingent liability		$	20,889			$	—			$	—			$	20,889

Additional information for the Company’s recurring fair value measurements using significant unobservable inputs (Level 3 inputs) was as follows (in thousands):

 

Balance at December 31, 2013		$	20,889
Contingent liability expense			4,111
Transfers in and/or out of Level 3			(25,000	)
Balance at September 30, 2014		$	—

As discussed in note 5, Acquisition – Milestone Payment, in August 2014, the Company, elected to defer payment of the previously disclosed $25.0 million milestone payment owed to Pfizer as a result of the first commercial sale of dalbavancin for the treatment of ABSSSI being made in the United States and delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment.

Certain financial instruments reflected in the consolidated balance sheets (for example, cash, accounts payable and certain other liabilities) are recorded at cost, which approximates fair value due to their short-term nature.

All available for sale securities have maturity dates less than one year. As of September 30, 2014, unrealized gains and losses on available for sale securities were immaterial.

 

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(5)	Acquisition – Milestone Payment

In December 2009, the Company acquired the rights to dalbavancin through its acquisition of all of the outstanding shares of capital stock of Vicuron from Pfizer pursuant to the stock purchase agreement between the Company and Pfizer dated December 11, 2009 (the Pfizer Agreement). The Company paid total upfront consideration of $10.0 million for the shares of Vicuron and the dalbavancin inventory to be used in research. In addition, upon the first commercial sale of dalbavancin, which occurred in late July 2014, the Company became required to pay Pfizer an additional milestone payment of $25.0 million. As allowed under the Pfizer Agreement, the Company elected to defer the milestone payment to Pfizer by delivering to Pfizer a promissory note in August 2014 for the full amount of such milestone payment. Interest on the outstanding principal amount of the promissory note accrues at a rate of 10% per annum, compounded annually. As of September 30, 2014 the outstanding principal amount of the Pfizer note amounted to $25.0 million and long term accrued interest amounted to $0.3 million. In addition, under the Company’s credit agreement with PDL discussed in note 6, Long-term Debt, the Company is prohibited from making any prepayment to Pfizer as long as amounts are outstanding under the Company’s credit agreement with PDL.

 

(6)	Long-term Debt

Long-term debt, net is composed of the Company’s obligations as follows:

 

(in thousands)		September 30, 2014				December 31, 2013
PDL Credit Facility		$	38,500			$	25,000
10.0% Pfizer Promissory Note			25,000				—
Outstanding balance, September 30, 2014		$	63,500			$	25,000

PDL Credit Facility

On October 31, 2013, the Company and certain of its subsidiaries entered into a credit agreement with PDL (the PDL credit agreement), pursuant to which the Company’s wholly-owned Dutch subsidiaries borrowed an aggregate principal amount of $25.0 million (the First Tranche) and upon FDA approval of dalbavancin on May 23, 2014, the Company borrowed, as required pursuant to the terms of the PDL credit agreement, an additional aggregate principal amount of $15.0 million (the Second Tranche). The Company may make a one-time election to borrow an additional aggregate principal amount of up to $30.0 million (the Delayed Draw) during the nine month period following May 23, 2014.

The funding of the Delayed Draw is subject to the satisfaction of certain conditions set forth in the PDL credit agreement, including, without limitation, the continued accuracy of representations and warranties, no default or material adverse change having occurred, and the execution and delivery of additional loan documents, if required.

Any amount borrowed under the PDL credit agreement is guaranteed by the Company and certain of the Company’s subsidiaries. The loans and the guarantee obligations are secured by a lien on all or substantially all of the Company’s assets and all or substantially all of the assets of the Company’s subsidiaries (other than Durata Therapeutics Limited), as applicable, including the pledge of the equity interests in each of the Company’s direct and indirect subsidiaries to secure the applicable loan and guarantee obligations.

The First Tranche bore interest at an annual rate equal to 14.00% prior to May 23, 2014. Currently, each term loan bears interest at an annual rate equal to 12.75%. The PDL credit agreement provides for interest-only payments payable quarterly in arrears through December 31, 2014, and payment of interest and principal in quarterly installments in the amounts specified in the PDL credit agreement starting on March 31, 2015 and continuing quarterly thereafter through September 30, 2018. The final maturity of the loan is October 31, 2018.

The Company paid an origination fee to PDL when the Company entered into the PDL credit agreement, which is included in deferred finance costs in other assets. At the Company’s option, the Company may elect to prepay the entire outstanding term loan plus any accrued interest, plus a

 

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prepayment penalty determined with respect to the principal amount of the term loan being prepaid. The PDL credit agreement also provides for indemnification of PDL and the other lenders from time to time party to the PDL credit agreement. The PDL credit agreement also prohibits the Company from prepaying the principal amount of the $25.0 million promissory note, discussed below, to Pfizer, as long as amounts are outstanding under the PDL credit agreement.

The PDL credit agreement also contains certain representations, warranties and covenants (including maintaining liquidity of at least $2.0 million) applicable to the Company and its subsidiaries. The PDL credit agreement contains certain events of default. The obligations under the PDL credit agreement and the other loan documents may, at PDL’s option, be accelerated upon the occurrence of certain events of default, and are automatically accelerated upon certain bankruptcy-related events of default.

The net proceeds of the First Tranche were used to repay amounts outstanding under the Company’s loan and security agreement with Oxford Finance LLC, including prepayment penalties and fees, and the remainder of the proceeds of the First Tranche has been used for general corporate purposes. The net proceeds of the Second Tranche will be used for general corporate purposes.

10% Pfizer Promissory Note

On August 18, 2014 the Company, pursuant to the Pfizer Agreement, (i) elected to defer payment of the $25.0 million milestone payment owed to Pfizer as a result of the first commercial sale of dalbavancin for the treatment of ABSSSI being made in the United States and (ii) delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment. The promissory note has a maturity date of July 7, 2019 and interest on the outstanding principal amount accrues at a rate of 10% per annum, compounded annually. As of September 30, 2014 the outstanding principal amount of the Pfizer note amounted to $25.0 million and long term accrued interest amounted to $0.3 million.

 

(7)	Stockholders’ Equity and Stock Compensation

 

(a)

Common Stock

On April 17, 2013, the Company closed a public offering of an aggregate of 8,222,500 shares of common stock at a public offering price of $7.00 per share, including 1,072,500 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $54.1 million, after deducting underwriting discounts and commissions but prior to the payment of offering expenses by the Company.

In July 2012, the Company closed the initial public offering of its common stock. The Company sold an aggregate of 8,625,000 shares of common stock under the registration statement at a public offering price of $9.00 per share, including 1,125,000 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $73.9 million, after deducting underwriting discounts and commissions but prior to the payment of offering expenses by the Company. Upon closing the initial public offering, all the then outstanding shares of the Company’s Series A Convertible Preferred Stock were converted into 9,649,738 shares of common stock.

In December 2009, the Company issued 62,500 shares of restricted common stock to an officer in return for services to be rendered over the effective vesting period. This award fully vested in January 2011.

Also included in common stock at September 30, 2014 were 159,081 common shares issued upon exercise of options and warrants during the nine month period ended September 2014. During that period, an additional 1,216 options were early exercised and restricted shares were issued, with 18,239 restricted shares vested and 3,216 restricted shares unvested at September 30, 2014.

 

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(b)

Series A Convertible Preferred Stock

Prior to completing its initial public offering, the Company issued and sold an aggregate of 77,197,936 shares of its Series A Convertible Preferred Stock that resulted in the Company receiving cash proceeds of $77.2 million. The proceeds were used for research and development and general working capital. In July 2012, upon closing its initial public offering, all the then outstanding shares of the Company’s convertible preferred stock were converted into 9,649,738 shares of common stock.

In July 2012, the Company’s one-for-8.000 reverse stock split became effective, effectively changing the conversion price of the Series A Convertible Preferred Stock.

 

(c)

Stock Incentive Plans

The two stock incentive plans (Incentive Plans) described in this section are the pre-IPO stock incentive plan, as amended (the Incentive Plan), and the Amended and Restated 2012 Stock Incentive Plan (2012 Plan, formerly referred to as the 2012 Stock Incentive Plan). Prior to the Company’s initial public offering, the Company granted awards to eligible participants under the Incentive Plan. Following the initial public offering, the Company grants awards to eligible participants under the 2012 Plan.

Amended and Restated 2012 Stock Incentive Plan (2012 Plan)

In April 2012, the Company’s board of directors and stockholders approved the 2012 Plan. The 2012 Plan was amended and restated in May 2014 following shareholder approval. The 2012 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock-based awards, and performance awards. As of September 30, 2014, the number of shares of the Company’s common stock reserved for issuance under the 2012 Plan was 2,005,267. This number may increase for the number of shares of the Company’s common stock subject to outstanding awards under the Company’s pre-IPO stock incentive plan, that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right.

Pre-IPO Stock Incentive Plan (Incentive Plan)

Upon the closing of its initial public offering, the Company ceased granting any awards under the Incentive Plan.

The Incentive Plan provided for the granting of stock options and other stock awards of the Company to employees and consultants. General awards under the Incentive Plan consisted of a specified number of options awarded to an employee or consultant subject to the satisfaction of various vesting conditions determined and specified by the Company at the time of the award. In April 2012, the Company’s board of directors and stockholders approved an amendment to the Incentive Plan to increase the number of shares reserved for issuance under the Incentive Plan from 1,875,000 to 2,125,000.

In April 2012, the Company’s board of directors resolved that all options granted under the Incentive Plan may be exercisable from the date of grant. If exercised prior to full vesting, restricted shares of common stock are issued and continue to vest in the same manner as the original options awarded. Upon termination of employment any unvested options or unvested restricted shares are immediately cancelled and available for future grant under the 2012 Plan, while vested options are exercisable for a defined period.

The outstanding option grants at September 30, 2014 have a term of 10 years and generally vest over periods up to 4 years.

 

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Activity with respect to options was as follows:

 

		Shares				Weighted average exercise price per share				Weighted average remaining contractual life (years)
Outstanding balance, December 31, 2013			2,651,886			$	4.26				7.67
Granted			1,623,308				15.71				—
Forfeited or expired			(83,292	)			12.01				—
Exercised			(126,735	)			2.21				—
Outstanding balance, September 30, 2014			4,065,167			$	8.74				8.00

At September 30, 2014, the number of shares exercisable pursuant to outstanding options was 1,997,687, at a weighted average exercise price of $3.32 and a weighted average remaining contractual life of 6.55 years.

The weighted-average grant date fair value of the stock options granted during the nine month period ended September 30, 2014 was $8.55 per share. The Company estimated the fair value of options granted during the nine month period ended September 30, 2014 using the Black-Scholes option pricing model using the following assumptions:

 

		Nine month period ended September 30, 2014
Risk-free interest rate		2.1%-2.25%
Expected volatility		56%-57%
Expected term (years)		7
Expected dividend yield		0%

Share-based compensation expense for stock options granted to employees and directors is based on the estimated grant date fair value of options recognized ratably over the requisite service period, which is the vesting period of the award. The level of forfeitures expected to occur was estimated based on the Company’s historical experience of pre-vesting cancellations for terminated employees.

During the nine month period ended September 30, 2014, 126,735 options were exercised resulting in approximately $0.3 million of proceeds to the Company.

Share-based compensation expense totaled $1.2 million and $3.0 million for the three and nine month periods ended September 30, 2014, respectively, and $0.7 million and $1.9 million for the three and nine month periods ended September 30, 2013, respectively, which is included in research and development and general and administrative expenses in the accompanying consolidated statement of operations. The aggregate intrinsic value of shares outstanding and exercisable was $20.9 million and $18.7 million, respectively, as of September 30, 2014. The intrinsic value was calculated as the difference between the fair value of the underlying common stock as of the respective balance sheet date and the exercise price of the stock options. The total unrecognized share-based compensation cost at September 30, 2014 amounted to $13.8 million, net of forfeitures, which is expected to be recognized over a weighted-average remaining vesting period of approximately 3.24 years.

 

(8)	Net Loss Per Share

Basic net loss per share is computed by dividing net loss available (attributable) to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss available (attributable) to common stockholders by the weighted average number of common stock equivalents during the period. The Company’s potentially dilutive shares, which include outstanding stock options, common stock warrants and unvested restricted stock are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

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The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of September 30, 2014 and 2013, as they would be anti-dilutive.

 

		September 30,
		2014				2013
Stock options, warrants, and unvested restricted stock			4,068,383				2,677,313

 

(9)	Income Taxes

The Company has historically computed interim period tax expense by applying its forecasted effective tax rate to year-to-date earnings. However, for the three and nine month periods ended September 30, 2014, the Company determined it was unable to reliably estimate its annual effective tax rate due to the effective tax rate being highly sensitive to minor fluctuations in forecasted income. As such, the Company has computed its tax expense for the three month and nine month periods ended September 30, 2014 using the actual year-to-date effective tax rate. The effective tax rate for the three and nine month periods ended September 30, 2014, was negative 1.0% and positive 2.4%. This effective tax rate differs from the federal tax rate of 35% primarily due to the effects of foreign loss that are not benefited, state taxes, foreign rate differential, as well as items that are deductible for books and not U.S. tax. The Company recorded tax expense of $0.2 million in the three month period ended September 30, 2014, and income benefit of $1.4 million in the nine month period ended September 30, 2014. The Company recorded income tax expense of $0.3 million and $0.7 million in the three and nine month periods ended September 30, 2013, respectively. Included within Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet at September 30, 2014 is a net tax receivable of $2.3 million. Included within Other assets on the Company’s Consolidated Balance Sheet at September 30, 2014 is a net non-current deferred tax asset of $1.6 million.

