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EX-32.1 - EX-32.1 - PORTOLA PHARMACEUTICALS INCptla-ex321_8.htm
EX-31.2 - EX-31.2 - PORTOLA PHARMACEUTICALS INCptla-ex312_9.htm
EX-31.1 - EX-31.1 - PORTOLA PHARMACEUTICALS INCptla-ex311_6.htm

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

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: 001-35935

 

 

PORTOLA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

20-0216859

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

270 E. Grand Avenue

South San Francisco, California

94080

(Address of Principal Executive Offices)

(Zip Code)

(650) 246-7000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of August 4, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 57,662,566.

 

 

 

 

 


 

PORTOLA PHARMACEUTICALS, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017

INDEX

 

 

 

 

Page

Part I —

 

Financial Information

 

 

 

 

Item 1. Financial Statements

F-3

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)-June 30, 2017 and December 31, 2016

F-3

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) –three and six months ended June 30, 2017 and 2016

F-4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) –three and six months ended June 30, 2017 and 2016

F-5

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) –six months ended June 30, 2017 and 2016

F-6

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

F-7

 

 

 

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

21

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4. Controls and Procedures

28

 

Part II —

 

Other Information

 

 

 

 

Item 1. Legal Proceedings

29

 

 

 

Item 1A. Risk Factors

29

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3. Defaults Upon Senior Securities

52

 

 

 

Item 4. Mine Safety Disclosures

52

 

 

 

Item 5. Other Information

52

 

 

 

Item 6. Exhibits

52

 

Signatures

53

 

 

F-2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

PORTOLA PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share data)

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

123,837

 

 

$

188,480

 

Short-term investments

 

 

145,861

 

 

 

130,291

 

Restricted cash (SRX Cardio)

 

 

172

 

 

 

178

 

Prepaid research and development

 

 

3,487

 

 

 

7,299

 

Prepaid expenses and other current assets

 

 

12,330

 

 

 

2,680

 

Total current assets

 

 

285,687

 

 

 

328,928

 

Property and equipment, net

 

 

5,576

 

 

 

6,143

 

Intangible assets

 

 

8,151

 

 

 

3,151

 

Prepaid and other long-term assets

 

 

6,277

 

 

 

5,214

 

Total assets

 

$

305,691

 

 

$

343,436

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,938

 

 

$

14,546

 

Accrued compensation and employee benefits

 

 

5,560

 

 

 

4,806

 

Accrued research and development

 

 

22,050

 

 

 

23,818

 

Accrued and other liabilities

 

 

3,038

 

 

 

1,696

 

Deferred revenue, current portion

 

 

15,187

 

 

 

20,798

 

Total current liabilities

 

 

57,773

 

 

 

65,664

 

Notes payable, long-term

 

 

51,627

 

 

 

49,815

 

Long term debt

 

 

50,117

 

 

 

 

Long term obligation to Collaborator

 

 

8,000

 

 

 

8,000

 

Deferred revenue, long-term

 

 

21,661

 

 

 

24,965

 

Other long-term liabilities

 

 

3,146

 

 

 

2,303

 

Total liabilities

 

 

192,324

 

 

 

150,747

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued

   and outstanding

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized at

   June 30, 2017 and December 31, 2016; 57,576,731 shares and 56,544,218 shares

   issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

59

 

 

 

57

 

Additional paid-in capital

 

 

1,140,660

 

 

 

1,108,832

 

Accumulated deficit

 

 

(1,029,634

)

 

 

(918,345

)

Accumulated other comprehensive loss

 

 

(70

)

 

 

(12

)

Total Portola stockholders’ equity

 

 

111,015

 

 

 

190,532

 

Noncontrolling interest (SRX Cardio)

 

 

2,352

 

 

 

2,157

 

Total stockholders’ equity

 

 

113,367

 

 

 

192,689

 

Total liabilities and stockholders’ equity

 

$

305,691

 

 

$

343,436

 

 

Amounts include the assets and liabilities of SRX Cardio, LLC, a consolidated variable interest entity (“VIE”). Portola’s interests and obligations with respect to the VIE’s assets and liabilities are limited to those accorded to Portola in its agreement with the VIE. See Note 7, “Asset Acquisition and License Agreements,” to these condensed consolidated financial statements.

 

See accompanying notes to the unaudited condensed consolidated financial statements.

F-3


 

PORTOLA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Collaboration and license revenue

 

$

3,787

 

 

$

4,231

 

 

$

8,915

 

 

$

12,489

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

49,292

 

 

 

44,823

 

 

 

79,937

 

 

 

103,636

 

Selling, general and administrative

 

 

20,329

 

 

 

17,044

 

 

 

35,350

 

 

 

31,795

 

Total operating expenses

 

 

69,621

 

 

 

61,867

 

 

 

115,287

 

 

 

135,431

 

Loss from operations

 

 

(65,834

)

 

 

(57,636

)

 

 

(106,372

)

 

 

(122,942

)

Interest and other income (expense), net

 

 

(124

)

 

 

297

 

 

 

289

 

 

 

629

 

Interest expense

 

 

(3,456

)

 

 

 

 

 

(5,095

)

 

 

 

Net loss

 

 

(69,414

)

 

 

(57,339

)

 

 

(111,178

)

 

 

(122,313

)

Net income attributable to noncontrolling interest (SRX Cardio)

 

 

(240

)

 

 

 

 

 

(195

)

 

 

 

Net loss attributable to Portola

 

$

(69,654

)

 

$

(57,339

)

 

$

(111,373

)

 

$

(122,313

)

Net loss per share attributable to Portola common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(1.22

)

 

$

(1.02

)

 

$

(1.96

)

 

$

(2.17

)

Shares used to compute net loss per share attributable to Portola

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

57,050,523

 

 

 

56,399,535

 

 

 

56,872,644

 

 

 

56,434,644

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

F-4


 

PORTOLA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(69,414

)

 

$

(57,339

)

 

$

(111,178

)

 

$

(122,313

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

21

 

 

 

27

 

 

 

(58

)

 

 

243

 

Comprehensive loss

 

 

(69,393

)

 

 

(57,312

)

 

 

(111,236

)

 

 

(122,070

)

Comprehensive income attributable to noncontrolling interest

   (SRX Cardio)

 

 

(240

)

 

 

 

 

 

(195

)

 

 

 

Total comprehensive loss attributable to Portola

 

$

(69,633

)

 

$

(57,312

)

 

$

(111,431

)

 

$

(122,070

)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

F-5


 

PORTOLA PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(111,178

)

 

$

(122,313

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,002

 

 

 

926

 

Amortization of premium on investment securities

 

 

250

 

 

 

759

 

Non-cash interest expense

 

 

5,095

 

 

 

 

Stock-based compensation expense

 

 

22,291

 

 

 

14,691

 

Remeasurement loss on embedded derivatives liabilities

 

 

666

 

 

 

 

Loss on assets disposal

 

 

26

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid research and development

 

 

3,812

 

 

 

(5,502

)

Prepaid expenses and other current assets

 

 

(9,650

)

 

 

(2,204

)

Prepaid and other long-term assets

 

 

(1,063

)

 

 

(4,025

)

Accounts payable

 

 

(2,765

)

 

 

(5,443

)

Accrued compensation and employee benefits

 

 

754

 

 

 

(824

)

Accrued research and development

 

 

(1,768

)

 

 

(3,688

)

Accrued and other liabilities

 

 

1,342

 

 

 

777

 

Deferred revenue

 

 

(8,915

)

 

 

22,011

 

Other long-term liabilities

 

 

(432

)

 

 

(371

)

Net cash used in operating activities

 

 

(100,533

)

 

 

(105,206

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(304

)

 

 

(1,803

)

Decrease in restricted cash (SRX Cardio)

 

 

6

 

 

 

196

 

Purchase of intangible assets

 

 

(5,000

)

 

 

 

Purchases of investments

 

 

(186,407

)

 

 

(155,436

)

Proceeds from maturities of investments

 

 

170,529

 

 

 

214,378

 

Net cash (used in) provided by investing activities

 

 

(21,176

)

 

 

57,335

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from debt issuance, net

 

 

48,000

 

 

 

 

Payment of public offering cost

 

 

 

 

 

(242

)

Debt issuance costs paid

 

 

(557

)

 

 

 

Proceeds from issuance of common stock pursuant to equity award plans

 

 

9,623

 

 

 

972

 

Net cash provided by financing activities

 

 

57,066

 

 

 

730

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(64,643

)

 

 

(47,141

)

Cash and cash equivalents at beginning of period

 

 

188,480

 

 

 

186,488

 

Cash and cash equivalents at end of period

 

$

123,837

 

 

$

139,347

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

F-6


 

PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization

Portola Pharmaceuticals, Inc.® (the “Company” or “we” or “our” or “us”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics in the areas of thrombosis, other hematologic diseases and inflammation for patients who currently have limited or no approved treatment options. We were incorporated in September 2003 in Delaware. Our headquarters and operations are located in South San Francisco, California and we operate in one segment.

On June 23, 2017, we received marketing approval from the U.S. Food and Drug Administration, or FDA, for Bevyxxa® (betrixaban), an oral once-daily inhibitor of Factor Xa, for the prophylaxis of venous thromboembolism, or VTE, in adult patients hospitalized for an acute medical illness who are at risk for thromboembolic complications due to moderate or severe restricted mobility and other risk factors for VTE. Our second compound, andexanet alfa, an FDA-designated breakthrough therapy and orphan drug, is a recombinant protein designed to reverse anticoagulant activity in patients treated with a Factor Xa inhibitor. Our third compound, cerdulatinib, is being developed for hematologic, or blood, cancers and inflammatory disorders. Cerdulatinib is an orally available dual kinase inhibitor that inhibits spleen tyrosine kinase, or Syk, and janus kinases, or JAK, enzymes that regulate important signaling pathways. We also have an early stage program of highly selective Syk inhibitors, one of which is partnered with Ora, Inc., or Ora, and another early stage program to develop a drug in the field of hypercholesterolemia.

 

 

2. Summary of Significant Accounting Policies

Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the amounts of Portola and its wholly-owned subsidiaries and a development partner that is a variable interest entity (a “VIE”) for which Portola is deemed, under applicable accounting guidance, to be the primary beneficiary as of June 30, 2017. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted.

These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and contemplate the need to raise additional capital as we continue to incur net operating losses. In light of estimated costs to support the launch of our recently approved product, Bevyxxa, we now estimate our existing capital resources, together with interest thereon, to be sufficient to meet our projected operating requirements into the first quarter of 2018. In order to support the launch as well as to continue advancing our other product candidates on a long-term basis, we plan to supplement anticipated cash receipts, including a committed $100.0 million payment from HCR contingent upon the FDA’s approval of andexanet alfa, through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and/or other marketing and distribution arrangements. In the opinion of management these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period or for any other future year. The condensed consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed on March 1, 2017 with the SEC.

Reclassification

Certain immaterial reclassifications have been made to prior period amounts to conform to current period presentation. This reclassification did not have an impact on our results of operations or financial condition as of December 31, 2016.

F-7


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses in the condensed consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, clinical trial accruals, fair value of assets and liabilities including short-term and long-term classification, embedded derivative liabilities, interest expense, income taxes, in-process research and development, the consolidation of VIEs and deconsolidation of VIEs and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

Variable Interest Entities

We review agreements we enter into with third party entities, pursuant to which we may have a variable interest in that entity, in order to determine if the entity is a VIE. If the entity is a VIE, we assess whether or not we are the primary beneficiary of that entity. In determining whether we are the primary beneficiary of an entity, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If we determine we are the primary beneficiary of a VIE, we consolidate the operations and financial position of the VIE into our consolidated financial statements.

Our determination about whether we should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

Intangible Assets

In-process research and development asset relates to our consolidated VIE and is considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If the project is completed, which generally occurs if and when regulatory approval to market a product is obtained, the carrying value of the related intangible asset is amortized as a part of cost of product revenues over the remaining estimated life of the asset beginning in the period in which the project is completed. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value and an impairment charge is taken in the period in which the impairment occurs. The in-process research and development asset is tested for impairment on an annual basis, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, and are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable. See Note 7, “Asset Acquisition and License Agreements,” to these condensed consolidated financial statements for further information.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and other highly liquid investments with original maturities of three months or less from the date of purchase.

Investments in Marketable Securities

All investments in marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of our investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Unrealized gains and losses are excluded from earnings and were reported as a component of accumulated comprehensive income (loss). Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income, net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income, net.

F-8


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Collaboration Customer Concentration

Collaboration customers who accounted for 10% or more of total collaboration and license revenues were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Daiichi Sankyo, Inc.

 

 

53

%

 

 

31

%

 

 

47

%

 

 

37

%

Bayer Pharma, AG and Janssen Pharmaceuticals, Inc.

 

 

14

%

 

 

19

%

 

 

15

%

 

 

33

%

Bristol-Myers Squibb Company and Pfizer Inc.

 

 

27

%

 

 

41

%

 

 

31

%

 

 

24

%

 

Revenue Recognition

We generate revenue from collaboration and license agreements for the development and commercialization of our products. Collaboration and license agreements may include non-refundable or partially refundable upfront license fees, partial or complete reimbursement of research and development costs, contingent consideration payments based on the achievement of defined collaboration objectives and royalties on sales of commercialized products.

Our performance obligations under our collaborations may include the transfer of intellectual property rights (licenses), obligations to provide research and development services and related clinical drug supply, obligations to provide regulatory approval services and obligations to participate on certain development and/or commercialization committees with the collaborators.  If we determine that multiple deliverables exist, the consideration is allocated to one or more units of accounting based upon the best estimate of the selling price of each deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available.  In order to account for multiple element arrangements, we identify the deliverables at the inception of the arrangement and each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in our control. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered items within the arrangement.  For a combined unit of accounting, non-refundable upfront payments are recognized in a manner consistent with the final deliverable, which has generally been ratably over the period we provide research and development services.  Amounts received in advance of performance are recorded as deferred revenue in our condensed consolidated balance sheet and are recognized as collaboration revenue. We regularly review the estimated periods of performance related to our collaborations based on the progress made under each arrangement. Our estimates of our performance period may change over the course of the collaboration term. Such a change could have a material impact on the amount of revenue we record in future periods.

Payments that are contingent upon achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved. A milestone is defined as an event that can only be achieved based on our performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered milestones subject to this guidance. Further, the amounts received must relate solely to prior performance, be reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with our performance to achieve the milestone after commencement of the agreement. Payments contingent upon achievement of events that are not considered substantive milestones are allocated to the respective arrangements unit of accounting when received and recognized as revenue based on the revenue recognition policy for that unit of accounting.  

Amounts received from our collaboration and license agreements are recognized as revenue if the collaboration arrangement involves the sale of services associated with the development and commercialization of our products at amounts that exceed our cost. Under certain collaboration arrangements, we receive reimbursement for a portion of our research and development costs. Such funding is recognized as a reduction in research and development expense when we engage in a research and development project jointly with another entity, with both entities participating in project activities and sharing costs and potential benefits of the arrangement.

Amounts related to research and development and regulatory approval funding are recognized as the related services or activities are performed, in accordance with the contract terms. Payments may be made to or by us based on the number of full-time equivalent researchers assigned to the collaboration project and the related research and development expenses incurred.

F-9


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Interest Expense 

Notes payable and long-term debt are eligible to be repaid based on royalties from our yet to be marketed product, andexanet alfa. The recognition of interest expense requires us to estimate the total amount of future royalty payments to be generated from product sales by jurisdiction over the life of the agreement. Consequently, we impute interest on the carrying value of the notes payable and long-term debt and record interest expense using an imputed effective interest rate. We reassess the expected royalty payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis, with a corresponding impact to the classification of our debt and note payable liabilities.

Net Loss per Share Attributable to Portola Common Stockholders

Basic net loss per share attributable to Portola Common Stockholders is calculated by dividing the net loss attributable to Portola Common Stockholders by the weighted-average number of shares of Common Stock outstanding for the period. Diluted net loss per share attributable to Portola Common Stockholders is the same as basic net loss per share attributable to Portola Common Stockholders, since the effects of potentially dilutive securities are antidilutive.

Recent Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU includes guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2017, with early adoption permitted. We have evaluated the effect that this guidance will have on our condensed consolidated financial statements and related disclosures and have determined it will not have a material impact.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Our effective date for adoption of this guidance is our fiscal year beginning January 1, 2018. We have evaluated the effect that this guidance will have on our condensed consolidated financial statements and related disclosures and determined it will not have a material impact.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies certain aspects of the accounting for share-based payment transactions, including income tax requirements, forfeitures, and presentation on the balance sheet and the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016 and for the interim periods therein. We adopted the standard as of January 1, 2017, with a cumulative-effect adjustment to increase our deferred tax assets by $14.0 million with a corresponding increase to our valuation allowance. In addition, we made an accounting policy election to account for forfeitures as they occur.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standard”) which is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted.

 

F-10


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The new revenue standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We plan to adopt the standard in the first quarter of 2018 using the modified retrospective method.  Although we are still evaluating our contracts and assessing all the potential impacts of the standard, we anticipate the adoption may have a material impact on our condensed consolidated financial statements. Specifically, the timing of recognition for certain contingent payments from our collaborators may be impacted by the adoption of the new revenue standard. ASU No. 2014-09 differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments or contingent payments.  Under our current accounting policy, we recognize contingent or milestone payments as revenue in the period that the payment-triggering event occurred or is achieved.  However, under the new revenue standard, it is possible to start to recognize contingent or milestone payments before the payment-triggering event is completely achieved, subject to management’s assessment of whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

 

 

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of our financial instruments, including cash and cash equivalents, restricted cash, short-term investments, receivables from collaborations, prepaid research and development,  prepaid expenses and other current assets accounts payable, accrued research and development, accrued compensation and employee benefits, accrued and other liabilities and deferred revenue, approximate their fair value due to their short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

 

Level 1 –

Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 –

Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3 –

Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. Our embedded derivative liabilities are measured at fair value using a Monte Carlo simulation model and are included as a component of other long-term liabilities on the condensed consolidated balance sheets. The embedded derivative liabilities are subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of interest and other income (expense), net, in our condensed consolidated statements of operations. The assumptions used in the Monte Carlo simulation model include: 1) our estimates of both the probability and timing of regulatory approval of andexanet alfa by geographical region and other related events; 2) probability weighted net sales of andexanet alfa; 3) our risk adjusted discount rate that includes a company specific risk premium; 4) cost of debt; 5) volatility; 6) the probability of a change in control occurring during the term of the note; and 7) probability of an event of default. The valuation of our embedded derivative liabilities is most sensitive to the probability of andexanet alfa achieving regulatory approval given the binary nature of such an approval event and the correlation to other assumptions included in the model.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Our noncontrolling interest includes the fair value of the contingent milestone and royalty payments, which is valued based on Level 3 inputs.  See Note 7, "Asset Acquisition and License Agreements," to these condensed consolidated financial statements for further information. 