The Company is currently being audited by the Internal Revenue Service for the 2012 calendar tax year. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from this examination and we do not anticipate a significant impact to our gross unrecognized tax benefits related to these years.

 

(10)	Commitments and Contingencies

 

(a)

Employment Agreements

The Company has employment agreements with certain employees which require the funding of a specified level of payments, if certain events (such as a change in control) or termination without cause occur.

On July 29, 2014, the Company amended its Amended and Restated Employment Agreement dated June 20, 2012, with John P. Shannon, Chief Marketing Officer, to increase the amount to which Mr. Shannon would be entitled upon his termination without cause (as defined therein) from six to twelve months of Mr. Shannon’s base salary.

 

(b)

Consulting and Other Business Arrangements

In the course of normal business operations, the Company has agreements with contract service providers to assist in the performance of its research and development and manufacturing activities. The Company can elect to discontinue the work under these agreements at any time. The Company could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require up-front payments and even long-term commitments of cash.

The Company has entered into a supply agreement, as amended, with Gnosis Bioresearch srl., or Gnosis, to supply it with the drug substance for dalbavancin in the form of injectable grade powder. Gnosis has agreed to produce a specified percentage of the Company’s worldwide demand for drug substance. Under this agreement, Gnosis is required to manufacture and supply,

 

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and the Company is required to purchase specified minimum annual purchase volumes of drug substance at specified prices. The agreement expires on June 12, 2017, subject to automatic renewal for successive two-year periods. The Company has purchase commitments of approximately $49.8 million associated with the first three years of the initial five-year term of the agreement. The Company has agreed with Gnosis to define the purchase commitments for the subsequent two years of the initial term by a date specified in the agreement. As of September 30, 2014, the Company has incurred and paid approximately $6.6 million under the purchase commitments in this contract. The remaining contracted amounts are estimated to be paid in 2015 and 2016. The Company has also identified possible secondary suppliers of drug substance and is currently engaged in a technology transfer process. The Company has entered into agreements with potential secondary suppliers of drug substance to manufacture registration and validation batches. The Company has purchase commitments of up to approximately $7.2 million under these agreements. As of September 30, 2014, we have incurred and paid $0.8 million under these agreements.

The Company has entered into a development and supply agreement with Hospira Worldwide, Inc., or Hospira, for its fill and finish services. Under this agreement, Hospira is required to supply and the Company is required to purchase a specified percentage of its commercial requirements of dalbavancin.

 

(c)

Leasing Arrangements

On May 27, 2014, the Company entered into a lease for office space in Chicago, Illinois. The Company intends to use the leased premises for corporate and commercial functions. The Company has agreed to pay aggregate rental fees of approximately $7.7 million over the 144 month term. The Company has provided a security deposit in the form of a letter of credit for the benefit of the landlord in the amount of $1.3 million, which amount will be reduced incrementally over the term of the lease.

During 2012, the Company entered into a lease for office space in Chicago, Illinois, which the Company uses for corporate and commercial functions. The Company has agreed to pay aggregate rental fees of approximately $1.2 million over the 65 month term. The Company has provided a security deposit in the form of a letter of credit for the benefit of the landlord in the amount of $0.4 million, which amount will be reduced incrementally over the term of the lease. The Company will sublease this office space in Chicago beginning in December 2014. Also during 2012, the Company entered into a lease for office space in Branford, Connecticut, which the Company uses for research and development, clinical and regulatory functions. The Company has agreed to pay aggregate rental fees of approximately $1.8 million over the 62 month term. The Company has provided a security deposit in the form of a letter of credit for the benefit of the landlord in the amount of $0.6 million because the landlord financed leasehold improvements in excess of the construction allowance during that period. The amount will be reduced incrementally over the term of the lease.

The letters of credit outstanding are collateralized with certificates of deposit.

As of September 30, 2014, the remaining future commitment under these leases is $9.8 million.

 

(d)

Contingencies

From time to time, the Company may be involved in various legal actions arising out of the ordinary conduct of business. In the opinion of management, the ultimate disposition of such actions will not materially affect the Company’s consolidated financial position, results of operations or cash flows.

 

(11)	Subsequent Events

On October 5, 2014, the Company entered into an agreement and plan of merger (the Merger Agreement) with Actavis W.C. Holding Inc. (Actavis W.C. Holding) and Delaware Merger Sub, Inc., a wholly owned subsidiary of Actavis W.C. Holding (Merger Sub), pursuant to which, and on the terms and subject to the

 

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conditions thereof, among other things, Merger Sub is obligated to commence a tender offer (the Offer) on or before October 21, 2014, to acquire all of the outstanding shares of common stock of the Company at a purchase price of $23.00 per share net to the seller in cash, without interest and less any applicable withholding taxes (the Cash Consideration), plus one non-transferable contractual contingent value right per share (each, a CVR), which represents the right to receive contingent payments of up to $5.00 in cash in the aggregate, if any, without interest and less any applicable withholding taxes, if specified milestones are achieved (the Contingent Consideration and together with the Cash Consideration, the Offer Consideration), subject to and in accordance with the terms and conditions of a CVR Agreement to be entered into between Actavis W.C. Holding and a rights agent selected by Actavis W.C. Holding and reasonably acceptable to the Company.

The obligation of Merger Sub to purchase the shares of common stock of the Company validly tendered pursuant to the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) that there shall have been validly tendered and not validly withdrawn a number of shares of common stock of the Company that, when added to the shares then owned by Actavis W.C. Holding and its subsidiaries, represents one share more than half of the total number of shares of common stock of the Company outstanding at the time of the expiration of the Offer, (ii) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), (iii) the accuracy of the representations and warranties and compliance with covenants contained in the Merger Agreement, (iv) the absence of any law, order, injunction or decree by any government, court or governmental entity that would make illegal or otherwise prohibit the Offer or the Merger described below, (v) there not having been a material adverse effect with respect to the Company and (vi) other customary conditions. On October 31, 2014, the Company and Actavis W.C. Holding received notice that the Federal Trade Commission granted early termination of the applicable waiting period under the HSR Act. The obligations of Actavis W.C. Holding and Merger Sub to complete the Offer and the Merger under the Merger Agreement are not subject to a financing condition.

The Merger Agreement contains customary representations and warranties from both the Company and Actavis W.C. Holding, and also contains customary covenants, including covenants providing for each of the parties to use its reasonable best efforts to cause the Offer and the Merger to be consummated, and covenants requiring the Company to (i) subject to certain exceptions, carry on its business in all material respects in the ordinary course of business consistent with past practice during the period between the execution of the Merger Agreement and the closing of the Merger and (ii) cease any existing, and not solicit or initiate or, subject to certain exceptions necessary to permit the board of directors to comply with its fiduciary duties, engage in any discussions or negotiations with third parties regarding other proposals to acquire the Company. The Merger Agreement contains customary termination rights for both Actavis W.C. Holding and the Company, including, among others, for failure to consummate the Offer on or before March 5, 2015. Upon termination of the Merger Agreement, the Company has agreed to pay Actavis W.C. Holding a termination fee of $20.2 million under specified circumstances, including (i) a termination by the Company to enter into an agreement for an alternative transaction which constitutes a Superior Proposal (as defined in the Merger Agreement), (ii) a termination by Actavis W.C. Holding if the Company’s board of directors changes its recommendation in respect of the Offer or (iii) a termination under specified circumstances during the pendency of a publicly disclosed third party proposal to acquire the Company if, within nine months of such termination, the Company’s board of directors approves or recommends an alternative transaction or the Company consummates or enters into an agreement for an alternative transaction.

Following the completion of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Actavis W.C. Holding, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without a vote of stockholders of the Company (the Merger). At the effective time of the Merger (the Effective Time), by virtue of the Merger and without any action on the part of the holders of any shares of common stock of the Company, each outstanding share of common stock of the Company, other than any shares owned by Actavis W.C. Holding, Merger Sub or any wholly owned subsidiary of Actavis W.C. Holding or held in the treasury of the Company, or any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be canceled and converted into the right to receive the Offer Consideration. In addition, (i) effective as of immediately prior to the Effective Time, each outstanding Company stock option will fully vest and automatically be canceled and terminated as of the Effective Time and the holder thereof will be entitled to receive (1) an amount in cash, equal to the product of (A) the number

 

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of shares of common stock of the Company underlying such option multiplied by (B) the excess, if any, of the Cash Consideration over the exercise price per share of such option and (2) one CVR for each share underlying such Company stock option outstanding immediately prior to the Effective Time, in each case without interest and less the amount of any applicable tax withholding, and (ii) effective as of immediately prior to the Effective Time, each outstanding share of Company restricted stock will fully vest and the restrictions thereon will lapse, and each such share of restricted stock will be canceled and converted into the right to receive the Offer Consideration, in each case without interest and less the amount of any applicable tax withholding.

The proposed transactions have been approved by the boards of directors of Actavis W.C. Holding, Merger Sub and the Company.

On October 17, 2014, Merger Sub commenced the Offer. Unless extended by Actavis W.C. Holding in accordance with the Merger Agreement, the offering period for the Offer will expire at 12:00 midnight, New York City time, on November 14, 2014. The Company expects the Merger to close in the fourth quarter of 2014. The outside date, after which either party may terminate the Merger Agreement if the transactions contemplated by the Merger Agreement have not been consummated, is March 5, 2015.

In the ordinary course of business, the Company and its subsidiaries are sometimes parties to various legal claims, actions and/or proceedings, which may involve a variety of areas of law.

On October 10, 2014, a putative stockholder class action complaint, captioned Warren Campbell v. Ahrens, et al., No. 10222 (Del. Ch. Ct.), was filed against the Company, the Company’s board of directors, Actavis W.C. Holding, and others in Delaware Chancery Court. The complaint alleges that members of the Company’s board of directors breached their fiduciary duties in connection with the approval of the Merger and that Actavis W.C. Holding and the Company aided and abetted the alleged breach of fiduciary duties. The complaint alleges that the Company directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of the Company. On October 22, 2014, the plaintiff filed an amended complaint to include additional allegations that the Company’s board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9, including that the Company’s board of directors misrepresented or omitted information concerning (1) the Company’s financial projections; (2) Bank of America Merrill Lynch’s financial analyses for the Company; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

Also on October 10, 2014, another putative stockholder class action complaint, captioned Shiva Stein v. Durata Therapeutics, Inc., et al., No. 2014-CH-16430 (Ill. Cir. Ct.), was filed against the Company, the Company’s board of directors, Actavis W.C. Holding, and Merger Sub in the Circuit Court of Cook County, Illinois. The complaint alleges that members of the Company’s board of directors breached their fiduciary duties in connection with the approval of the Merger and that the Company, Actavis W.C. Holding and Merger Sub aided and abetted the alleged breach of fiduciary duties. The complaint alleges that the Company directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of the Company. On October 21, 2014, the plaintiff filed an amended complaint to include additional allegations that the Company’s board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9, including that the Company’s board of directors misrepresented or omitted information concerning (1) the Company’s financial projections; (2) Bank of America Merrill Lynch’s financial analyses for the Company; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. Also on October 21, 2014, the plaintiff filed a motion with the Court asking the Court to expedite the proceedings in this case. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

 

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On October 20, 2014, another putative stockholder class action complaint, captioned Nadyenka Pelpola v. Ahrens, et al., No. 2014-CH-16971 (Ill. Cir. Ct.), was filed against the Company, the Company’s board of directors, Actavis W.C. Holding, and Merger Sub in the Circuit Court of Cook County, Illinois. The complaint alleges that members of the Company’s board of directors breached their fiduciary duties in connection with the approval of the Merger and that the Company, Actavis W.C. Holding and Merger Sub aided and abetted the alleged breach of fiduciary duties. The complaint alleges that the Company directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of the Company. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

On October 23, 2014, another putative stockholder class action complaint, captioned Darshan Kansagara v. Durata Therapeutics, Inc., et al., No. 10279 (Del. Ch. Ct.), was filed against the Company and the Company’s board of directors in Delaware Chancery Court. The complaint alleges that members of the Company’s board of directors breached their fiduciary duties in connection with the approval of the Merger. The complaint alleges that the Company directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of the Company. Plaintiff also alleges that the Company’s board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9 Solicitation/Recommendation Statement that was filed with the U.S. Securities and Exchange Commission on October 17, 2014, including that the Company’s board of directors misrepresented or omitted information concerning (1) the Company’s financial projections; (2) the financial analyses of the Company’s financial advisor; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. Also on October 23, 2014, the plaintiff filed a motion with the Court asking the Court to expedite the proceedings in this case and asking the Court to preliminarily enjoin the Merger. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

On November 6, 2014, the Company, each of its directors, Actavis W.C. Holding and Merger Sub entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs in the Campbell, Kansagara, Stein, and Pelpola Actions (together the “Actions”), which sets forth the parties’ agreement in principle for a settlement of the Actions. As explained in the MOU, the Company and each of the other defendants have agreed to the settlement solely to eliminate the burden and uncertainty of continued litigation and without admitting any liability or wrongdoing. The MOU contemplates that the parties will enter into a settlement agreement. The settlement agreement will be subject to customary conditions, including court approval following notice to the Company’s stockholders. In the event that the parties enter into a settlement agreement, a hearing will be scheduled at which the Court of Chancery of the State of Delaware will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought by or on behalf of the plaintiff or any member of the plaintiff class challenging any aspect of the Offer, the Merger, the Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), among other claims. In addition, in connection with the settlement, the parties contemplate that they will seek to negotiate the plaintiffs’ claim for attorneys’ fees and that plaintiffs’ counsel will file a petition in the Court of Chancery of the State of Delaware for an award of attorneys’ fees and expenses to be paid by the Company or its successor, which the defendants may oppose. The Company or its successor will pay or cause to be paid any attorneys’ fees and expenses awarded by the Court of Chancery of the State of Delaware. The parties may not ultimately enter into a settlement agreement and the Court of Chancery of the State of Delaware may not approve the settlement even if the parties were to enter into such settlement agreement. In such event, the proposed settlement as contemplated by the MOU may be terminated. The settlement will not affect the consideration to be received by the Company’s stockholders in connection with the Offer and the Merger. The Company and the other defendants believe the Actions are without merit and, in the event that the MOU is not approved or the requisite conditions are not satisfied, intend to defend the lawsuits vigorously.