F-11


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table sets forth the fair value of our financial assets and liabilities, allocated into Level 1, Level 2 and Level 3, that were measured on a recurring basis (in thousands):

 

 

 

 

June 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

18,046

 

 

$

 

 

$

 

 

$

18,046

 

Corporate notes and commercial paper

 

 

 

 

134,677

 

 

 

 

 

 

134,677

 

U.S. government agency securities

 

 

 

 

 

86,745

 

 

 

 

 

 

86,745

 

Total financial assets

 

$

18,046

 

 

$

221,422

 

 

$

 

 

$

239,468

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives liabilities

 

$

 

 

$

 

 

$

1,521

 

 

$

1,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,254

 

 

$

 

 

$

 

 

$

6,254

 

Corporate notes and commercial paper

 

 

 

 

 

133,099

 

 

 

 

 

 

133,099

 

U.S. government agency securities

 

 

 

 

 

55,936

 

 

 

 

 

 

55,936

 

Total financial assets

 

$

6,254

 

 

$

189,035

 

 

$

 

 

$

195,289

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives liabilities

 

$

 

 

$

 

 

$

246

 

 

$

246

 

 

Level 3 liabilities are comprised of embedded derivatives liabilities as described in Note 8. The following table sets forth a summary of the changes in the estimated fair value of the Company’s embedded derivatives liabilities, which were measured at fair value on a recurring basis (in thousands):

 

Balance as of December 31, 2016

 

$

246

 

Issuance of embedded derivatives

 

 

609

 

Net increase in fair value included in other income (expense)

 

 

666

 

Balance as of June 30, 2017

 

$

1,521

 

 

We estimate the fair values of our corporate notes and commercial paper and U.S government agency securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data, and other observable inputs.

There were no transfers between any of the levels of the fair value hierarchy during the periods presented.

 

 

F-12


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4. Financial Instruments

Cash equivalents and investments, all of which are classified as available-for-sale securities, consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

 

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Value

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Value

 

Money market funds

 

$

18,046

 

 

$

 

 

$

 

 

$

18,046

 

 

$

6,254

 

 

$

 

 

$

 

 

$

6,254

 

Corporate notes and

   commercial paper

 

 

134,702

 

 

 

 

 

 

(25

)

 

 

134,677

 

 

 

133,112

 

 

 

1

 

 

 

(14

)

 

$

133,099

 

U.S. government agency securities

 

 

86,790

 

 

 

 

 

 

(45

)

 

 

86,745

 

 

 

55,934

 

 

 

5

 

 

 

(3

)

 

$

55,936

 

 

 

$

239,538

 

 

$

 

 

$

(70

)

 

$

239,468

 

 

$

195,300

 

 

$

6

 

 

$

(17

)

 

$

195,289

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

93,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

64,998

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130,291

 

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and

   investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

239,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

195,289

 

 

At June 30, 2017 and December 31, 2016, the remaining contractual maturities of available-for-sale securities were less than one year. There have been no significant realized losses on available-for-sale securities for the periods presented.

 

 

5. Collaboration and License Agreements

 

Summary of Collaboration-Related Revenue

We have recognized revenue from our collaboration and license agreements as follows (in thousands):  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

BMS and Pfizer

 

$

1,027

 

 

$

1,733

 

 

$

2,785

 

 

$

2,987

 

Daiichi Sankyo

 

 

2,012

 

 

 

1,297

 

 

 

4,194

 

 

 

4,681

 

Bayer and Janssen

 

 

538

 

 

 

807

 

 

 

1,336

 

 

 

4,115

 

Bayer

 

 

210

 

 

 

394

 

 

 

600

 

 

 

654

 

Other

 

 

 

 

 

 

 

 

 

 

52

 

Total collaboration and license revenue

 

$

3,787

 

 

$

4,231

 

 

$

8,915

 

 

$

12,489

 

 

Bristol-Myers Squibb Company (“BMS”) and Pfizer Inc. (“Pfizer”)

In 2014, we entered into an agreement with BMS and Pfizer to study andexanet alfa as a reversal agent to apixaban in our Phase 3 studies. As of June 30, 2017, we have no further milestone payments eligible for achievement under this agreement and continue to recognize the non-contingent payments received on a straight-line basis over the period of performance, which is estimated to be through the third quarter of 2018. In the second quarter of 2017, we updated our estimated period of performance from the first quarter of 2018 to the third quarter of 2018 to reflect a modification to our clinical development and regulatory plans. The effect of this change in estimate was not significant. During the three and six months ended June 30, 2017 and 2016, we recognized $0.4 million and $1.0 million, and $0.6 million and $1.0 million in collaboration revenue under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $10.2 million.  

F-13


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In 2016, we entered into an agreement with BMS and Pfizer whereby they obtained exclusive rights to develop and commercialize andexanet alfa in Japan and we are responsible for certain research, development and manufacturing activities. As of June 30, 2017, we have milestone payments totaling up to $20.0 million that remain eligible for achievement upon certain regulatory events and up to $70.0 million which may be earned upon the achievement of specified annual net sales volumes in Japan in addition to royalties ranging from 5% to 15% on net sales of andexanet alfa in Japan. We continue to recognize non-contingent consideration received under the agreement on a straight-line basis over the period of performance, which is estimated to be through the fourth quarter of 2020. In the second quarter of 2017, we updated our estimated period of performance from the first quarter of 2019 to the fourth quarter of 2020 to reflect a modification to our clinical development and regulatory plans. The effect of this change in estimate was not significant. During the three and six months ended June 30, 2017 and 2016, we recognized $0.6 million and $1.8 million, and $1.2 million and $2.0 million in collaboration revenue under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $8.9 million.

Daiichi Sankyo, Inc. (“Daiichi Sankyo”)

In 2014, as amended in 2016, we entered into an agreement with Daiichi Sankyo to study andexanet alfa as a reversal agent to edoxaban. As of June 30, 2017, we have milestone payments totaling up to $12.5 million that remain eligible for achievement upon the occurrence of certain clinical events and patient enrollment targets.  We continue to recognize non-contingent consideration received under the agreement on a straight-line basis over the period of performance, which is estimated to be through the third quarter of 2018. The $8.0 million refundable portion of the upfront consideration is recorded as an obligation to collaborator and will be relieved as we make royalty payments or written off should we fail to commercialize andexanet alfa. During the three and six months ended June 30, 2017 and 2016, we recognized $1.8 million and $3.6 million, and $0.9 million and $4.3 million in collaboration revenue under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $9.0 million.

In 2016 we entered into an agreement with Daiichi Sankyo associated with the pursuit of regulatory approval of andexanet alfa as a reversal agent to edoxaban in Japan. As of June 30, 2017, we have milestone payments totaling up to $10.0 million eligible for achievement upon initial and final regulatory approval of andexanet alfa as a reversal agent to edoxaban in Japan. We continue to recognize non-contingent consideration received under the agreement on a straight-line basis over the period of performance, which is estimated to be through the fourth quarter of 2020. In the second quarter of 2017, we updated our estimated period of performance from the first quarter of 2019 to the fourth quarter of 2020 to reflect a modification to our clinical development and regulatory plans. The effect of this change in estimate was not significant. During the three and six months ended June 30, 2017 and 2016, we recognized $0.2 million and $0.6 million, and $0.4 million and $0.4 million in collaboration revenue under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $3.1 million.  

Bayer Pharma, AG (“Bayer”) and Janssen Pharmaceuticals, Inc. (“Janssen”)

In 2014, we entered into an agreement with Bayer and Janssen to study andexanet alfa as a reversal agent to rivaroxaban in our Phase 3 studies. As of June 30, 2017, we have milestone payments totaling up to $5.0 million that remain eligible for achievement upon the occurrence of certain events associated with scaling up our manufacturing process. We continue to recognize non-contingent consideration received under the agreement on a straight-line basis over the period of performance, which is estimated to be through the third quarter of 2018. In the second quarter of 2017 we updated our estimated period of performance from the first quarter of 2018 to the third quarter of 2018 to reflect a modification to our clinical development and regulatory plans. The effect of this change in estimate was not significant. During the three and six months ended June 30, 2017 and 2016, we recognized $0.5 million and $1.3 million, and $0.8 million and $4.1 million in collaboration revenue including milestone payment under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $2.7 million.

F-14


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Bayer Pharma, AG (“Bayer”)

In 2016, we entered into an agreement with Bayer associated with the pursuit of regulatory approval of andexanet alfa as a reversal agent to rivaroxaban in Japan. As of June 30, 2017, the $10.0 million milestone payment associated with regulatory approval of andexanet alfa as a reversal agent to rivaroxaban in Japan remains eligible for achievement. We continue to recognize non-contingent consideration received under the agreement on a straight-line basis over the period of performance, which is estimated to be through the fourth quarter of 2020. In the second quarter of 2017, we updated our estimated period of performance from the first quarter of 2019 to the fourth quarter of 2020 to reflect a modification to our clinical development and regulatory plans. The effect of this change in estimate was not significant. During the three and six months ended June 30, 2017 and 2016, we recognized $0.2 million and $0.6 million, and $0.4 million and $0.7million in collaboration revenue under this agreement, respectively. The deferred revenue balance under this agreement as of June 30, 2017 was $3.0 million.