 

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Item 2.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2014. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a pharmaceutical company focused on the development and commercialization of novel therapeutics for patients with infectious diseases and acute illnesses. On May 23, 2014, the U.S. Food and Drug Administration, or FDA, approved Dalvance™ (dalbavancin) for injection for the treatment of adult patients with acute bacterial skin and skin structure infections, or ABSSSI, caused by susceptible Gram-positive bacteria, including methicillin-resistant Staphylococcus aureus, or MRSA. Dalvance is the first and only IV antibiotic approved for the treatment of ABSSSI with a two-dose regimen of 1000 mg followed one week later by 500 mg, each administered over 30 minutes. Dalbavancin is designated as a Qualified Infectious Disease Product, or QIDP, by the FDA. Dalbavancin’s QIDP designation qualifies it for an additional five years of marketing exclusivity to be added to certain exclusivity periods already provided by the Food, Drug and Cosmetic Act. We have completed two global Phase 3 clinical trials with dalbavancin for the treatment of patients with ABSSSI (which we refer to as DISCOVER 1 and DISCOVER 2). Based on final data from DISCOVER 1 and DISCOVER 2, or the DISCOVER trials, dalbavancin achieved its primary efficacy endpoint of non-inferiority, which was clinical response at 48 to 72 hours after initiation of therapy, as determined by the cessation of spread of the lesion, as well as the resolution of fever. Dalbavancin also achieved its secondary efficacy endpoint in the DISCOVER trials, which was clinical success at the end of treatment. We expect that this secondary endpoint will be the primary measure of efficacy for regulatory review in Europe. We submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, on November 27, 2013. On December 20, 2013, the EMA accepted our MAA for review. We began selling dalbavancin in the United States in late July and, if approved in the European Union, we may also directly commercialize dalbavancin in Western Europe with a targeted hospital sales force and may use a variety of types of collaboration arrangements for commercialization in other markets. On July 29, 2014 we entered into a license agreement and a supply agreement with A.C.R.A.F. S.p.A., or Angelini, for the purpose of allowing Angelini to commercialize dalbavancin in certain European markets.

In April 2014, we initiated enrollment in a Phase 3b clinical trial to evaluate the efficacy and safety of a single 1500 mg dose of dalbavancin infused over 30 minutes in adult patients with ABSSSI caused by susceptible Gram-positive bacteria, which we refer to as our single dose study. This Phase 3b multicenter, double-blind, randomized, controlled clinical trial is designed to compare a single dose of dalbavancin with the same two dose, once weekly regimen of dalbavancin that was used in each of the previously conducted Phase 3 clinical trials for dalbavancin. We plan to enroll approximately 410 adult patients with ABSSSI known or suspected to be caused by susceptible Gram-positive bacteria, including MRSA; the sample size of the study could be increased if, after review of interim outcome data by a Data Management Committee, a recommendation is made to add additional patients to the study to maintain the power of the trial.

We are randomizing adult patients in the single dose study to receive either one 1500 mg single dose of dalbavancin on day 1 or two doses of dalbavancin, with a 1000 mg dose on day 1 followed by a 500 mg dose on day 8. All doses will be administered over 30 minutes through a peripheral intravenous line. The primary outcome measure for efficacy evaluation will be the percentage of patients in each treatment group who demonstrate a clinical response at 48 to 72 hours after the initiation of therapy with study medication. The study was designed to meet the new standards required by regulatory authorities for antibiotic development in the United States.

 

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In August 2014, we commenced the initial planning and start-up activities for a Phase 3, double-blind, randomized, multicenter trial to assess the safety and efficacy of a single 1500 mg dose of dalbavancin plus a single 500 mg dose of azithromycin in comparison to an approved antibiotic regimen of linezolid 600 mg every 12 hours for 10-14 days plus a single 500 mg dose of azithromycin for the treatment of community acquired bacterial pneumonia. We are also currently developing a protocol for an additional Phase 3 clinical trial to evaluate efficacy and safety of dalbavancin in patients with pediatric osteomyelitis. We expect this trial to begin enrollment in late 2014 to early 2015.

On October 5, 2014, we entered into an agreement and plan of merger, or the Merger Agreement, with Actavis W.C. Holding Inc., or Actavis W.C. Holding, and Delaware Merger Sub, Inc., a wholly owned subsidiary of Actavis W.C. Holding referred to herein as Merger Sub, pursuant to which, and on the terms and subject to the conditions thereof, among other things, Merger Sub is obligated to commence a tender offer, or the Offer, on or before October 21, 2014, to acquire all of the outstanding shares of our common stock at a purchase price of $23.00 per share net to the seller in cash, without interest and less any applicable withholding taxes, plus one non-transferable contractual contingent value right per share, which represents the right to receive contingent payments of up to $5.00 in cash in the aggregate, if any, without interest and less any applicable withholding taxes, if specified milestones are achieved, subject to and in accordance with the terms and conditions of a CVR Agreement to be entered into between Actavis W.C. Holding and a rights agent selected by Actavis W.C. Holding and reasonably acceptable to us. Following the completion of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into us, with our company surviving as a direct wholly owned subsidiary of Actavis W.C. Holding, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without a vote of our stockholders, the foregoing transaction being described herein as the Merger. On October 17, 2014, Merger Sub commenced the Offer. Unless extended by Actavis W. C. Holding in accordance with the Merger Agreement, the offering period for the Offer will expire at 12:00 midnight, New York City time, on November 14, 2014. We expect the merger with Actavis W.C. Holding to close in the fourth quarter of 2014. The outside date, after which either party may terminate the Merger Agreement if the transactions contemplated by the Merger Agreement have not been consummated, is March 5, 2015.

We expect to consummate the merger with Actavis W.C. Holding in the fourth quarter of 2014. However, we have prepared this quarterly report and the forward-looking statements contained in this quarterly report as if we were going to remain an independent company. If the merger is consummated, many of the forward-looking statements contained in this quarterly report would no longer be applicable.

We acquired our rights to dalbavancin through our acquisition of all of the outstanding shares of capital stock of Vicuron Pharmaceuticals Inc., or Vicuron, from Pfizer Inc., or Pfizer, in December 2009. We paid total up-front consideration of $10.0 million for the Vicuron shares and dalbavancin inventory to be used in research. In March 2011, Pfizer refunded to us $6.0 million of the initial purchase price under the terms of our stock purchase agreement, or Pfizer Agreement, based on documentation we provided that supported the position that marketing approval for dalbavancin required more than one new Phase 3 clinical trial. Following the first commercial sale of dalbavancin for the treatment of adult patients with ABSSSI in the United States, which occurred in late July 2014, we became obligated to pay Pfizer an additional milestone payment of $25.0 million. However in late August 2014, pursuant to the Pfizer Agreement, we elected to defer the milestone payment for a period of up to five years by delivering to Pfizer a promissory note for the full amount of such milestone payment. Interest on the outstanding principal amount of the promissory note accrues at a rate of 10% per annum, compounded annually. Under our credit agreement with PDL BioPharma, Inc., or PDL, discussed in note 6 to our financial statements, Long-term Debt, we are prohibited from making any prepayment to Pfizer as long as amounts are outstanding under the credit agreement, which we refer to as the PDL credit agreement.

We were incorporated and commenced active operations in the fourth quarter of 2009. Through September 30, 2014, we recorded net revenue of $10.1 million. We do not expect our commercially launched product, Dalvance, to generate revenue that is sufficient to achieve profitability in 2014 because we continue to incur significant expenses as we expand commercialization activities and conduct additional Phase 3 clinical trials for additional indications. To date, we have financed our operations primarily with net proceeds from private placements of our preferred stock, our initial public offering of common stock, which we closed in July 2012, a secured debt financing, which we completed in March 2013 and refinanced with a new lender in October 2013, and a public offering of our common stock, which we closed in April 2013. We incurred net losses of $58.0 million for the nine month period ended September 30, 2014.

 

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In March 2013, we and certain of our subsidiaries entered into a loan and security agreement, or loan agreement, with Oxford Finance LLC, or Oxford, pursuant to which our wholly-owned Dutch subsidiaries borrowed an aggregate principal amount of $20.0 million. On October 31, 2013, we and certain of our subsidiaries entered into the PDL credit agreement, pursuant to which our wholly-owned Dutch subsidiaries borrowed an aggregate principal amount of $25.0 million, and upon marketing approval of dalbavancin on May 23, 2014 we borrowed, as required pursuant the terms of the PDL credit agreement, an additional aggregate principal amount of $15.0 million. Upon the satisfaction of certain conditions to funding set forth in the PDL credit agreement, and for up to nine months following regulatory approval in May 2014, we have the option to borrow an additional aggregate principal amount of up to $30.0 million. Amounts borrowed under the PDL credit agreement are guaranteed by us and certain of our subsidiaries. The loans are secured by a lien on all or substantially all of our assets and all or substantially all of the assets of our subsidiaries (other than Durata Therapeutics Limited), including the pledge of the equity interests in each of our subsidiaries. Pursuant to the PDL credit agreement, in October 2013 we repaid in full amounts outstanding under the Oxford loan agreement, including prepayment penalties and fees, and our arrangement with Oxford was terminated.

In April 2013, we closed a public offering of 8,222,500 shares of common stock at a public offering price of $7.00 per share, including 1,072,500 shares pursuant to the exercise by the underwriters of an over-allotment option. Net proceeds were approximately $54.1 million, after deducting underwriting discounts and commissions but prior to the payment of offering expenses payable by us.

We expect to continue to incur significant expenses particularly as we commercialize dalbavancin, seek marketing approval for product candidates, build our commercial organization, conduct clinical trials for additional indications for dalbavancin, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations, and manufacture product. In addition, based upon the marketing approval of dalbavancin, and if we obtain marketing approval of any other product candidate that we develop, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. Furthermore, we are incurring additional costs associated with operating as a public company. These costs include significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Moreover, additional rules and regulations applicable to public companies will continue to increase our legal and financial compliance costs and make some activities more time-consuming and costly. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.

Financial Operations Overview

Revenue

Total revenues through September 30, 2014 were composed of product sales of Dalvance, which was launched in the United States in late July 2014, and revenue from non-refundable upfront license fees related to our licensing agreement with Angelini, which we refer to as contract revenue. Through September 30, 2014, we have generated $10.1 million in revenue, of which $6.3 million relates to product sales and $3.8 million relates to contract revenue. We record product revenue net of allowances and accruals for prompt pay discounts, rebates and chargebacks under U.S. governmental programs (including Medicaid), product returns, and distribution-related fees. We recognize contract revenue over the term of the agreement as performance obligations are completed. Our ability to continue to generate product revenue will depend heavily on our ability to successfully commercialize dalbavancin, which we launched in the United States in late July 2014.

Research and Development Expenses

Research and development expenses consist of costs associated with our research activities, and the development and clinical testing of dalbavancin. Our research and development expenses consist of:

 

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employee-related expenses, including salaries, benefits, travel and share-based compensation expense;

 

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•

external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, manufacturing organizations and consultants, including our scientific advisory board; and

 

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facilities and laboratory and other supplies.

We expense research and development costs to operations as incurred. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

We intend to use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-related expenses or depreciation to any particular project. To date, the large majority of our research and development work has related to dalbavancin and completing clinical testing to support approval to market dalbavancin for the treatment of adult patients with ABSSSI, which was received in May 2014.

We anticipate that we will continue to incur significant research and development expenses in connection with clinical trials for additional indications and new dosing strategies and formulations for dalbavancin, manufacturing product candidates and with seeking marketing approval for possible other product candidates.

The successful development of dalbavancin and future product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainties of:

 

•

the scope, rate of progress and expense of our research and development activities;

 

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our ability to market, commercialize and achieve market acceptance for dalbavancin or any other product candidate that we may develop in the future;

 

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clinical trial results;

 

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the terms and timing of regulatory approvals; and

 

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the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of dalbavancin or any other product candidate that we may develop could mean a significant change in the costs and timing associated with the development of dalbavancin or such product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of product candidates or if we experience significant delays in enrollment in any clinical trials of product candidates, we could be required to expend significant additional financial resources and time on the completion of the clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, in our executive, finance, medical affairs, marketing and business development functions. Other general and administrative expenses include facility costs and professional fees for legal, patent, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in future periods to support increases in our commercialization activities and research and development and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

 

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Acquisition Related Charges, Net

In connection with our acquisition of Vicuron in December 2009, we were required to fair value two contingent payment streams on the closing date of the acquisition. The first related to the $25.0 million milestone payment owed to Pfizer in connection with the first commercial sale of dalbavancin and the other related to the potential refund of $6.0 million of the initial purchase price. We completed an assessment of the probability of the successful clinical development, regulatory approval and commercial sale of dalbavancin in future periods and determined that a liability of $5.8 million should be recorded at December 11, 2009 to reflect the best estimate of additional cash consideration likely to be paid related to the potential $25.0 million milestone payment. We also recorded the fair value of a contingent asset of $0.6 million at December 11, 2009 based on the probability of receiving the potential refund from Pfizer of $6.0 million of the initial purchase price.