 

 

6. Purchase Commitments

Commercial Supply Agreement

In 2016, we entered into an Amended Restated Commercial Supply Agreement (“aCSA”) with CMC ICOS Biologics, Inc. (“CMC”), a subsidiary of AGC Asahi Glass, that amends and restates the terms of the original Commercial Supply Agreement. We have made firm orders to manufacture 20 batches in 2017 and are required to make a non-refundable manufacturing reservation payment of $2.5 million for ten batches to be manufactured in 2018 contingent upon CMC’s successful delivery of services related to our BLA re-submission to the FDA.

Pursuant to the terms of the aCSA, we received a $33.7 million credit, which may be applied to either satisfy or partially offset specified amounts owed to CMC for services rendered under the aCSA, existing obligations/payables to CMC as of the execution date and future services to be rendered through December 31, 2017. For the three and six months ended June 30, 2017, the Company utilized $1.5 million and $5.3 million of these credits as a reduction of R&D expense to settle accounts payable and accrued liabilities related to specified services rendered by CMC.

 

Under the consolidation guidance, we determined that CMC is a VIE and we are not the primary beneficiary and therefore consolidation of CMC is not required. As of June 30, 2017, we have not provided financial or other support to CMC that was not previously contractually required. We have recorded $0.3 million of accounts payable and $1.0 million of prepaid manufacturing services in our condensed consolidated balance sheet as of June 30, 2017. Our agreement with CMC does not require us to fund operations at CMC and therefore, we quantify our maximum exposure to loss as the aggregate value of prepaid manufacturing services as of June 30, 2017. Further, we believe that our total exposure to losses associated with the fixed pricing terms of this agreement is de minimis given the cost per batch, number of batches and time frame over which the batches will be manufactured, pursuant to the amended agreement.         

Betrixaban Manufacturing Agreement

 

In 2016 we entered into a Manufacturing Agreement, as amended, with Hovione, Limited, (“Hovione”), pursuant to which Hovione will manufacture active pharmaceutical ingredient for betrixaban at commercial scale and perform process validation during the term of the agreement. As of June 30, 2017, we have recorded $6.2 million in prepaid expenses and other current assets and $6.3 million in prepaid and other long-term under the agreement, and will make up to $15.2 million of additional cancellable and non-cancellable payments throughout the term of the Hovione Agreement, ending June 2018.

 

 

F-15


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

7. Asset Acquisition and License Agreements

SRX Cardio, LLC

In 2016 we entered into an exclusive license agreement with SRX Cardio, LLC (“SRX Cardio”) to explore a novel approach to develop a drug in the field of hypercholesterolemia. We determined that SRX Cardio is, and as of June 30, 2017, continues to be a variable interest entity that requires consolidation. Accordingly, we have consolidated the financial statements of SRX Cardio since inception of the agreement on December 1, 2015 by (a) eliminating all intercompany balances and transactions; and (b) allocating loss attributable to the noncontrolling interest in SRX Cardio to net loss attributable to noncontrolling interest in our consolidated statement of operations and reflecting noncontrolling interest on our consolidated balance sheet. Our interest in SRX Cardio is limited to the development of the intellectual property asset.

As of June 30, 2017, we have not provided financial or other support to SRX Cardio that was not previously contracted or required. We recorded SRX Cardio’s $0.2 million of cash as restricted cash because (a) we do not have any interest in or control over SRX Cardio's cash and (b) the agreement does not provide for these assets to be used for the development of the intellectual property assets developed pursuant to this agreement. We recorded $0.2 million as net income attributable to noncontrolling interest (SRX Cardio) for the three and six months ended June 30, 2017 on our condensed consolidated statements of operations, reflecting a change in fair value of our contingent payment liability to SRX Cardio as of June 30, 2017. Should the development program make substantive advancement, we expect to record increases in the fair value of the contingent milestone and royalty payments with a corresponding increase to net loss or decrease to net income attributable to Portola.

Millennium Pharmaceuticals, Inc. (“Millennium”)

In August 2004, we entered into an agreement to license from Millennium certain exclusive rights to research, develop and commercialize certain compounds that inhibit Factor Xa, including betrixaban. The license agreement requires us to make license fee, milestone, royalty and sublicense sharing payments to Millennium as we develop, commercialize or sublicense betrixaban. The license agreement will continue in force, on a country-by-country basis, until the expiration of the relevant patents or ten years after the launch, whichever is later, during such time a tiered single-digit royalty rate will apply to net product sales. This license agreement may be terminated by either party for the other party’s uncured material breach. In addition, we may terminate this agreement for convenience with 30 days’ advance written notice.

Under the agreement, milestone payments are determined based on the indication included in our filing and become payable upon acceptance of our new drug application, or NDA, and regulatory approval in the United States and Europe. In December 2016, the FDA accepted our NDA for betrixaban for extended-duration prophylaxis of venous thromboembolism, triggering a $2.0 million milestone payment to Millennium which is recorded as a research and development expense in our consolidated statement of operations. In June 2017, betrixaban received regulatory approval in the United States, triggering a $5.0 million milestone payment to Millennium which is recorded as finite-lived intangible assets in our condensed consolidated balance sheet and will be amortized on a straight-line basis over the remaining estimated useful life. Amortization expense was immaterial for the three and six months ended June 30, 2017. Should betrixaban receive regulatory approval in Europe, another $5.0 million will become payable for such approval event.     

An additional $23.0 million in milestone payments would become due if betrixaban was approved in the United States and Europe for other indications specified in the agreement.

 

 

 

8. Long-term Debt

Note Payable

In December 2016, we entered into a supplemental funding support agreement with BMS and Pfizer whereby we received $50.0 million in exchange for two promissory notes totaling $65.0 million that become due in December 2024. The use of funds is restricted to development activities needed for regulatory approval of andexant alfa by the FDA and European Medicines Agency (“EMA”) as provided for in the agreement.

F-16


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Pursuant to the terms of the agreement, we are required to pay down the note each quarter in an amount equal to 5% of net sales of andexanet alfa in the United States and European Union (“EU”). Should the initial regulatory approval of andexanet alfa in the USA and EU not be achieved by January 1, 2019, one hundred percent of payments due to us under the Japan License agreement and fifty percent of all other andexanet alfa license fees and milestone payments received from third party collaborators will be applied to the notes payable. In addition, if the approval of andexanet alfa in the United States and EU is not achieved by January 1, 2019, we are able to reduce the repayment amount to $60.0 million if such amount is paid by December 31, 2021 and regardless of the timing of regulatory approval, we may reduce the repayment amount to $62.5 million if such amount is paid by December 31, 2023.  Any unpaid amounts shall become immediately due upon: 1) a change of control of our company; 2) an event of default; and 3) termination for breach. We have the right to prepay the repayment amount at any time without any penalty.

The accounting for such funding agreement requires us to make certain estimates and assumptions, including timing of andexanet alfa approval, timing of royalty payments due to BMS and Pfizer, the expected rate of return to BMS and Pfizer, the split between current and long-term portions of the obligation and accretion of related interest expense.

The upfront cash receipt of $50.0 million is recorded as notes payable, long term at issuance. We are accruing for interest over the term of the related note. The carrying values of the notes payable at June 30, 2017 and December 31, 2016, including accrued interest of $1.9 million and $0.1 million, are $51.6 million and $49.8 million, respectively.

We evaluated the features of the notes payable and determined that certain features which require acceleration of payments such as pursuant to a change of control or an event of default, as well as the terms that adjust the total amount of interest required to be paid based upon the timing of initial regulatory approval in the United States and EU require bifurcation and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 3 to the condensed consolidated financial statements. The aggregate fair value of the embedded derivatives at issuance date was $0.3 million included in other long-term liabilities. We will remeasure the embedded derivatives to fair value each reporting period until the repayment, termination or maturity of the long-term note payable.  For the three and six months ended June 30, 2017, we recognized a gain of $22,000 and $57,000, respectively, upon remeasurement of the embedded derivatives.

The estimated fair value of the note payable at June 30, 2017 was $57.5 million and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 3.    

          

Royalty-based Financing

In February 2017, we entered into a purchase and sale agreement (the “Royalty Sales Agreement”) with HealthCare Royalty Partners and its affiliates. (“HCR”) whereby HCR acquired a royalty interest in future worldwide net sales of andexanet alfa. We received $50.0 million upon closing and have the right to receive an additional $100.0 million if U.S. regulatory approval of andexanet alfa is received prior to October 2018.

We are required to pay HCR a royalty of 2.0% based on tiered net worldwide sales of andexanet alfa. If the additional $100.0 million is received from HCR, the tiered royalty rate will increase to a range of 7.85% to 3.58%, as the applicable rate decreases starting at worldwide net sales levels above $150 million. Total royalty payments are capped at 195% of the funded amount, however, the royalty rates are subject to increase if the timing of marketing and manufacturing approvals from the FDA is not received before the dates within 2018 specified in the Royalty Sales Agreement. If andexanet alfa is not approved for commercial sale the Company has no repayment obligations under this agreement. We have evaluated the terms of the Royalty Sales Agreement and concluded that the features of the funded amount are similar to those of a debt instrument.  Accordingly, we have accounted for the transaction as long-term debt.

As the repayment of the funded amount is contingent upon the sales volumes of andexanet alfa, the repayment term may be shortened or extended depending on the actual sales of andexanet alfa. The repayment period is commencing from the first commercial sale of andexanet alfa in any country and expiring on the date when HCR has received cash payments totaling an aggregate of 195% of the funded amounts.

F-17


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

We evaluated the terms of the debt and determined that certain features, such as the increase in the repayment amount up to $125.0 million upon a change of control and the variability in the royalty payments based upon the timing of initial regulatory approval in the United States and EU, are embedded derivatives that require bifurcation from the debt instrument and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 3 to these condensed consolidated financial statements. The Company will remeasure the embedded derivatives to fair value each reporting period until the time the features lapse and/or termination of the Royalty Sales Agreement. For the three and six months ended June 30, 2017, we recognized a loss of $0.7 million upon remeasurement of the embedded derivatives.    

The effective interest rate as of June 30, 2017 was 18.1%. For the three and six months ended June 30, 2017, accrued interest in the amount of $2.0 million and $3.3 million were added to the principal balance of the debt.

In connection with the Royalty Sales Agreement, we paid HCR a fee of $2.0 million and incurred additional debt issuance costs totaling $0.6 million, which includes expenses that we paid on behalf of HCR and expenses incurred directly by us. Debt issuance costs have been netted against the debt as of June 30, 2017 and are being amortized over the estimated term of the debt using the effective interest method. For the three and six months ended June 30, 2017, we recognized interest expense, including amortization of the debt discount, related to the debt of $2.0 million and $3.3 million. The assumptions used in determining the expected repayment term of the debt and amortization period of the issuance costs requires that we make estimates that could impact the short and long-term classification of these costs, as well as the period over which these costs will be amortized. The carrying value of the debt as of June 30, 2017 was $50.1 million, inclusive of accrued interest expense of $3.3 million and net of unamortized debt discount of $2.5 million.

The estimated fair value of long-term debt at June 30, 2017 was $47.6 million and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 3.     

 

 

9. Stock Based Compensation

In January 2013, our Board of Directors adopted our 2013 Equity Incentive Plan (the “2013 Plan”), which became effective upon  the closing of our initial public offering in May 2013. On January 1, 2017, the number of shares available for issuance under the 2013 Plan automatically increased by a number of shares equal to 5% of the total common stock outstanding at December 31, 2016. As of June 30, 2017, there were 15,032,633 shares reserved under the 2013 Plan for the future issuance of equity awards.  

Stock Options

The following table summarizes stock option activity under our 2013 Plan and related information during the six months ended June 30, 2017:

 

 

 

Shares

 

 

 

 

 

 

 

Subject to

 

 

Weighted-

 

 

 

Outstanding

 

 

Average Exercise

 

 

 

Options

 

 

Price Per Share

 

Balance at December 31, 2016

 

 

5,817,116

 

 

$

25.26

 

Options granted

 

 

1,259,150

 

 

 

29.05

 

Options exercised

 

 

(757,573

)

 

 

11.42

 

Options canceled

 

 

(142,391

)

 

 

33.90

 

Balance at June 30, 2017

 

 

6,176,302

 

 

$

27.53

 

 

F-18


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Performance Stock Options (“PSOs”)

 

In May 2016, the Compensation Committee of our Board of Directors approved the commencement of granting performance stock option awards to our executive and senior officers. PSOs represent a contingent right to purchase our Common Stock upon achievement of specified conditions. The PSOs granted in May 2016 will vest upon the achievement of certain regulatory and manufacturing goals related to our lead programs. As of June 30, 2017, there was $0.7 million of unrecognized compensation costs related to the PSOs which management currently estimates to be probable of vesting and which we estimate will be recognized over a weighted-average period of 0.42 years.

 

The following table summarizes PSO activity under our 2013 Plan and related information during the six months ended June 30, 2017:

 

 

 

Shares

 

 

 

 

 

 

 

Subject to

 

 

Weighted-

 

 

 

Outstanding

 

 

Average Exercise

 

 

 

Options

 

 

Price Per Share

 

Balance at December 31, 2016

 

 

180,752

 

 

$

23.76

 

Options granted

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

Options canceled

 

 

 

 

 

 

Balance at June 30, 2017

 

 

180,752

 

 

$

23.76

 

 

Restricted Stock Units (“RSUs”)

In January 2015, the Compensation Committee of our Board of Directors approved the commencement of granting restricted stock units, to our employees. RSUs are share awards that entitle the holder to receive freely tradable shares of our Common Stock upon vesting.

The following table summarizes RSU activity, under our 2013 Plan and related information:

 

 

 

Shares

 

 

 

 

 

 

 

Subject to

 

 

Weighted-

 

 

 

Outstanding

 

 

Average grant date

 

 

 

RSUs

 

 

fair value per share

 

Balance at December 31, 2016

 

 

546,507

 

 

$

28.38

 

RSUs granted

 

 

335,050

 

 

 

26.41

 

RSUs released

 

 

(211,882

)

 

 

28.26

 

RSUs canceled

 

 

(23,022

)

 

 

27.42

 

Balance at June 30, 2017

 

 

646,653

 

 

$

27.43

 

 

Performance Stock Units (“PSUs”)

In January 2015, the Compensation Committee of our Board of Directors approved the commencement of granting performance stock units to our employees. PSUs are share awards that entitle the holder to receive freely tradable shares of our Common Stock upon achievement of specified conditions. In January 2016, the Compensation Committee of our Board of Directors approved a program to award up to 102,906 PSUs to the management team based on the achievement of certain commercial and regulatory goals related to andexanet alfa and betrixaban, respectively. In January 2017, the Compensation Committee of our Board of Directors approved a program to award up to 143,750 PSUs to the management team based on the achievement of certain regulatory goals related to andexanet alfa.

 

As of June 30, 2017, there was $0.2 million of unrecognized compensation costs related to the PSUs which management currently estimates to be probable of vesting and which we currently estimate will be recognized over a weighted-average period of 0.16 years.

 

F-19


PORTOLA PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes PSU activity, under our 2013 Plan and related information:

 

 

 

Shares

 

 

 

 

 

 

 

Subject to

 

 

Weighted-

 

 

 

Outstanding

 

 

Average grant date

 

 

 

PSUs

 

 

fair value per share

 

Balance at December 31, 2016

 

 

285,866

 

 

$

29.24

 

PSUs granted

 

 

143,750

 

 

 

25.54

 

PSUs released

 

 

(8,917

)

 

 

50.30

 

PSUs canceled

 

 

(52,281

)

 

 

33.76

 

Balance at June 30, 2017

 

 

368,418

 

 

$

26.64

 

 

 

The table below sets forth the functional classification of stock-based compensation expense, net of estimated forfeitures, for the periods presented (in thousands):  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

6,670

 

 

$

3,066

 

 

$

10,820

 

 

$

6,096

 

Selling, general and administrative

 

 

6,587

 

 

 

4,556

 

 

 

11,471

 

 

 

8,595

 

Total stock-based compensation

 

$

13,257

 

 

$

7,622

 

 

$

22,291

 

 

$

14,691

 

 

 

10. Net Loss per Share Attributable to Portola Common Stockholders

Basic net loss per share attributable to Portola Common Stockholders has been computed by dividing the net loss attributable to Portola Common Stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per share attributable to Portola Common Stockholders is calculated by dividing net loss attributable to Portola Common Stockholders by the weighted average number of shares of Common Stock and potential dilutive securities outstanding during the period.

The following common stock equivalent shares were excluded from the computation of diluted net loss per share attributable to Portola Common Stockholders for the three and six months ended June 30, 2017 and 2016 because including them would have been anti-dilutive:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Stock options to purchase common stock

 

 

6,176,302

 

 

 

5,969,370

 

 

 

6,176,302

 

 

 

5,969,370

 

Performance stock options

 

 

180,752

 

 

 

271,122

 

 

 

180,752

 

 

 

271,122

 

Common stock warrants

 

 

1,500

 

 

 

1,500

 

 

 

1,500

 

 

 

1,500

 

Restricted stock units

 

 

646,653

 

 

 

585,989

 

 

 

646,653

 

 

 

585,989

 

Performance stock units

 

 

368,418

 

 

 

290,756

 

 

 

368,418

 

 

 

290,756

 

Employee stock purchase plan

 

 

22,982

 

 

 

25,457

 

 

 

22,982

 

 

 

25,457

 

 

 

11. Subsequent events

 

In July 2017, the Board of Directors approved the Portola Pharmaceuticals, Inc. Inducement Plan, including a share reserve of 1.5 million shares of common stock. The Inducement Plan allows for stock options and restricted stock units to be granted to new employees on substantially the same terms for those awards as our 2013 Equity Incentive Plan. The Inducement Plan was principally adopted to accommodate a reserve of additional shares of common stock for issuance to new employees hired to support commercial operations following the FDA’s approval of Bevyxxa.

 

 

 

F-20


 

ITEM 2.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2016.