Subsequent to the closing date of the acquisition, we measured the contingent consideration arrangements at fair value for each period with changes in fair value recognized in our statement of operations under acquisition related charges, net. Changes in fair value reflected new information about the acquired in-process research and development asset and its progress toward approval, and the passage of time, and therefore ultimately the probability of achieving regulatory approval for dalbavancin. Separately, the possibility of receiving the $6.0 million contingent asset was also reassessed as development efforts continued. We received the $6.0 million contingent receivable in March 2011. In the absence of new information, changes in fair value reflected only the passage of time as development work towards the achievement of the milestones progressed. The balance of the contingent liability consideration, which reflects the fair value of the contingent milestone payment, was $20.9 million as of December 31, 2013. Following regulatory approval of dalbavancin in May 2014, we increased the fair value of the contingent consideration to $25.0 million. In August 2014, we deferred payment of the previously disclosed $25.0 million milestone payment owed to Pfizer and delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment. In our consolidated balance sheet as of September 30, 2014, we reflected this liability as long-term debt, as payment is not expected to occur within twelve months. Further, we are prohibited from making any payment to Pfizer as long as amounts are outstanding under our credit agreement with PDL.

Interest Income

Our cash and cash equivalents are invested primarily in money market accounts and other short-term investments, which generate a modest amount of interest income. We expect to continue that investment philosophy as we obtain more financing proceeds or generate cash from operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, 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.

Our significant accounting policies are described in more detail in the notes to our financial statements. However, we believe that certain of those significant accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates, which also would have been reasonable, could have been used, which would have resulted in different financial results.

 

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The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the year ended December 31, 2013 related to accrued research and development expenses, share-based compensation and valuation of long-lived and intangible assets and goodwill. We began to sell Dalvance in late July 2014. As such, we identified additional critical accounting policies as of September 30, 2014 related to revenue and inventory, further described in note 2, Summary of Significant Accounting Policies, to our financial statements.

Results of Operations

Comparison of Three Month Periods Ended September 30, 2014 and 2013

The following table summarizes selected operating expense data for the three month periods ended September 30, 2014 and 2013:

 

		Three Month Period Ended
(In Millions)		September 30, 2014				September 30, 2013
Revenue:
Product revenue, net		$	6.3			$	—
Contract revenue			3.8				—
Total revenue			10.1				—
Operating Expenses:
Amortization of intangible assets			0.4				—
Research and development expenses			11.3				5.9
General and administrative expenses			16.7				4.8
Acquisition related charges, net			—				0.3

Revenue

Net revenue was $10.1 million for the three month period ended September 30, 2014 and included net product revenue of $6.3 million and contract revenue of $3.8 million. We did not record any revenue for the three month period ended September 30, 2013 as FDA approval of Dalvance had not yet been obtained.

Our gross product revenue is offset by provisions as follows for the three month periods ended September 30, 2014 and 2013:

 

		Three Month Period Ended
(In Millions)		September 30, 2014				September 30, 2013
Gross product revenue		$	6.8			$	—
Contractual adjustments			(0.4	)			—
Governmental rebates			(0.1	)			—
Product revenue, net		$	6.3			$	—

Certain of our product sales qualify for rebates or discounts from standard pricing due to contractual agreements or government-sponsored programs. Our contractual adjustments include provisions for wholesaler distribution fees, pricing, returns, and early payment discounts. Our governmental rebates include estimated amounts for government-mandated rebates and discounts relating to certain qualifying federal and state government programs such as the Veterans’ Administration and Department of Defense (DoD) programs and Medicaid.

We launched Dalvance during the third quarter and we had anticipated very limited demand sales prior to the fourth quarter. Through September, we had sold approximately 4,900 vials of Dalvance. The majority of those vial sales, approximately 80%, were sold into third party inventory with the remainder of the vials sold representing patient-intended purchases, or end-user customer demand.

 

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As of September 2014, nearly 150 hospitals and other end-user customers had ordered Dalvance, and that number has increased by approximately 40% in October. Our customer reorder rate was approximately 40% through the end of the third quarter, and increased to over 50% through October. Our sales and medical affairs teams have also been very active in initiating formulary processes and reviews. As we look to the fourth quarter and full year 2014, our commercial organization and medical affairs team will have helped support the formulary review of Dalvance at over 500 institutions.

We expect the volume of patient-intended demand sales of Dalvance in the U.S. to increase in the fourth quarter of 2014 due to greater market penetration, continued expansion of unique account orders, a continued high percentage of repeat orders and increased formulary acceptance.

Amortization of intangible assets

Following the FDA approval of dalbavancin in May 2014, the Company determined the useful life of the asset to be 10 years based largely on the 10-year marketing exclusivity period and reclassified the asset out of in-process research and development and began amortization. We recorded $0.4 million of amortization of intangible assets for the three month period ended September 30, 2014. No amortization had been recorded for the three month period ended September 30, 2013 as the related acquired research and development was still in process.

Research and Development Expenses

Research and development expenses for the quarter ended September 30, 2014 were $11.3 million, compared to $5.9 million for the quarter ended September 30, 2013. The $5.4 million increase was due primarily to costs associated with our single dose study and higher payroll expenses as a result of increased headcount to support ongoing development of dalbavancin, partially offset by a decrease in consulting spending.

Research and development expenses during the three month periods ended September 30, 2014 and 2013 included the following:

 

•

CRO and other clinical trial related expenses were $6.7 million for the three month period ended September 30, 2014, representing 59% of total research and development expenses during the period, and were principally comprised of expenses for clinical trial activities, including costs related to our single dose study. CRO and other clinical trial expenses were $1.3 million for the three month period ended September 30, 2013. The increase of $5.4 million is primarily due to the increase in clinical trial activities related to our single dose and pneumonia studies.

 

•

Chemistry, manufacturing and control, or CMC, related expenses were $0.6 million for the three month period ended September 30, 2014, representing 5% of total research and development expenses during the period, and were principally comprised of costs related to the manufacturing of product for commercialization. CMC related expenses were $0.6 million for the three month period ended September 30, 2013, and were principally comprised of costs related to manufacturing product for commercialization.

 

•

Consulting fees were approximately $0.9 million for the three month period ended September 30, 2014, representing 8% of total research and development expenses during the period, and were comprised of $0.2 million for clinical activity consultants, including database, microbiology, toxicology and pharmacology consultants, $0.3 million for regulatory consultants, $0.1 million for CMC consultants, $0.2 million for quality assurance consultants, and $0.1 million for pharmacovigilance consultants. Consulting fees were $2.3 million for the three month period ended September 30, 2013, and were comprised of $0.8 million for clinical activity consultants, including database, microbiology, toxicology and pharmacology consultants, $0.5 million for regulatory

 

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consultants, $0.5 million for CMC consultants and $0.5 million for quality assurance consultants. The decrease of $1.4 million is due to a decrease in outsourced clinical trial resources and is offset by an increase in headcount to support ongoing development of dalbavancin, as well as reduced activity surrounding regulatory submissions versus the prior year.

 

•

Payroll expenses were $3.1 million for the three month period ended September 30, 2014, representing 28% of total research and development expenses during the period, and were principally comprised of salaries, payroll taxes and benefits for our employees in research and development. We had 52 employees in research and development at September 30, 2014. Payroll expenses for the three month period ended September 30, 2014 also included share-based compensation expense for employees of approximately $0.3 million. We had 26 employees in research and development at September 30, 2013. Payroll expenses for the three month period ended September 30, 2013 were $1.7 million, which included $0.1 million of share-based compensation expense. The increase of $1.4 million is primarily related to increased headcount as we build out our clinical development team to support ongoing development of dalbavancin.

General and Administrative Expenses

Our general and administrative expenses in the three month period ended September 30, 2014 increased $11.9 million to $16.7 million from $4.8 million in the three month period ended September 30, 2013. The increase related to our continued expansion efforts to support the commercial launch of dalbavancin, which occurred in late July 2014. General and administrative expenses during three month periods ended September 30, 2014 and 2013 included the following:

 

•

Payroll expenses for the three month period ended September 30, 2014 were $10.7 million, representing 64% of total general and administrative expenses during the period, and were principally comprised of salaries, payroll taxes and benefits for our general and administrative employees. We had 154 employees in general and administrative functions at September 30, 2014 and 36 employees as of September 30, 2013. Payroll expense of a similar nature was $3.1 million for the three month period ended September 30, 2013. Payroll expense for the three month periods ended September 30, 2014 and 2013 included share-based compensation expense for employees of $0.8 million and $0.5 million, respectively. The increase of $7.6 million is primarily due to increased headcount for commercial activities including our sales force.

 

•

Professional fee expenses for the three month period ended September 30, 2014 were $0.9 million, representing 5% of total general and administrative expenses during the period, and were principally comprised of fees for legal services. Professional fee expense of a similar nature was $0.2 million for the three month period ended September 30, 2013. The increase of $0.7 million is due to an increase in legal costs in support of business expansion.

 

•

Consulting fees for the three month period ended September 30, 2014 were $3.8 million, representing 23% of total general and administrative expenses during the period, and were principally comprised of activities related to the commercial launch of dalbavancin. Consulting fees also included expenses related to tax services, business development, public relations, audit and public reporting fees, and research projects for our medical affairs and commercial departments. Consulting fees were $0.9 million for the three month period ended September 30, 2013. The increase of $2.9 million is due to costs associated with the third quarter 2014 launch of Dalvance.

 

•

Occupancy and other operating expenses for the three month period ended September 30, 2014 were $1.0 million, representing 6% of total general and administrative expenses during the period, and were principally comprised of rent, utilities, insurance, office and other expenses. Occupancy and other operating expense of a similar nature was $0.5 million for the three month period ended September 30, 2013.

 

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•

Non-employee compensation expense for the three month period ended September 30, 2014 was $0.3 million, representing 2% of total general and administrative expense during the period, and included board of director fees and expense related to non-employee director stock option awards. Non-employee compensation expense for the three month period ended September 30, 2013 was approximately $0.1 million and included board of director fees and expense related to non-employee director stock option awards.

Acquisition Related Charges, Net

For the three month period ended September 30, 2014, there were no acquisition related charges, net. Acquisition related charges, net were $0.3 million for the three month period ended September 30, 2013, which consisted of the accretion of the contingent liability related to the $25.0 million milestone payment that became due upon the first commercial sale of dalbavancin. Pursuant to the terms of the Pfizer Agreement, in August 2014, we delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment.

Income Taxes

We have historically computed interim period tax expense by applying the forecasted effective tax rate to year-to-date earnings. However, for the three month period ended September 30, 2014 we determined we were unable to reliably estimate our annual effective tax rate due to the effective tax rate being highly sensitive to minor fluctuations in forecasted income. As such, we have computed the U.S. and foreign tax expense for the three month period ended September 30, 2014 using the actual year-to-date effective tax rate. The effective tax rate for the three month period ended September 30, 2014 was negative 1.0%. This effective rate differs from the federal tax rate of 35% primarily due to the effects of foreign losses that are not benefited, state taxes, foreign rate differential, as well as items that are deductible for books and not U.S. tax. We recorded income tax expense of $0.2 million and $0.3 million in the three month periods ended September 30, 2014 and 2013, respectively.

Interest Expense

Interest expense recorded in the three month period ended September 30, 2014 consisted of interest incurred related to our credit agreement with PDL and our milestone payment due to Pfizer. For the three month period ended September 30, 2013, interest expense consisted of interest incurred and amortization of debt discount and debt financing fees related to the debt financing completed in March 2013.

Comparison of Nine Month Periods Ended September 30, 2014 and 2013

The following table summarizes selected operating expense data for the nine month periods ended September 30, 2014 and 2013:

 

		Nine Month Period Ended
(In Millions)		September 30, 2014				September 30, 2013
Revenue:
Product revenue, net		$	6.3			$	—
Contract revenue			3.8				—
Total revenue			10.1				—
Operating Expenses:
Amortization of intangible assets			0.5				—
Research and development expenses			26.5				30.2
General and administrative expenses			35.0				13.4
Acquisition related charges, net			4.1				0.8

 

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Revenue

Total revenue for the nine month period ended September 30, 2014 was comprised of product revenue related to sales of Dalvance, which was launched in the United States in late July 2014, and revenue from non-refundable upfront license fees related to our licensing agreement with Angelini, which we refer to as contract revenue. Net revenue was $10.1 million for the nine month period ended September 30, 2014 and included net product revenue of $6.3 million and contract revenue of $3.8 million. We record product revenue net of allowances and accruals for prompt pay discounts, rebates and chargebacks under U.S. governmental programs (including Medicaid), product returns, and distribution-related fees. We recognize contract revenue over the term of the agreement as performance obligations are completed. We did not record any revenue for the nine month period ended September 30, 2013 as FDA approval of Dalvance had not yet been obtained.

Our gross product revenue is offset by provisions as follows for the three month periods ended September 30, 2014 and 2013:

 

		Nine Month Period Ended
(In Millions)		September 30, 2014				September 30, 2013
Gross product revenue		$	6.8			$	—
Contractual adjustments			(0.4	)			—
Governmental rebates			(0.1	)			—
Product revenue, net		$	6.3			$	—

Certain of our product sales qualify for rebates or discounts from standard pricing due to contractual agreements or government-sponsored programs. Our contractual adjustments include provisions for wholesaler distribution fees, pricing, returns, and early payment discounts. Our governmental rebates include estimated amounts for government-mandated rebates and discounts relating to certain qualifying federal and state government programs such as the Veterans’ Administration and Department of Defense (DoD) programs and Medicaid.

Amortization of intangible assets

Following the FDA approval of dalbavancin in May 2014, the Company determined the useful life of the asset to be 10 years based largely on the 10-year marketing exclusivity period and reclassified the asset out of in-process research and development and began amortization. We recorded $0.5 million of amortization of intangible assets for the nine month period ended September 30, 2014. No amortization had been recorded for the nine month period ended September 30, 2013 as the related acquired research and development was still in process.

Research and Development Expenses

Research and development expenses for the nine month period ended September 30, 2014 were $26.5 million, compared to $30.2 million for the nine month period ended September 30, 2013. The $3.7 million decrease was due primarily to the production of active pharmaceutical ingredient in the second quarter of 2013 versus none in the second quarter of 2014 as well as reduced clinical consulting expenses and is partially offset by an increase in costs related to our single dose study and higher payroll expenses as a result of increased headcount to support ongoing development of dalbavancin.

Research and development expenses during the nine month periods ended September 30, 2014 and 2013 included the following:

 

•

CRO and other clinical trial related expenses were $11.4 million for the nine month period ended September 30, 2014, representing 43% of total research and development expenses during the period, and were principally comprised of expenses for clinical trial activities, including costs related to our single dose study. CRO and other clinical trial

 

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expenses were $8.9 million for the nine month period ended September 30, 2013. The decrease of $2.5 million is primarily due to the decrease in clinical trial activities following completion of our DISCOVER trials, partially offset by the increase in costs related to our clinical trial activities for our single dose and pneumonia studies.

 

•

CMC related expenses were $4.0 million for the nine month period ended September 30, 2014, representing 15% of total research and development expenses during the period, and were principally comprised of costs related to the manufacturing of product for commercialization. CMC related expenses were $10.5 million for the nine month period ended September 30, 2013, and were principally comprised of costs related to the production of active pharmaceutical ingredient in anticipation of commercialization.

 

•

Consulting fees were approximately $3.2 million for the nine month period ended September 30, 2014, representing 12% of total research and development expenses during the period, and were comprised of $0.9 million for clinical activity consultants, including database, microbiology, toxicology and pharmacology consultants, $1.1 million for regulatory consultants, $0.4 million for CMC consultants, $0.6 million for quality assurance consultants, and $0.2 million for pharmacovigilance consultants. Consulting fees were $6.3 million for the nine month period ended September 30, 2013, and were comprised of $3.1 million for clinical activity consultants, including database, microbiology, toxicology and pharmacology consultants, $1.2 million for regulatory consultants, $1.1 million for CMC consultants and $0.9 million for quality assurance consultants. The decrease of $3.1 million is primarily due to a decrease in outsourced clinical trial resources as well as reduced activity surrounding regulatory submissions versus the prior year.

 

•

Payroll expenses were approximately $7.9 million for the nine month period ended September 30, 2014, representing 30% of total research and development expenses during the period, and were principally comprised of salaries, payroll taxes and benefits for our employees in research and development. Payroll expenses for the nine month period ended September 30, 2014 also included share-based compensation expense for employees of approximately $0.7 million. Payroll expenses for the nine month period ended September 30, 2013 were $4.5 million, which included $0.4 million of share-based compensation expense. The increase of $3.4 million is primarily related to increased headcount as we build our clinical development team to support ongoing development of dalbavancin.

General and Administrative Expenses

Our general and administrative expenses in the nine month period ended September 30, 2014 increased $21.6 million to $35.0 million from $13.4 million in the nine month period ended September 30, 2013. The increase related to our continued expansion efforts to support the commercial launch of dalbavancin. General and administrative expenses during the nine month periods ended September 30, 2014 and 2013 included the following:

 

•

Payroll expenses for the nine month period ended September 30, 2014 were $22.3 million, representing 64% of total general and administrative expenses during the period, and were principally comprised of salaries, payroll taxes and benefits for our general and administrative employees. Payroll expense of a similar nature was $8.5 million for the nine month period ended September 30, 2013. Payroll expense for the nine month periods ended September 30, 2014 and 2013 included share-based compensation expense for employees of $2.0 million and $1.3 million, respectively. The increase of $13.8 million is primarily due to increased headcount for commercial activities including our sales force.

 

•

Professional fee expenses for the nine month period ended September 30, 2014 was $1.4 million, representing 4% of total general and administrative expenses during the period, and was principally comprised of fees for legal services. Professional fee expense of a similar nature was $0.7 million for the nine month period ended September 30, 2013. The increase of $0.7 million is due to an increase in legal costs in support of business expansion.

 

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•

Consulting fees for the nine month period ended September 30, 2014 were $7.8 million, representing 22% of total general and administrative expenses during the period, and were principally comprised of activities related to the commercial launch of dalbavancin. Consulting fees also included expenses related to tax services, business development, public relations, audit and public reporting fees, and research projects for our medical affairs and commercial departments. Consulting fees were $2.3 million for the nine month period ended September 30, 2013. The increase of $5.5 million is due to costs associated with the advancement of our commercial planning activities through the third quarter 2014 launch of Dalvance.

 

•

Occupancy and other operating expenses for the nine month period ended September 30, 2014 were $2.8 million, representing 8% of total general and administrative expenses during the period, and were principally comprised of rent, utilities, insurance, office and other expenses. Occupancy and other operating expenses of a similar nature were $1.6 million for the nine month period ended September 30, 2013.

 

•

Non-employee compensation expense for the nine month period ended September 30, 2014 was $0.7 million, representing 2% of total general and administrative expense during the period, and included board of director fees and expense related to non-employee director stock option awards. Non-employee compensation expense for the nine month period ended September 30, 2013 was $0.3 million and included board of director fees and expense related to non-employee director stock option awards.

Acquisition Related Charges, Net

The contingent liability increased by $4.1 million for the nine month period ended September 30, 2014 and $0.8 million for the nine month period ended September 30, 2013, which was recorded as a charge to acquisition related charges, net. The increase during the nine month period ended September 30, 2014 is due to the FDA’s approval of dalbavancin for the treatment of adult patients with ABSSSI on May 23, 2014. Pursuant to the terms of the Pfizer Agreement, in August 2014, we delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment, which resulted in a change in probability of the contingent liability related to such milestone payment.

Income Taxes

We have historically computed interim period tax expense by applying the forecasted effective tax rate to year-to-date earnings. However, for the nine month period ended September 30, 2014, we determined we were unable to reliably estimate our annual effective tax rate due to the effective tax rate being highly sensitive to minor fluctuations in forecasted income. As such, we have computed the U.S. and foreign tax expense for the nine month period ended September 30, 2014, using the actual year-to-date effective tax rate. The effective tax rate for the nine month period ended September 30, 2014 was 2.4%. This effective tax rate differs from the federal tax rate of 35% primarily due to the effects of foreign losses that are not benefited, state taxes, foreign rate differential, as well as items that are deductible for books and not U.S. tax. We recorded income benefit of $1.4 million for the nine month period ended September 30, 2014, and income tax expense of $0.7 million in the nine month period ended September 30, 2013.

Liquidity and Capital Resources

Sources of Liquidity

Through September 30, 2014, we have generated limited revenues and have financed our operations primarily with proceeds from private placements of our preferred stock, our initial public offering of common stock, which we closed in July 2012, a secured debt financing, which we completed in March 2013 and refinanced with a new lender in October 2013, and a public offering of our common stock, which we closed in April 2013. As of September 30, 2014, we had cash and cash equivalents totaling $27.7 million and short-term investments of $7.8 million. We primarily invest our cash and cash equivalents in money market funds.

 

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The following table summarizes our cash flow activity for the nine month periods ended September 30, 2014 and 2013:

 

		Nine month Period Ended
(In Thousands)		September 30, 2014				September 30, 2013
Net cash used in operating activities		$	(37,333	)		$	(51,046	)
Net cash provided by (used in) investing activities		$	12,905			$	(9,791	)
Net cash provided by financing activities		$	15,244			$	73,065

Operating Activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital. The decrease in net cash used in operating activities in the nine month period ended September 30, 2014 was primarily related to changes in components of working capital as well as the decrease in research and development expenses, as discussed above under results of operations, partially offset by an increase in general and administrative costs as we continued expansion efforts in support of the commercial launch of dalbavancin.

Investing Activities

Net cash provided by investing activities during the nine month period ended September 30, 2014 was primarily related to proceeds from the sale of short-term investments, partially offset by the addition of a certificate of deposit held by our bank as collateral for an irrevocable standby letter of credit issued in connection with one of our office leases. Net cash used by investing activities during the nine month period ended September 30, 2013 was primarily related to cash invested in short-term investments, the purchase of property and equipment and an increase in our certificate of deposit held by the bank as collateral for an irrevocable standby letter of credit issued in connection with one of our office leases.

Financing Activities

Net cash provided by financing activities for the nine month period ended September 30, 2014 was principally the result of cash received from the receipt of the obligatory Second Tranche Milestone funding as part of our credit agreement with PDL, and cash received from stock option exercises. Net cash provided by financing activities for the nine month period ended September 30, 2013 was principally the result of the $54.1 million of net proceeds from the public offering that we closed in April 2013 and the proceeds from the $20.0 million secured debt financing that we closed in March 2013, partially offset by financing fees and expenses of $1.1 million that we paid in connection with these two financings.

Funding Requirements

We anticipate that we will continue to incur significant expenses in connection with marketing our products, seeking marketing approval for product candidates, continuing to develop our commercial organization, conducting clinical trials for additional indications for dalbavancin, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations, and manufacturing product. In addition, in connection with obtaining regulatory approval and commercializing dalbavancin, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. Our expenses also will increase if and as we:

 

•

maintain, expand and protect our intellectual property portfolio;

 

•

in-license or acquire other products and technologies;

 

•

hire additional clinical, quality control and scientific personnel; and

 

•

add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

 

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Our cash, cash equivalents and short-term investment balances are our primary source of liquidity, and we believe our financial resources are sufficient to fund our operations for the next twelve months. We also have available to us through February 22, 2015, the $30.0 million Delayed Draw under our PDL credit agreement, discussed in note 6, Long-term Debt, to our financial statements, and we anticipate the receipt of a milestone payment of $10.0 million under our License Agreement with Angelini, discussed in note 3, License Agreement, to our financial statements, payable 30 days following EMA approval which is expected in the first quarter of 2015. We estimate that such funds will be sufficient to enable us to support the commercial launch of dalbavancin for the treatment of patients with ABSSSI in the United States and to seek marketing approval for dalbavancin in the European Union. Additionally, we estimate the funds will be sufficient to explore the development of dalbavancin for additional indications and new dosing strategies and formulations. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

 

•

the costs of continued commercialization activities for dalbavancin, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

•

revenue received from commercial sales of dalbavancin;

 

•

the costs of developing dalbavancin for additional indications and new dosing strategies and formulations;

 

•

the costs, timing and outcome of regulatory review of dalbavancin;

 

•

our ability to establish collaborations on favorable terms, if at all;

 

•

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

•

the extent to which we in-license or acquire other products and technologies; and

 

•

the scope, progress, results and costs of product development for our product candidates.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Under the terms and prior to the termination of the Merger Agreement, we must receive Actavis W.C. Holding’s approval of certain expenditures above certain dollar amounts, as set forth in the Merger Agreement.

Contractual Obligations and Commitments

Pursuant to the PDL credit agreement, upon marketing approval of dalbavancin in the United States on May 23, 2014, we borrowed, as required pursuant to the terms of the PDL agreement, an aggregate principal amount of $15.0 million from PDL.

Pursuant to the Pfizer Agreement in August 2014, we delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of the milestone payment owed to Pfizer as a result of the first commercial sale of dalbavancin for the treatment of ABSSSI.

 

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We have a supply agreement, as amended, with Gnosis Bioresearch srl., or Gnosis, to supply us with the drug substance for dalbavancin in the form of injectable grade powder. Pursuant to the second amendment to this supply agreement, effective as of August 2014, we are required to purchase specified minimum annual purchase volumes of drug substances at specified prices through 2017 in the amount of $49.8 million from Gnosis.

In the event we terminate the Merger Agreement with Actavis W.C. Holding, we have agreed to pay Actavis W.C. Holding a termination fee of $20.2 million under specified circumstances, including (i) a termination by us to enter into an agreement for an alternative transaction which constitutes a Superior Proposal (as defined in the Merger Agreement), (ii) a termination by Actavis W.C. Holding if our board of directors changes its recommendation in respect of the Offer or (iii) a termination under specified circumstances during the pendency of a publicly disclosed third party proposal to acquire our company if, within nine months of such termination, our board of directors approves or recommends an alternative transaction or we consummate or enter into an agreement for an alternative transaction.

There have been no other material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates. We had cash and cash equivalents and available for sale securities of $35.5 million and $59.7 million as of September 30, 2014 and December 31, 2013, respectively. Our current investment policy is to invest our cash in a variety of financial instruments, principally deposits, securities issued by the U.S. government and its agencies, corporate fixed income, and money market instruments. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs, and fiduciary control of cash and investments. We seek to maximize income from our investments without assuming significant risk.

Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, because our investments are primarily in short-term debt securities. These securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

We contract with CROs and contract manufacturers globally. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As of September 30, 2014 and December 31, 2013, substantially all of our liabilities were denominated in the U.S. dollar.