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

OVERVIEW

We are a biopharmaceutical company focused on the development and commercialization of novel therapeutics in the areas of thrombosis, other hematologic disorders and inflammation for patients who currently have limited or no approved treatment options. We are advancing three programs, including Bevyxxa® (betrixaban), an oral once-daily anticoagulant Factor Xa, or fXa, inhibitor, andexanet alfa (proposed tradename AndexXa®), a recombinant protein designed to reverse the anticoagulant effect in patients treated with an oral or injectable fXa inhibitor, and cerdulatinib, a spleen tyrosine kinase, or Syk, and Janus kinases, or JAK, inhibitor in development to treat hematologic cancers.

On June 23, 2017, we received marketing approval from the U.S. Food and Drug Administration, or FDA, for Bevyxxa, for the prophylaxis of venous thromboembolism, or VTE, in adult patients hospitalized for an acute medical illness who are at risk for thromboembolic complications due to moderate or severe restricted mobility and other risk factors for VTE. We expect to launch Bevyxxa in the United States between September and November 2017. During this period, we will complete salesforce hiring and training, drug manufacturing validation and inventory buildup. Our Marketing Authorization Application or MAA, for betrixaban to the Committee for Medicinal Products for Human Use of the European Medicine Agency, or EMA, was accepted in December 2016 under a standard review period.

Our second lead compound, andexanet alfa, an FDA-designated breakthrough therapy and orphan drug, is a recombinant protein designed to reverse anticoagulant activity in patients treated with a fXa inhibitor. Andexanet alfa has potential indications for patients anticoagulated with a direct or indirect fXa inhibitor when reversal of anticoagulation is needed, such as in life-threatening or uncontrolled bleeding or for emergency surgery or urgent procedures. We have completed Phase 3 registration studies in healthy volunteers and are conducting a Phase 4 confirmatory trial in patients. In August 2017, we re-submitted a Biologics License Application, or BLA, with the FDA after addressing issues communicated to us in a Complete Response Letter, or CRL from the FDA, received in August 2016. While the BLA is under review, we are building reserves of bulk drug substance from our first generation manufacturing process and continuing to advance our generation 2 manufacturing process which will enable us to produce commercial quantities of andexanet alfa. Our MAA was filed with the EMA in the third quarter of 2016 and is currently under review.

Our third product candidate, cerdulatinib, is an orally available dual kinase inhibitor that inhibits spleen tyrosine kinase, or Syk, and Janus kinases, or JAK, enzymes that regulate important signaling pathways that promote cell growth in certain cancers. Cerdulatinib is being developed for hematologic, or blood, cancers and inflammatory disorders. We are currently evaluating the safety and efficacy of cerdulatinib in a Phase 2a proof-of-concept study in patients with non-Hodgkin’s lymphoma, or NHL, or chronic lymphocytic leukemia, who have failed or relapsed on existing marketed therapies or products in development, including patients with identified mutations. On June 15, 2017, we announced the presentation of the interim results of this Phase 2a study demonstrating evidence of activity of cerdulatinib in patients with relapsed/refractory chronic lymphocytic leukemia, or CLL, follicular lymphoma, and peripheral T cell lymphoma.

21


 

In addition to our three lead product candidates, we have other early research and development programs, including a collaboration with Ora Inc. for the development of Syk-selective inhibitors for allergic conjunctivitis and an exclusive in-license agreement with SRX Cardio LLC to explore a novel approach to develop a drug in the field of hypercholesterolemia.

Financial operations overview

Revenue

Our revenue to date has been generated from collaboration and license revenue pursuant to our collaboration agreements.  We have not generated any revenue from commercial product sales to date.  We may be entitled to additional milestone payments and other contingent payments upon the occurrence of specific events. Due to the nature of these collaboration agreements and the nonlinearity of the earnings process associated with certain payments and milestones, we expect that our revenue will continue to fluctuate in future periods.

In the future, we may receive revenue from the sale of Bevyxxa in the United States or our other product candidates, if approved. Betrixaban and andexanet alfa are currently under review by the EMA. We recently re-submitted a Biologics License Application, or BLA, with the FDA for andexanet alfa.

The following table summarizes the sources of our collaboration and license revenue (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

BMS and Pfizer

 

$

1,027

 

 

$

1,733

 

 

$

2,785

 

 

$

2,987

 

Daiichi Sankyo

 

 

2,012

 

 

 

1,297

 

 

 

4,194

 

 

 

4,681

 

Bayer and Janssen

 

 

538

 

 

 

807

 

 

 

1,336

 

 

 

4,115

 

Bayer

 

 

210

 

 

 

394

 

 

 

600

 

 

 

654

 

Other

 

 

 

 

 

 

 

 

 

 

52

 

Total collaboration and license revenue

 

$

3,787

 

 

$

4,231

 

 

$

8,915

 

 

$

12,489

 

 

Research and development expenses

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our un-partnered product candidates, as well as discovery and development of clinical candidates pursuant to our collaboration agreements. We recognize all research and development costs as they are incurred. Our research and development expenses may increase or decrease by amounts we may pay or receive under various cost-sharing provisions of our collaboration and license agreements.

We expect our research and development expenses to be similar or slightly lower in the near term as our late stage thrombosis programs work through the regulatory approval process and we prepare for commercialization. Also, if or when we receive regulatory approval of our product candidates, associated manufacturing costs will be capitalized as inventory and subsequently expensed as costs of goods sold when the inventory is sold. Further, expenses incurred for setting up additional manufacturing facilities may be categorized as research and development expense or as manufacturing start-up costs, a component of operating expenses, based on the significance of the process changes and enhancements at the additional manufacturing facility. The timing and amount of expenses incurred will depend upon FDA approval and the outcomes of current or future clinical studies for our product candidates as well as the related regulatory requirements, start-up manufacturing and supply chain costs and any costs associated with the advancement of our preclinical programs.

22


 

The following table summarizes our research and development expenses incurred by product candidate:

 

 

 

Phase of

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

Development

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

(in thousands)

 

 

(in thousands)

 

Product candidate

 

 

 

(unaudited)

 

 

(unaudited)

 

Betrixaban

 

Phase 3

 

$

14,450

 

 

$

10,794

 

 

$

28,908

 

 

$

26,228

 

Andexanet alfa

 

Phase 2/3/4

 

 

30,495

 

 

 

30,552

 

 

 

43,718

 

 

 

70,893

 

Cerdulatinib

 

Phase 1/2a

 

 

3,333

 

 

 

2,186

 

 

 

5,185

 

 

 

4,548

 

Syk selective inhibitor

 

Pre-clinical

 

 

50

 

 

 

68

 

 

 

89

 

 

 

88

 

Other research and development expenses(1)

 

 

 

 

964

 

 

 

1,223

 

 

 

2,037

 

 

 

1,879

 

Total research and development expenses

 

 

 

$

49,292

 

 

$

44,823

 

 

$

79,937

 

 

$

103,636

 

 

(1)

Amounts in all periods include costs for other potential product candidates.

 

The program-specific expenses summarized in the table above include costs directly attributable to our product candidates. We allocate research and development salaries, benefits, stock-based compensation and indirect costs to our product candidates on a program-specific basis, and we include these costs in the program-specific expenses. The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development and manufacturing of our product candidates.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, human resources, audit and accounting services and sales and marketing expenses related to commercial launch preparation. Personnel costs consist of salaries, benefits and stock-based compensation. In addition, we will incur significant additional expenses associated with the establishment of a hospital-based sales force in the United States and possibly other major markets, as well as commercial infrastructure initiatives including information technology systems quality and compliance systems, and personnel support for commercial operations.

Interest and other income (expense), net

Interest and other income (expense), net, consists primarily of interest received on our cash, cash equivalents and investments.

Interest expense

Interest expense consists of amounts accrued pursuant to our long-term debt and notes payable balances outstanding during the period.  

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 consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except as noted below, there have been no significant and material changes in our critical accounting policies during the six months ended June 30, 2017, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 1, 2017.

23


 

Interest expense

In the fourth quarter of 2016 and first quarter of 2017, we entered into two financing arrangements that, under relevant accounting literature, are required to be recorded as debt (see Note 8, Long-Term Debt). Both arrangements are eligible to be repaid based on royalties from our yet to be marketed product candidate, andexanet alfa. The recognition of interest expense requires us to estimate the total amount of future royalty payments to be generated from product sales by jurisdiction over the life of the agreements. The sum of the amounts paid to our financing partners less the net proceeds we received will be recorded as interest expense over the life of the agreements. Consequently, we impute interest on the carrying value of the notes payable and long-term debt and record interest expense using an imputed effective interest rate. We reassess the expected royalty payments each reporting period and account for any changes through an adjustment to the effective interest rate on a prospective basis, with a corresponding impact to the classification of our debt and note payable liabilities.

Results of operations

Comparison of the three and six months ended June 30, 2017 and 2016  

Revenue

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Decrease

 

 

% Decrease

 

 

2017

 

 

2016

 

 

Decrease

 

 

% Decrease

 

 

 

(in thousands, except percentages)

 

Collaboration and license revenue

 

$

3,787

 

 

$

4,231

 

 

$

(444

)

 

 

(10

%)

 

$

8,915

 

 

$

12,489

 

 

$

(3,574

)

 

 

(29

%)

 

The decrease in collaboration and license revenue during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was primarily attributable to extending our estimated performance period for collaboration agreements to reflect a modification to our clinical development and regulatory plans.   

 

The decrease in collaboration and license revenue during the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was mainly due to $5.0 million in milestone revenues recognized in 2016 partially offset by $1.8 million of revenues recognized in 2017 associated with an amendment we entered into during the fourth quarter of 2016 to our existing phase 3 collaboration with Daiichi Sankyo.

Research and development expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Increase

 

 

% Increase

 

 

2017

 

 

2016

 

 

Decrease

 

 

% Decrease

 

 

 

(in thousands, except percentages)

 

Research and development expenses

 

$

49,292

 

 

$

44,823

 

 

$

4,469

 

 

 

10

%

 

$

79,937

 

 

$

103,636

 

 

$

(23,699

)

 

 

(23

%)

 

The increase in research and development expenses during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was primarily attributable to:

 

increased program costs of $3.6 million related to betrixaban,  largely due to an increase in manufacturing costs to produce betrixaban active pharmaceutical ingredient incurred in 2017 and prior to FDA approval; and

 

increased program costs of $1.1 million related to cerdulatinib.  

 

The decrease in research and development expenses during the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was primarily attributable to:

 

decreased program costs of $27.1 million related to andexanet alfa. This decrease was largely attributable to lower manufacturing costs following the discontinuation of the 6x2000 liter, or Line C, manufacturing process, as well as decreased generation 2 manufacturing expenses, as our validation batches were substantially complete prior to 2017.

 

24


 

Selling, general and administrative expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Increase

 

 

% Increase

 

 

2017

 

 

2016

 

 

Increase

 

 

% Increase

 

 

 

(in thousands, except percentages)

 

Selling, general and administrative expenses

 

$

20,329

 

 

$

17,044

 

 

$

3,285

 

 

 

19

%

 

$

35,350

 

 

$

31,795

 

 

$

3,555

 

 

 

11

%

 

The increase in selling, general and administrative expenses during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was primarily attributable to increased headcount-related costs of $2.2 million, inclusive of an increase in stock-based compensation expense of $2.0 million, as well as increased commercial launch preparation activities and business development related costs of $1.3 million.

 

The increase in selling, general and administrative expenses during the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was primarily attributable to increased headcount-related costs of $3.4 million, inclusive of an increase in stock-based compensation expense of $2.8 million, as well as increased commercial launch preparation activities and business development related costs of $1.1 million. These increases were partially offset by decreased costs associated with professional, accounting fees and other expense of $0.8 million.

 

Interest and other income (expense), net

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Decrease

 

 

% Decrease

 

 

2017

 

 

2016

 

 

Decrease

 

 

% Decrease

 

 

 

(in thousands, except percentages)

 

Interest and other income (expense), net

 

$

(124

)

 

$

297

 

 

$

(421

)

 

 

(142

%)

 

$

289

 

 

$

629

 

 

$

(340

)

 

 

(54

%)

 

The decrease in interest and other income (expense), net during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was primarily due to the remeasurement of the embedded derivatives of $0.7 million associated with certain terms in our two financing arrangements, partially offset by a decrease in foreign exchange losses of $0.2 million as a result of fluctuations in the Euro and Pound sterling compared to the U.S. dollar and its impact on services we purchase from vendors denominated in foreign currencies.  

The decrease in interest and other income (expense), net, during the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was primarily due to remeasurement of the embedded derivatives liabilities of $0.7 million, partially offset by a decrease in foreign exchange losses of $0.3 million and an increase in interest income of $0.1 million due to higher investment balances in 2017.

 

Interest expense

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Increase

 

 

% Increase

 

 

2017

 

 

2016

 

 

Increase

 

 

% Increase

 

 

 

(in thousands, except percentages)

 

Interest expense

 

$

3,456

 

 

$

 

 

$

3,456

 

 

 

100

%

 

$

5,095

 

 

$

 

 

$

5,095

 

 

 

100

%

 

The increase in interest expense during the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 was due to new debt incurred in the fourth quarter of 2016 and first quarter of 2017.  We had no outstanding debt during the first half of 2016.

     

25


 

Liquidity and capital resources

Due to our significant research and development expenditures, we have generated significant operating losses since our inception. We have financed our operations primarily through sales of our equity securities, collaborations, including loans from our collaboration partners, a royalty-based financing arrangement, and sales of commercial and development rights to some of our product candidates. Our expenditures are primarily related to research and development activities, including clinical trial and manufacturing related costs, and commercial preparation costs. At June 30, 2017, we had available cash, cash equivalents and investments of $269.7 million. Our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, including investments backed by U.S. government agencies, corporate debt securities and money market accounts. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

In light of estimated costs to support the launch of our recently approved product, Bevyxxa, we now estimate our existing capital resources, together with interest thereon, to be sufficient to meet our projected operating requirements into the first quarter of 2018. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital other than the $100.0 million payment from HCR contingent upon the FDA’s approval of andexanet alfa and potential milestones receivable under our current collaboration and license agreements. In order to support the launch as well as to continue advancing our other product candidates on a long-term basis, we plan to supplement anticipated cash receipts through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and/or other marketing and distribution arrangements. Our future funding requirements will depend on many factors, including the following:

 

the cost, timing and outcomes of regulatory approvals;

 

the cost of manufacturing our product candidates, including process improvements in order to manufacture product candidates at commercial scale, and establishing commercial supplies of our product candidates;

 

the cost and timing of establishing sales, marketing and distribution capabilities;

 

the timing, receipt and amount of sales, profit sharing or royalties, if any, from our potential products;

 

the terms and timing of any other collaborative, licensing and other arrangements that we may establish;

 

the receipt of any collaboration payments;

 

the number and characteristics of product candidates that we pursue;

 

the scope, rate of progress, results and cost of our clinical studies, preclinical testing and other related activities;

 

the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

 

the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

When we seek to raise additional capital to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical studies, research and development programs or commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

26


 

The following table summarizes our cash flows for the periods indicated:

 

 

 

Six Months Ended June 30,

 

 

Increase /

 

 

% Increase /

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

(Decrease)

 

 

 

(in thousands, except percentages)

 

Cash used in operating activities

 

$

(100,533

)

 

$

(105,206

)

 

$

(4,673

)

 

 

(4

%)

Cash provided by (used in) investing activities

 

$

(21,176

)

 

$

57,335

 

 

$

(78,511

)

 

 

(137

%)

Cash provided by financing activities

 

$

57,066

 

 

$

730

 

 

$

56,336

 

 

 

7717

%

Net (decrease) increase in cash

 

$

(64,643

)

 

$

(47,141

)

 

$

(17,502

)

 

 

37

%

 

Cash used in operating activities

Cash used in operating activities was $100.5 million for the six months ended June 30, 2017, compared to cash used of $105.2 million for the same period in 2016. Operating cash flows can differ from our condensed consolidated net loss as a result of differences in the timing of cash receipts and non-cash charges.

Cash used in operating activities for the six months ended June 30, 2017 includes payments made to our contract manufacturing organizations for the manufacture of andexanet alfa and betrixaban totaling $20.5 million and $9.0 million, respectively, $50.3 million of disbursements to third party vendors to support routine research and development and selling and general and administrative operations, and $19.3 million in payroll and related employee costs.   

Cash used in operating activities for the six months ended June 30, 2016 related primarily to our $122.3 million of operating expenses for the period, excluding non-cash expenses for stock based compensation, depreciation and amortization of investment securities premium totaling to $16.4 million. Our operating expenses were largely attributable to the continued development of our late stage programs. Cash used in operating activities was partially offset by receipts of $20.0 million in upfront payments from collaboration arrangements executed during the first quarter of 2016 and $5.0 million in cash receipts following achievement of milestones from existing collaboration arrangements.  

 

Cash provided by (used in) investing activities

Cash used in investing activities was $21.2 million for the six months ended June 30, 2017, compared to $57.3 million of cash provided for the same period in 2016.

Cash used in investing activities for the six months ended June 30, 2017 was primarily related to investments of $186.4 million, intangible assets purchase of $5.0 million and fixed assets purchase of $0.3 million, partially offset by proceeds from maturities of investments of $170.5 million.

Cash provided by investing activities for the six months ended June 30, 2016 was primarily related to proceeds from maturities of investments of $214.4 million, partially offset by purchases of investments of $155.4 million and fixed assets purchases of $1.8 million.

Cash provided by financing activities

Cash provided by financing activities was $57.1 million for the six months ended June 30, 2017, compared to $0.7 million of cash provided for the same period in 2016.

Cash provided by financing activities of $57.1 million for the six months ended June 30, 2017 was related to net proceeds from debt issuance of $48.0 million and proceeds from purchases under our Employee Stock Purchase Plan of $1.0 million and exercises of stock options of $8.7 million. These cashflows were partially offset by payments of debt issuance costs of $0.6 million.

Cash provided by financing activities of $0.7 million for the six months ended June 30, 2016 was related to proceeds from purchases under our Employee Stock Purchase Plan of $0.7 million and proceeds from the exercise of stock options of $0.2 million, partially offset by payments of deferred offering costs of $0.2 million relating to our December 2015 public offering.

 

 

27


 

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of June 30, 2017, we had cash, cash equivalents and investments of $269.7 million consisting of cash and liquid investments deposited in highly-rated financial institutions in the United States. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We actively monitor changes in interest rates.