Our long-term debt obligations to PDL BioPharma, Inc. and Pfizer Inc. bear interest at a fixed rate and therefore we do not have exposure to changes in interest rates on borrowings under these facilities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company

 

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that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) occurred during the nine months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

In the ordinary course of business, the Company and its subsidiaries are sometimes parties to various legal claims, actions and/or proceedings, which may involve a variety of areas of law.

On October 10, 2014, a putative stockholder class action complaint, captioned Warren Campbell v. Ahrens, et al., No. 10222 (Del. Ch. Ct.), was filed against us, our board of directors, Actavis W.C. Holding, and others in Delaware Chancery Court. The complaint alleges that members of our board of directors breached their fiduciary duties in connection with the approval of the Merger and that we and Actavis W.C. Holding aided and abetted the alleged breach of fiduciary duties. The complaint alleges that our directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of our company. On October 22, 2014, the plaintiff filed an amended complaint to include additional allegations that our board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9, including that our board of directors misrepresented or omitted information concerning (1) our financial projections; (2) the financial analyses of our financial advisor; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

Also on October 10, 2014, another putative stockholder class action complaint, captioned Shiva Stein v. Durata Therapeutics, Inc., et al., No. 2014-CH-16430 (Ill. Cir. Ct.), was filed against us, our board of directors, Actavis W.C. Holding, and Merger Sub in the Circuit Court of Cook County, Illinois. The complaint alleges that members of our board of directors breached their fiduciary duties in connection with the approval of the Merger and that we, Actavis W.C. Holding and Merger Sub aided and abetted the alleged breach of fiduciary duties. The complaint alleges that our directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of our company. On October 21, 2014, the plaintiff filed an amended complaint to include additional allegations that our board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9, including that our board of directors misrepresented or omitted information concerning (1) our financial projections; (2) the financial analyses of our financial advisor; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. Also on October 21, 2014, the plaintiff filed a motion with the Court asking the Court to expedite the proceedings in this case. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

On October 20, 2014, another putative stockholder class action complaint, captioned Nadyenka Pelpola v. Ahrens, et al., No. 2014-CH-16971 (Ill. Cir. Ct.), was filed against us, our board of directors, Actavis W.C. Holding, and Merger Sub in the Circuit Court of Cook County, Illinois. The complaint alleges that members of our board of directors breached their fiduciary duties in connection with the approval of the Merger and that we, Actavis W.C. Holding and Merger Sub aided and abetted the alleged breach of fiduciary duties. The complaint alleges that our directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of our company. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

 

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On October 23, 2014, another putative stockholder class action complaint, captioned Darshan Kansagara v. Durata Therapeutics, Inc., et al., No. 10279 (Del. Ch. Ct.), was filed against us and our board of directors in Delaware Chancery Court. The complaint alleges that members of our board of directors breached their fiduciary duties in connection with the approval of the Merger. The complaint alleges that our directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and obtain the best financial and other terms, and failing to inform themselves of the value of our company. Plaintiff also alleges that our board of directors breached its fiduciary duties by misrepresenting and omitting information in the Schedule 14D-9 Solicitation/Recommendation Statement that was filed with the U.S. Securities and Exchange Commission on October 17, 2014, including that our board of directors misrepresented or omitted information concerning (1) our financial projections; (2) the financial analyses of our financial advisor; (3) potential conflicts of interest with the Merger; and (4) facts about the background leading up to the announcement of the Merger. Also on October 23, 2014, the plaintiff filed a motion with the Court asking the Court to expedite the proceedings in this case and asking the Court to preliminarily enjoin the Merger. The plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the Merger, in addition to other unspecified damages, fees and costs.

On November 6, 2014, we, each of our directors, Actavis W.C. Holding and Merger Sub entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs in the Campbell, Kansagara, Stein, and Pelpola Actions (together the “Actions”), which sets forth the parties’ agreement in principle for a settlement of the Actions. As explained in the MOU, we and each of the other defendants have agreed to the settlement solely to eliminate the burden and uncertainty of continued litigation and without admitting any liability or wrongdoing. The MOU contemplates that the parties will enter into a settlement agreement. The settlement agreement will be subject to customary conditions, including court approval following notice to our stockholders. In the event that the parties enter into a settlement agreement, a hearing will be scheduled at which the Court of Chancery of the State of Delaware will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought by or on behalf of the plaintiff or any member of the plaintiff class challenging any aspect of the Offer, the Merger, the Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), among other claims. In addition, in connection with the settlement, the parties contemplate that they will seek to negotiate the plaintiffs’ claim for attorneys’ fees and that plaintiffs’ counsel will file a petition in the Court of Chancery of the State of Delaware for an award of attorneys’ fees and expenses to be paid by us or our successor, which the defendants may oppose. We or our successor will pay or cause to be paid any attorneys’ fees and expenses awarded by the Court of Chancery of the State of Delaware. The parties may not ultimately enter into a settlement agreement and the Court of Chancery of the State of Delaware may not approve the settlement even if the parties were to enter into such settlement agreement. In such event, the proposed settlement as contemplated by the MOU may be terminated. The settlement will not affect the consideration to be received by our stockholders in connection with the Offer and the Merger. We and the other defendants believe the Actions are without merit and, in the event that the MOU is not approved or the requisite conditions are not satisfied, intend to defend the lawsuits vigorously.

 

Item 1A.

Risk Factors

Except for the important risk factors relating to consummation of the Merger, the following important factors have been prepared as if our company were remaining independent.

Risks Related to the Merger

The announcement and pendency of Actavis W.C. Holding Inc., or Actavis W.C. Holding’s, proposed acquisition of our company pursuant to a tender offer and subsequent merger with a wholly-owned direct subsidiary of Actavis W.C. Holding could have an adverse effect on our stock price and/or our business, financial condition, results of operations or business prospects.

The announcement and pendency of the Offer and Merger could disrupt our business in the following ways, among others:

 

•

third parties may determine to delay or defer purchase decisions with regard to our products or terminate and/or attempt to renegotiate their relationships with us as a result of the Offer and Merger, whether pursuant to the terms of their existing agreements with us or otherwise;

 

•

the attention of our management may be directed toward the completion of the Offer and Merger and related matters, and their focus may be diverted from the day-to-day business operations of our company, including from other opportunities that might otherwise be beneficial to us; and

 

•

current and prospective employees may experience uncertainty regarding their future roles with us (and, if the Merger is completed, Actavis W.C. Holding), which might adversely affect our ability to retain, recruit and motivate key personnel and may adversely affect the focus of our employees on development and sales of our products.

Any of the above matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.

If the proposed Merger with Actavis W.C. Holding is not consummated, our business and stock price could be adversely affected.

The consummation of the transactions contemplated by the Merger Agreement is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement. We expect to close the Merger in the fourth quarter of 2014, subject to the satisfaction or waiver of these conditions. If the Merger is delayed or otherwise not consummated within the contemplated time periods or at all, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

 

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•

we have incurred and expect to continue to incur significant expenses related to the proposed Merger with Actavis W.C. Holding. These Merger-related expenses include investment banking fees and legal and other professional fees. These fees will be payable by us even if the Merger does not close;

 

•

we would be obligated to pay Actavis W.C. Holding a $20.2 million termination fee in connection with the termination of the Merger Agreement in certain circumstances;

 

•

our customers, prospective customers and investors in general may view the failure to consummate the Merger as a poor reflection on our business or prospects;

 

•

certain of our suppliers, distributors, and other business partners may seek to change or terminate their relationships with us as a result of the proposed Merger; and

 

•

the market price of our common stock may decline, particularly to the extent that the current market price reflects a market assumption that the proposed Merger will be completed.

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the Offer and Merger that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our common stock, stock options and restricted stock, and the receipt of change in control or other severance payments in connection with the proposed transactions.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire our company prior to the completion of the Offer and the Merger.

The Merger Agreement contains provisions that make it difficult for us to entertain a third-party proposal for an acquisition of our company. These provisions include our agreement not to solicit or initiate any additional discussions with third parties regarding other proposals for our acquisition, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to Actavis W.C. Holding a termination fee of approximately $20.2 million.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the Actavis W.C. Holding offer. Furthermore, even if a third party elects to propose an acquisition, our obligation to pay a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

 

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Lawsuits have been filed, and additional lawsuits may be filed, against us and the members of our Board of Directors arising out of our acquisition by Actavis W.C. Holding, which may delay or prevent the proposed transaction.

To date, four putative stockholder class action complaints have been filed against us, our board of directors, Actavis W.C. Holding and others in connection with the transactions contemplated by the Merger Agreement. On November 6, 2014, we, each of our directors, Actavis W.C. Holding and Merger Sub entered into a Memorandum of Understanding which sets forth the parties’ agreement in principle for a settlement of these lawsuits. We and the other defendants believe the lawsuits are without merit and, in the event that the MOU does not receive court approval or the requisite conditions are not satisfied, we intend to vigorously defend against these claims; however, the outcome of all litigation is uncertain and we may not be successful in defending against these claims. Regardless of the outcome of these lawsuits, and the contemplated settlement, they could delay or prevent our acquisition by Actavis W.C. Holding, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses for at least the next year and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss was $58.0 million for the nine month period ended September 30, 2014 and $62.1 million for the year ended December 31, 2013. Through September 30, 2014, we have recorded $10.1 million in revenues. We have financed our operations primarily through private placements of our preferred stock, our initial public offering of common stock, which we closed in July 2012, a secured debt financing, which we completed in March 2013 and refinanced with a new lender in October 2013, and a public offering of our common stock, which we closed in April 2013. We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses and operating losses for at least the next year. The net losses we incur may fluctuate significantly from quarter to quarter.

We anticipate that we will continue to incur significant expenses in connection with commercializing our products, seeking marketing approval for product candidates, building our commercial organization, conducting clinical trials for additional indications for dalbavancin, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations, and manufacturing product. In April 2014, we initiated enrollment in a Phase 3b clinical trial to evaluate the efficacy and safety of a single 1500 mg dose of dalbavancin infused over 30 minutes in adult patients with ABSSSI caused by susceptible Gram-positive bacteria, which we refer to as our single dose strategy. In August 2014, we commenced the initial planning and start-up activities for a Phase 3, double-blind, randomized, multicenter trial to assess the safety and efficacy of a single 1500 mg dose of dalbavancin plus a single 500 mg dose of azithromycin in comparison to an approved antibiotic regimen of linezolid 600 mg every 12 hours for 10-14 days plus a single 500 mg dose of azithromycin for the treatment of community acquired bacterial pneumonia. We are also currently developing protocols for additional Phase 3 clinical trials to evaluate the efficacy and safety of dalbavancin in patients with pediatric osteomyelitis. We expect the trial to begin enrollment in late 2014 to early 2015. In addition, in connection with commercializing dalbavancin, we expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. Our expenses also will increase if and as we:

 

•

maintain, expand and protect our intellectual property portfolio;

 

•

in-license or acquire other products and technologies;

 

•

hire additional clinical, quality control and scientific personnel; and

 

•

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

Our ability to become and remain profitable depends on our ability to continue to generate revenue. We do not expect to generate significant revenue unless and until we successfully commercialize dalbavancin. This will require us to be successful in a range of challenging activities, including:

 

•

protecting our rights to our intellectual property portfolio related to dalbavancin;

 

•

contracting for the manufacture of commercial quantities of dalbavancin;

 

•

obtaining marketing approval for dalbavancin in the European market; and

 

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•

developing sales, marketing and distribution capabilities to effectively market and sell dalbavancin in the United States and possibly Western Europe.

We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business or continue our operations. A decline in the value of our company could also cause stockholders to lose all or part of their investment.

Our short operating history may make it difficult to evaluate the success of our business to date and to assess our future viability.

We are an early-stage company. We were incorporated and commenced active operations in the fourth quarter of 2009. Our operations to date have been largely related to organizing and staffing our company, business planning, raising capital, acquiring and developing dalbavancin and building our commercial and marketing infrastructure. We have not yet demonstrated our ability to manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a product development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

We may need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we seek additional marketing approvals for dalbavancin, including from the EMA, develop our commercial organization, conduct clinical trials for additional indications for dalbavancin, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations, and possibly other product candidates, and manufacture product. In addition, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. Furthermore, we are incurring additional costs associated with operating as a public company. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any current or future commercialization efforts.

Our cash, cash equivalents and short-term investment balances are our primary source of liquidity. We also have available to us through February 22, 2015, the $30.0 million Delayed Draw under our PDL credit agreement, and we anticipate the receipt of a milestone payment of $10.0 million under our License Agreement with Angelini payable 30 days following EMA approval which is expected in the first quarter of 2015. We believe our financial resources are sufficient to fund our operations for the next twelve months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

 

•

the costs of continued commercialization activities for dalbavancin, including the costs and timing of developing product sales, marketing, distribution and manufacturing capabilities;

 

•

revenue received from commercial sales of dalbavancin;

 

•

the costs of developing dalbavancin for additional indications and new dosing strategies and formulations;

 

•

the costs, timing and outcome of regulatory review of dalbavancin;

 

•

our ability to establish collaborations on favorable terms, if at all;

 

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•

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property-related claims;

 

•

the extent to which we in-license or acquire other products and technologies; and

 

•

the scope, progress, results and costs of product development for our product candidates.

Conducting clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and, even if regulatory approval is obtained, we may never achieve commercial success. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. As of September 30, 2014, we do not have any committed external source of funds other than amounts available pursuant to our credit agreement with PDL, receipt of which funds is subject to the satisfaction of certain conditions set forth in the PDL credit agreement and we anticipate the receipt of a milestone payment of $10.0 million under our License Agreement with Angelini payable 30 days following EMA approval which is expected in the first quarter of 2015. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the stock ownership interest of our stockholders will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our existing indebtedness and the pledge of our assets as collateral limit our ability to obtain additional debt financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2013.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our indebtedness may limit cash flow available to invest in the ongoing needs of our business.

In March 2013, we and certain of our subsidiaries entered into a loan and security agreement, or loan agreement, with Oxford Finance LLC, or Oxford, pursuant to which, subject to the conditions to borrowing thereunder, our wholly-owned Dutch subsidiaries borrowed an aggregate principal amount of $20.0 million. On October 31, 2013, we and certain of our subsidiaries entered into a credit agreement with PDL, pursuant to which our wholly-owned Dutch subsidiaries borrowed an aggregate principal amount of $25.0 million, which we refer to as the PDL credit agreement. Following FDA approval of dalbavancin on May 23, 2014, we borrowed, as required pursuant to terms of the PDL credit agreement, an additional $15.0 million, and may, upon the satisfaction of certain conditions to the funding set forth in the credit agreement, borrow an additional aggregate principal amount of up to $30.0 million within nine months of the FDA approval date. Pursuant to the credit agreement, we repaid in full amounts outstanding under the Oxford loan agreement, including prepayment penalties and fees.

Amounts borrowed under the PDL credit agreement are guaranteed by us and certain of our subsidiaries. The loans are secured by a lien on all or substantially all of our assets and all or substantially all of the assets of our subsidiaries (other than Durata Therapeutics Limited), including the pledge of the equity interests in each of our subsidiaries.

 

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On August 18, 2014, pursuant to the stock purchase agreement between us and Pfizer dated December 11, 2009, we (i) elected to defer payment of the $25.0 million milestone payment owed to Pfizer as a result of the first commercial sale of dalbavancin for the treatment of ABSSSI being made in the United States and (ii) delivered to Pfizer a promissory note in an aggregate principal amount of $25.0 million representing the amount of such milestone payment. The promissory note has a maturity date of July 7, 2019 and interest on the outstanding principal amount accrues at a rate of 10% per annum, compounded annually.

We could in the future incur additional indebtedness beyond amounts currently outstanding under the PDL credit agreement and Pfizer promissory note. Our debt combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:

 

•

requiring us to dedicate a substantial portion of cash flow from operations to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes;

 

•

increasing our vulnerability to adverse changes in general economic, industry and market conditions;

 

•

obligating us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;

 

•

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

 

•

placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

We intend to satisfy our current and future debt service obligations with our cash and cash equivalents and short-term investments and funds from external sources. However, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under our existing debt. Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply with the covenants under our debt instruments could result in an event of default under those instruments. In the event of an acceleration of amounts due under our debt instruments as a result of an event of default, we may not have sufficient funds and may be unable to arrange for additional financing to repay our indebtedness, and the lenders could seek to enforce security interests in the collateral securing such indebtedness. In addition, the covenants under our debt instruments and the pledge of our assets as collateral limit our ability to obtain additional debt financing.

We are currently incurring and expect to continue to incur increased costs as a result of being a public company, and our management is and will continue to be required to devote substantial time to compliance initiatives.

As a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company. These costs will continue to increase, particularly after we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. These rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

However, for as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may remain an emerging growth company until December 31, 2017, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also would cease to be an emerging growth company if we issue more than $1 billion of non-convertible debt over a three-year period.

 

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Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on our internal control over financial reporting. However, as an emerging growth company, we are not required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm until we are no longer an emerging growth company. To achieve compliance with Section 404, we have documented and evaluated the effectiveness of our internal control over financial reporting. We will need to continue to dedicate internal resources to continuously assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We cannot predict whether investors will find our common stock less attractive because we took advantage of the exception from Section 404 that permits us not to obtain an attestation report on internal control over financial reporting by our independent registered public accounting firm. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Risks Related to Product Development and Commercialization

We currently depend entirely on the success of dalbavancin, for the treatment of adult patients with ABSSSI. If we are not successful with the commercialization of dalbavancin, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources in the development of dalbavancin for the treatment of adult patients with ABSSSI. Our ability to generate product revenue will depend heavily on our ability to successfully commercialize dalbavancin. On May 23, 2014, the FDA approved dalbavancin for the treatment of adult patients with ABSSSI. Sales of dalbavancin in the United States commenced in late July 2014. We also submitted a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, on November 27, 2013. On December 20, 2013, the EMA accepted our MAA for review. The success of dalbavancin will depend on several factors, including the following:

 

•

acceptance of dalbavancin, by patients, the medical community and third-party payors;

 

•

effectively competing with other therapies including new entrants;

 

•

making arrangements with third-party manufacturers;

 

•

obtaining and maintaining patent and trade secret protection and regulatory exclusivity;

 

•

a continued acceptable safety profile of dalbavancin;

 

•

protecting our rights in our intellectual property portfolio; and

 

•

receipt of marketing approvals from additional regulatory authorities.

Successful commercialization of dalbavancin for additional indications, including pneumonia, pediatric skin and pediatric osteomyelitis, as well as new dosing strategies and formulations, will depend on similar factors.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize dalbavancin for the treatment of ABSSSI or any additional indication, which would materially harm our business.

 

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Dalbavancin or any other product candidate that we develop may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success and the market opportunity for dalbavancin may be smaller than we estimate.

Dalbavancin or any other product candidate that we develop may fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current treatments for ABSSSI, including generic options, are well established in the medical community, and doctors may continue to rely on these treatments. If dalbavancin does not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of dalbavancin or any other product candidate that we develop, if approved for commercial sale, will depend on a number of factors, including:

 

•

efficacy and potential advantages compared to alternative treatments;

 

•

the ability to offer our products for sale at competitive prices;

 

•

convenience and ease of administration compared to alternative treatments;

 

•

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

•

the strength of marketing and distribution support;

 

•

sufficient third-party coverage or reimbursement;

 

•

the prevalence and severity of any side effects; and

 

•

the development of resistance by bacterial strains to treatment with dalbavancin.

In addition, the potential market opportunity for dalbavancin is difficult to precisely estimate, particularly in the out-patient setting. Our estimates of the potential market opportunity for dalbavancin include several key assumptions based on our industry knowledge, industry publications, third-party research reports and other surveys. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions. If any of these assumptions proves to be inaccurate, then the actual market for dalbavancin could be smaller than our estimates of our potential market opportunity. If the actual market for dalbavancin is smaller than we expect, our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.

If we are unable to establish sales and marketing capabilities or enter into sales and marketing agreements with third parties, we may not be successful in commercializing dalbavancin or any other product candidate that we develop when and if the product candidate is approved.

We have limited experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for dalbavancin or any other approved product, we must continue to develop a sales and marketing organization or outsource these functions to third parties. Ultimately, we expect that our commercial organization in the United States, and possibly Western Europe, will include a targeted hospital sales force, a marketing staff, a reimbursement support team and a national accounts team. Although we are currently evaluating our commercialization strategy outside the United States and Western Europe, we expect that we would commercialize dalbavancin in other markets through a variety of types of collaboration arrangements with leading pharmaceutical and biotechnology companies.

There are risks involved with both establishing our own sales, marketing and distribution capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:

 

•

our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

•

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

 

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

 

•

unforeseen costs and expenses associated with developing an independent sales and marketing organization.

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenue or the profitability of these product revenue to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our products or product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our products or product candidates.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

The development and commercialization of new drug products is highly competitive. We face competition with respect to dalbavancin, and will face competition with respect to any other product candidate that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of ABSSSI. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.

There are a variety of available therapies marketed for the treatment of ABSSSI. Some of these drugs are branded and subject to patent protection, and others, including vancomycin, are available on a generic basis. Many of these approved drugs are well established therapies and are widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. Dalbavancin is priced at a significant premium over vancomycin and other competitive generic products. This may make it difficult for us to replace existing therapies with dalbavancin.

There are also a number of products recently approved or in clinical development by third parties to treat ABSSSI. These companies include pharmaceutical companies, biotechnology companies, and specialty pharmaceutical and generic drug companies of various sizes, such as The Medicines Company, Cubist Pharmaceuticals, Inc. (through its acquisition of Trius Therapeutics, Inc.), Cempra, Inc., Melinta Therapeutics, Inc. (formerly Rib-X Pharmaceuticals, Inc.), Nabriva Therapeutics AG and Tetraphase Pharmaceuticals, Inc. Our competitors may develop products that are more effective, safer, more convenient or less costly than dalbavancin or that would render dalbavancin obsolete or non-competitive.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

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Dalbavancin or any other product candidate that we commercialize may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.

Our ability to successfully commercialize dalbavancin or any other product candidate also will depend in part on the extent to which 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, decide which medications they will cover and pay for and, in doing so, establish payment levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of payment 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 reimbursement will be available for dalbavancin or any other product that we commercialize or, if reimbursement is available, the level of payment. Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with drugs administered under the supervision of a physician. If reimbursement is not available or 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 reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for 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 not be sufficient to cover our costs and may not be made permanent. Reimbursement schemes and payment rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payment 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. Private 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 adequate payment rates from both government-funded and private third-party payors for any approved 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.

If clinical trials of the product candidates that we develop fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of the product candidates.

Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

 

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We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

 

•

clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

•

the number of patients required for current and future clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

•

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

•

regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

•

we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

•

regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

•

the cost of clinical trials of our product candidates may be greater than we anticipate;

 

•

the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

 

•

our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate the trials.

If we are required to conduct additional clinical trials or other testing of product candidates that we develop beyond those that we contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

•

be delayed in obtaining marketing approval for our product candidates;

 

•

not obtain marketing approval at all;

 

•

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

•

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

•

be subject to additional post-marketing testing requirements; or

 

•

have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

 

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If serious adverse or inappropriate side effects are identified during the development of our product candidates, or following their approval and commercialization, we may need to abandon or limit our development or marketing of such product or product candidate.

It is impossible to predict when or if any product or product candidate that we develop will prove effective or safe in humans or will receive marketing approval, and it is impossible to ensure that safety or efficacy issues will not arise following marketing approval. If our products or product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development, limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective or suspend or cease marketing of our approved products, and we may become subject to significant liabilities. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause side effects that prevented further development of the compound or resulted in their withdrawal from the market.

Our strategy of obtaining rights to product candidates and approved products for the hospital and acute care markets through in-licenses and acquisitions may not be successful.

We intend to enhance our product pipeline through strategically in-licensing or acquiring additional clinical stage product candidates or approved products for the hospital and acute care markets. Because we do not engage in drug discovery or early stage research, the future growth of our business will depend in significant part on our ability to in-license or acquire rights to additional product candidates or approved products. However, we may be unable to in-license or acquire any products or product candidates from third parties. The in-licensing and acquisition of pharmaceutical products is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire products or product candidates that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to in-license or acquire the relevant products or product candidates on terms that would allow us to make an appropriate return on our investment. Furthermore, we may be unable to identify suitable products or product candidates within our area of focus. If we are unable to successfully obtain rights to suitable products or product candidates, our business, financial condition and prospects for growth could suffer.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

We may not be able to initiate or continue clinical trials for dalbavancin or any other product candidate that we develop if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. Many of our competitors also have ongoing clinical trials for product candidates that treat the same indications as dalbavancin, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.

Patient enrollment is affected by other factors including:

 

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severity of the disease under investigation;

 

•

eligibility criteria for the study in question;

 

•

perceived risks and benefits of the product candidate under study;

 

•

efforts to facilitate timely enrollment in clinical trials;

 

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patient referral practices of physicians;

 

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the ability to monitor patients adequately during and after treatment; and

 

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proximity and availability of clinical trial sites for prospective patients.

 

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Our inability to enroll a sufficient number of patients for our clinical trials could result in significant delays or may require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.

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

We face an inherent risk of product liability exposure related to the testing of dalbavancin and any other product candidate that we develop in human clinical trials and face an even greater risk as we commercially sell any products that we develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

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reduced resources of our management to pursue our business strategy;

 

•

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

 

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injury to our reputation and significant negative media attention;

 

•

withdrawal of clinical trial participants;

 

•

significant costs to defend the related litigation;

 

•

substantial monetary awards to trial participants or patients;

 

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loss of revenue; and

 

•

the inability to commercialize any products that we may develop.

We currently hold $20.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. We will need to increase our insurance coverage as we continue commercializing dalbavancin or any other product candidate that receives marketing approval. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and wastes, we cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

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Risks Related to Our Dependence on Third Parties

We contract with third parties for the manufacture of dalbavancin for commercialization and for clinical trials and commercialization of any other product candidates that we develop. This reliance on third parties increases the risk that we will not have sufficient quantities of our products or product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our commercialization efforts.

We do not currently own or operate manufacturing facilities for the production of commercial or clinical quantities of dalbavancin and have limited personnel with manufacturing experience. We currently rely on and expect to continue to rely on third-party contract manufacturers to manufacture commercial quantities and clinical supplies of dalbavancin and other drug substances and drug product candidates when and if approved for marketing by applicable regulatory authorities.

We currently rely on one third-party manufacturer to supply us with dalbavancin drug substance and another third-party manufacturer to conduct fill and finish services.

We have a supply agreement, as amended, with Gnosis Bioresearch srl., or Gnosis, to supply us with the drug substance for dalbavancin in the form of injectable grade powder. Although Gnosis has agreed to supply us with a specified percentage of our worldwide demand for drug substance, Gnosis is not obligated to supply any drug substance in excess of this specified percentage. If Gnosis should become unavailable to us for any reason for the supply of drug substance, we believe that there are a number of potential replacements, although we might incur some delay in identifying or qualifying such replacements. In the event Gnosis breaches its supply obligations as specified in the agreement, we may engage an alternate supplier to supply us with drug substance until Gnosis demonstrates to our reasonable satisfaction that Gnosis has fully remedied such supply failure.

We have identified possible secondary suppliers of drug substance and are currently engaged in the technology transfer process with these manufacturers.

We have a development and supply agreement with Hospira Worldwide, Inc., or Hospira, for our fill and finish services. If Hospira should become unavailable to us for any reason for fill and finish services, we believe that there are a number of potential replacements, although we might incur some delay in identifying or qualifying such replacements. Although Hospira has agreed to supply us with a specified percentage of our requirements of dalbavancin, Hospira is not obligated to manufacture any products in excess of this specified percentage. If Hospira is unable to supply us with product as a result of its breach, a force majeure event or restrictions under applicable law, we may engage an alternate manufacturer to supply us with the quantity of product which Hospira was unable to supply.

Even if we are able to establish and maintain such arrangements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

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reliance on the third party for regulatory compliance and quality assurance;

 

•

the possible breach of the manufacturing agreement by the third party;

 

•

the possible misappropriation of our proprietary information, including our trade secrets and know-how; and

 

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the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

Third-party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products and harm our business and results of operations.

Dalbavancin or any other product that we develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.

 

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Any performance failure on the part of our existing or future manufacturers could adversely affect revenue, clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance for dalbavancin or for fill-finish services. If either of our existing manufacturers should become unavailable to us for any reason, we believe that there are a number of potential replacements, although we might incur some delay in identifying or qualifying such replacements.

Our current and anticipated future dependence upon others for the manufacture of dalbavancin and any other product candidate or product that we develop may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

We expect to depend on collaborations with third parties for the development and commercialization of our products and product candidates. If those collaborations are not successful, we may not be able to capitalize on the market potential of these products and product candidates.

We intend to commercialize dalbavancin through a variety of types of collaboration arrangements in other markets, including Eastern Europe and Asia. In addition, we may seek third-party collaborators for development and commercialization of other product candidates. Our likely collaborators for any marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If we do enter into any such arrangements with any third parties in the future, we will likely have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our products and product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.

Collaborations involving our products and product candidates would pose the following risks to us:

 

•

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

•

collaborators may not pursue development and commercialization of our products and product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

•

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

•

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

•

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

•

collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;

 

•

collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;

 

•

disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and

 

•

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable products and product candidates.

 

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Collaboration agreements may not lead to development or commercialization of products and product candidates in the most efficient manner or at all. If a collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

If we are not able to establish collaborations, we may have to alter our development and commercialization plans.

The commercialization of dalbavancin and the development and potential commercialization of other product candidates will require substantial additional cash to fund expenses. For some of our products and product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those products and product candidates. For example, we intend to seek to commercialize dalbavancin through a variety of types of collaboration arrangements outside the United States and Western Europe.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our products and product candidates or bring them to market and generate product revenue.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We have relied on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct our clinical trials for dalbavancin and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it would delay our product development activities.

Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

 

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Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

If we fail to comply with our obligations in the agreements under which we in-license or acquire development or commercialization rights to products or technology from third parties, we could lose commercial rights that are important to our business.

In December 2010, we acquired from RaQualia Pharma Inc., or RaQualia, rights to commercialize dalbavancin in Japan, which Pfizer had previously granted to RaQualia pursuant to a marketing rights agreement. Under our agreement with RaQualia, if we fail to use reasonable efforts to file a regulatory approval application in Japan for dalbavancin within a specified time, RaQualia has the right to regain rights to dalbavancin in Japan. Although we currently plan to pursue the filing of a regulatory approval application in Japan within the specified time, our failure to do so could result in the loss of our commercial rights in Japan and reduce the commercial value of our rights to dalbavancin.

We may enter into additional agreements, including license agreements, in the future that impose diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these future obligations, third parties may have the right to terminate these agreements, in which event we might not be able to market any product that is covered by these agreements, which could materially adversely affect the value of the product candidate being developed under any such license agreement. Termination of these license agreements or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms, or cause us to lose rights in important intellectual property or technology.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize product candidates that we develop, and our ability to generate revenue will be materially impaired.

Our product candidates, including dalbavancin, and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate, and approved products are subject to continual review by the FDA. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and rely on third-party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. The FDA or other regulatory authorities may determine that any product candidate that we develop is not effective, or is only moderately effective, or has undesirable or unintended side effects, toxicities, safety profile or other characteristics that preclude our obtaining marketing approval or prevent or limit commercial use.

 

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The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

For example, the European Medicines Agency, or EMA, questioned the approvability of Pfizer’s marketing authorization application based on remaining objections that a single pivotal trial in complicated skin and skin structure infections did not provide sufficiently robust data and that patients enrolled in the trial were not sick enough to support use in the desired indication. The FDA and the EMA may identify additional issues as their review of our current or future applications proceeds.

If we experience delays in obtaining approval or if we fail to obtain approval of any product candidate that we develop, the commercial prospects for the product candidate may be harmed and our ability to generate revenues will be materially impaired.

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

In order to market and sell dalbavancin and any other product candidate that we develop in the European Union and many other jurisdictions, we or our third-party collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We submitted an MAA to the EMA on November 27, 2013. On December 20, 2013, the EMA accepted our MAA for review. However, we may not be able to file for marketing approvals in other jurisdictions and may not receive necessary approvals to commercialize our products in any market outside the United States.

Dalbavancin and any other product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.

Dalbavancin and any other product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance, complaints and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or may be subject to significant conditions of approval, or may impose requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved

 

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indications and in accordance with the provisions of the approved labeling and regulatory requirements. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not restrict the marketing of our products only to their approved indications, we may be subject to enforcement action for off-label marketing.

In addition, later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

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restrictions on such products, manufacturers or manufacturing processes;

 

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restrictions on the labeling or marketing of a product;

 

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restrictions on product distribution or use;

 

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requirements to conduct post-marketing clinical trials;

 

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warning or untitled letters;

 

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withdrawal of the products from the market;

 

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refusal to approve pending applications or supplements to approved applications that we submit;

 

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recall of products;

 

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fines, restitution or disgorgement of profits or revenue;

 

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suspension or withdrawal of marketing approvals;

 

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refusal to permit the import or export of our products;

 

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product seizure; or

 

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injunctions or the imposition of civil or criminal penalties.

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

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

 

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the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward 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 federally funded healthcare programs such as Medicare and Medicaid;

 

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the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

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the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

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•

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

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the federal transparency requirements under the Health Care Reform Law require manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

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analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

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

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates that we develop, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates, including dalbavancin, for which we obtain marketing approval.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with health care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the full effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

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Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and product candidates that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, if we license technology or product candidates from third parties in the future, these license agreements may not permit us to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering this intellectual property. These agreements could also give our licensors the right to enforce the licensed patents without our involvement, or to decide not to enforce the patents without our consent. Therefore, in these circumstances, we could not be certain that these patents and applications would be prosecuted and enforced in a manner consistent with the best interests of our business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. In addition, we may not pursue or obtain patent protection in all major markets. Assuming the other requirements for patentability are met, currently, the first to file a patent application is entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office or become involved in opposition, derivation, reexamination, inter partes review, post-grant review, interference proceedings or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such

 

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submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.

For example, although dalbavancin is protected by four issued U.S. patents consisting of two method-of-treatment patents, a dosage-form patent and a formulation patent, patent protection is not available for composition-of-matter claims that only recite the active pharmaceutical ingredient for dalbavancin. Because dalbavancin lacks composition-of-matter protection for its active pharmaceutical ingredient, competitors will be able to offer and sell products with the same active pharmaceutical ingredient so long as these competitors do not infringe any other patents covering this drug. Moreover, method-of-treatment patents, are more difficult to enforce than composition-of-matter patents because of the risk of off-label sale or use of the subject compound. Physicians are permitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off-label prescriptions may infringe our method-of-treatment patents, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. Off-label sales would limit our ability to generate revenue from the sale of our product candidates, if approved for commercial sale. In addition, if a third party were able to design around our dosage-form and formulation patents and create a different formulation and dosage form that is not covered by our patents or patent applications, we would likely be unable to prevent that third party from manufacturing and marketing its product.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In November 2012, the FDA designated dalbavancin as a Qualified Infectious Disease Product. This designation provides ten years of marketing exclusivity in the United States.

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

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such marks. In any infringement litigation, any award of monetary damages we receive may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

 

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

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the intellectual property and other proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing or future intellectual property rights. We have not conducted a freedom-to-operate search or analysis for dalbavancin, and we may not be aware of pending or future patent applications that, if issued, would block us from commercializing dalbavancin. Thus, we cannot guarantee that dalbavancin, or our commercialization thereof, does not and will not infringe any third party’s intellectual property.

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

We may be subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.

In addition, while we typically require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Moreover, because we acquired the rights to our lead product candidate from Pfizer, we must rely on Pfizer’s practices, and those of its predecessors, with regard to the assignment of intellectual property therein. Our and their assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.

If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

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

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these

 

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results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

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

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. However, we cannot guarantee that we have executed these agreements with each party that may have or have had access to our trade secrets.

Moreover, because we acquired the rights to our lead product candidate from Pfizer, we must rely on Pfizer’s practices, and those of its predecessors, with regard to parties that may have had access to our trade secrets related thereto before our acquisition. Any party with whom we or they have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.

Our trademark applications may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the U.S. Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.

Proprietary names must be approved by the FDA, regardless of whether we have registered the name with the U.S. Patent and Trademark Office, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. Dalvance has been approved by the FDA for use with dalbavancin in the United States as of May 23, 2014. We have also proposed potential proprietary names in Europe. We have not yet proposed a proprietary name for dalbavancin in any jurisdiction other than the United States and Europe.

 

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Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

We are highly dependent on Paul R. Edick, our Chief Executive Officer, Corey N. Fishman, our Chief Operating Officer and Chief Financial Officer, Michael W. Dunne, M.D., our Chief Medical Officer, and John P. Shannon, our Chief Marketing Officer, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our development and commercialization objectives.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We expect to expand our development, regulatory and sales, marketing and distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We have recently experienced and continue to expect significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs and sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Common Stock

Our executive officers, directors and principal stockholders maintain the ability to control or significantly influence all matters submitted to stockholders for approval.

Our executive officers, directors and stockholders who own more than 5% of our outstanding common stock, in the aggregate, beneficially own a majority of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is

 

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responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

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establish a classified board of directors such that not all members of the board are elected at one time;

 

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allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

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limit the manner in which stockholders can remove directors from the board;

 

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establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

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require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

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limit who may call stockholder meetings;

 

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authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

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require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses.

Our stock price may be volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, our stockholders could incur substantial losses. The market price for our common stock may be influenced by many factors, including:

 

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the success of commercial launch of dalbavancin;

 

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the success of competitive products or technologies;

 

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results of clinical trials of dalbavancin and any other product candidate that we develop;

 

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results of clinical trials of product candidates of our competitors;

 

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

 

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

 

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the recruitment or departure of key personnel;

 

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

 

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

 

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

 

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

 

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changes in the structure of healthcare payment systems;

 

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market conditions in the pharmaceutical and biotechnology sectors;

 

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general economic, industry and market conditions; and

 

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the other factors described in this “Risk Factors” section.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and may remain an emerging growth company through December 31, 2017. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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

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

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

A substantial portion of our outstanding common stock can be traded without restriction at any time, and some of the shares which are currently restricted as a result of securities laws will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales, in the near future. As such, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of October 31, 2014, we had outstanding 26,793,419 shares of common stock. In addition, holders of an aggregate of 9,537,533 shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

 

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We registered all shares of common stock that we may issue under our equity compensation plans. These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

We did not conduct any sales of unregistered securities during the period covered by this Quarterly Report on Form 10-Q.

Purchase of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Quarterly Report on Form 10-Q.

 

Item 6.

Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 7, 2014				DURATA THERAPEUTICS, INC.
				By:		/s/ Corey N. Fishman
						Corey N. Fishman
						Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Exhibit
10.1		Agreement and Plan of Merger, dated as of October 5, 2014, by and among Actavis W.C. Holding Inc., Delaware Merger Sub, Inc. and Registrant (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the SEC on October 6, 2014)
†10.2*		Supply Agreement dated July 29, 2014 between Registrant and A.C.R.A.F. S.p.A
†10.3*		License Agreement dated July 29, 2014 between Registrant and A.C.R.A.F S.p.A
†10.4*		Amendment No. 2, dated August 22, 2014, to Manufacturing and Supply Agreement between Registrant and Gnosis Bioresearch srl dated June 12, 2012
10.5*		First Amendment, dated July 29, 2014, to the Amended and Restated Employment Agreement, dated June 20, 2012, between Registrant and John P. Shannon
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1		Form of Contingent Value Rights Agreement (incorporated herein by reference to Exhibit A to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the SEC on October 6, 2014)
99.2		Tender and Support Agreement, dated as of October 5, 2014, by and among Actavis W.C. Holding Inc., Delaware Merger Sub, Inc. and certain officers, directors and stockholders of Registrant (incorporated herein by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on October 6, 2014)
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Database*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

 

*	Submitted electronically herewith.

†	Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately with the Securities and Exchange Commission.

 

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Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheet at September 30, 2014 (unaudited) and December 31, 2013 (ii) Consolidated Statement of Operations for the three and nine month periods ended September 30, 2014 and 2013 (unaudited), (iii) Consolidated Statement of Cash Flows for the nine month periods ended September 30, 2014 and 2013 (unaudited) and (iv) Notes to Consolidated Financial Statements (unaudited).

 

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