We contract for the conduct of certain clinical development, manufacturing, regulatory and commercialization activities with vendors in Europe.  We made payments in the aggregate amount of €11.1 million and €0.9 million to our European vendors during the six months ended June 30, 2017 and 2016, respectively. We are subject to exposure due to fluctuations in foreign exchange rates in connection with these agreements and with our cash balance denominated in Euros and British Pounds, to a lesser extent. For the six months ended June 30, 2017, the effect of the exposure to these fluctuations in foreign exchange rates was not material.

ITEM 4:

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2017. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

28


 

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

Item 1A.

RISK FACTORS.  

Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this report, including our financial statements and notes thereto, before you invest in our common stock. If any of the following risks actually materializes, our operating results, future prospects, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

In assessing these risks, you should also refer to other information contained in this quarterly report on Form 10-Q, including our Condensed Consolidated Financial Statements and related Notes. We have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described in our annual report on Form 10-K for the year ended December 31, 2016.

RISKS RELATED TO OUR FINANCIAL CONDITION AND NEED FOR ADDITIONAL CAPITAL

*We have incurred significant losses and expect to incur substantial additional losses as we continue to develop and commercialize our product candidates.

We are an early stage commercial biopharmaceutical company preparing to launch our first commercial product. Bevyxxa is our only approved product, and we continue to continue incur significant expenses related to the planned commercialization of Bevyxxa, the funding of our ongoing and planned future clinical studies and other research and development activities, and selling, general and administrative activities. As of June 30, 2017, we had an accumulated deficit of approximately $1.0 billion.

To date, we have financed our operations primarily through sales of our equity securities, collaborations, including a loan from one of our collaboration partners, the sale of a royalty stream from future product sales, sales of commercial and development rights to some of our product candidates and, to a lesser extent, government grants, equipment leases, venture debt and the benefit of tax credits made available under a federal stimulus program supporting drug development. We have devoted substantially all of our efforts to research and development, including clinical studies. We anticipate that we will continue to incur substantial expenses as we:

 

establish and scale-up manufacturing capabilities and a sales, marketing and distribution infrastructure to commercialize Bevyxxa and other products for which we may obtain regulatory approval, including process improvements in order to manufacture andexanet alfa at commercial scale;

 

initiate or continue clinical studies of betrixaban and our two most advanced product candidates;

 

continue the research and development of our product candidates;

 

seek to discover or in-license additional product candidates;

 

seek regulatory approvals for our product candidates that successfully complete clinical studies; and

 

enhance operational, compliance, financial, quality and information management systems and hire more personnel, including personnel to support development of our product candidates and support our commercialization efforts.

To be profitable in the future, we must succeed in commercializing Bevyxxa and developing and commercializing other products with significant market potential. This will require us to be successful in a range of activities, including advancing our product candidates, completing clinical studies of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling Bevyxxa and those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may not succeed in these activities and may never generate revenue that is sufficient to be profitable in the future. Even if we are profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve sustained profitability would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product candidates, market our product candidates, if approved, or continue our operations.

29


 

*Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to the recent approval by the FDA of Bevyxxa and the absence of historical sales data, Bevyxxa sales will be difficult to predict from period to period and as a result, you should not rely on Bevyxxa sales results in any period as being indicative of future performance and sales of Bevyxxa may be below the expectation of securities analysts or investors in the future. We believe that our quarterly and annual results of operations may be affected by a variety of factors relating to Bevyxxa, and andexanet alfa and cerdulatinib if approved, including:

 

the level of demand;

 

the extent to which coverage and reimbursement is available from government and health administration authorities, private health insurers, managed care programs and other third-party payors;

 

the timing, cost and level of investment in our marketing efforts to support sales;

 

the timing, cost and level of investment in our research and development activities involving approved products and product candidates;

 

the cost of manufacturing and the amount of legally mandated discounts to government entities, other discounts and rebates, product returns and other gross-to-net deductions;

 

the risk/benefit profile, cost and reimbursement of existing and potential future drugs which compete with approved products; and

 

expenditures that we will or may incur to acquire or develop additional technologies, product candidates and products.

In addition, from time to time, we enter into collaboration agreements with other companies that include development funding and upfront and milestone payments, and we expect that amounts earned from our collaboration agreements will continue to be an important source of revenue. These upfront and milestone payments may vary significantly from quarter to quarter and any such variance could cause a significant fluctuation in our operating results from one quarter to the next.

The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.

We will need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our product candidates and technologies.

We are launching commercial operations for our first product and advancing multiple product candidates through the research and clinical development process. The completion of development and commercialization of Bevyxxa or our product candidates will continue to require substantial funds. As of June 30, 2017, we had $269.7 million in cash, cash equivalents and investments. Our future financing requirements will depend on many factors, some of which are beyond our control, including the following:

 

the costs of commercialization activities, including product sales, marketing, manufacturing and distribution and general corporate and commercial infrastructure;

 

the timing of, and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities;

 

the possible development of additional product candidates, including through in-licensing and acquisitions;

 

the degree and rate of market acceptance of any products launched by us or future partners;

 

our ability to enter into additional collaboration, licensing, commercialization or other financing arrangements and the terms and timing of such arrangements;

 

the rate of progress and cost of our clinical studies; and

 

the emergence of competing technologies or other adverse market developments.

30


 

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other financing, marketing and distribution arrangements. Additional financing may not be available to us when we need it or it may not be available on favorable terms.

If we raise additional capital through financing, marketing and distribution arrangements or other collaborations, strategic alliances, licensing or other financial arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend one or more of our clinical studies, research and development programs or commercialization efforts.

RISKS RELATED TO THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES

*Our success depends heavily on the commercialization of Bevyxxa and the approval and successful commercialization of our product candidates andexanet alfa and cerdulatinib. Our commercialization and development of these product candidates may not be successful. If we are unable to commercialize one or more of our product candidates, or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of our efforts and financial resources into the development and commercialization of Bevyxxa, the development of andexanet alfa and, to a lesser extent, cerdulatinib and our selective Syk inhibitor program. Our ability to generate product revenue from Bevyxxa or from our product candidates, which will not occur until after regulatory approval, if ever, will depend on the successful development, regulatory approval and eventual commercialization of our product candidates. The success of our product candidates will depend on several factors, including the following:

 

our ability to reach agreement with the FDA and other regulatory authorities on the appropriate regulatory path for approval of our product candidates;

 

receipt of marketing approvals from the FDA and similar regulatory authorities outside the United States for our product candidates;

 

obtaining product indications and other labeling information that is acceptable to the medical community, third-party payors and patients;

 

our ability to manufacture product commercially at acceptable costs;

 

acceptance of any approved product by the medical community, third-party payors and patients;

 

establishing and maintaining commercial manufacturing arrangements with third parties;

 

commercializing any product candidate that may be approved, whether alone or in collaboration with others;

 

effectively competing with other therapies;

 

a continued acceptable safety profile of the product following approval;

 

successful enrollment in, and completion of, clinical studies; and

 

obtaining, maintaining, enforcing and defending intellectual property rights and claims.

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 our product candidates, which would materially harm our business.

*Bevyxxa and potential future product candidates may fail to achieve the degree of market acceptance by physicians, patients, healthcare payors and others in the medical community necessary for commercial success.

The commercial success of Bevyxxa and any potential future product candidates for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third-party payors as clinically useful, cost-effective and safe. The degree of market acceptance of any drug depends on a number of factors, such as:

 

the prevalence and severity of any side effects;

31


 

 

efficacy and potential advantages compared to alternative treatments;

 

the price we charge for our product candidates;

 

differing interpretations of the results of our clinical trials;

 

the willingness of physicians to change their current treatment practices;

 

the willingness of hospitals and hospital systems to include our product candidates as treatment options;

 

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; and

 

the availability of third-party coverage or reimbursement.

Failure to attain market acceptance among the medical community and third-party payors may have adverse impact on our operations and profitability. Although certain of our employees have commercialization experience, as a company we currently have only limited commercial capabilities. We may not be able to attract and retain qualified personnel to serve in our sales and marketing organization to effectively support our commercialization activities. If we are not successful in commercializing Bevyxxa or potential future product candidates in the event they receive regulatory approval, our future product revenue will suffer and we may incur significant additional losses.

*We currently have limited sales and distribution personnel and are in the initial stages of developing marketing capabilities for Bevyxxa. If we are unable to develop effective sales, marketing and distribution capabilities on our own or through collaborations or other marketing partners, we will not be successful in commercializing Bevyxxa, or andexanet alfa and our other future products.

We are in the early stages of developing our sales or marketing infrastructure and have limited to no history of selling, marketing or distributing therapeutic products. To achieve commercial success for Bevyxxa or any potential product candidate, we must continue to develop a sales and marketing organization or outsource these functions to third parties. We plan to establish a hospital-based sales force in the United States and possibly other major markets and work with partners in other parts of the world to commercialize Bevyxxa globally, and andexanet alfa if it is approved. There are risks involved with both establishing our own sales and marketing 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 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.

We also may not be successful entering into arrangements with third parties to sell and market our 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, which could damage our reputation. 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 product candidates.

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

The development and commercialization of new therapeutic products is highly competitive. We face competition with respect to commercializing Bevyxxa and developing our current product candidates, and will face competition with respect to any products that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. For example, several large pharmaceutical and biotechnology companies currently market and sell direct or indirect anticoagulants for use in various disease states, including injectable anticoagulants for the prevention of VTE in acutely ill medical patients. 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. Many of these competitors are attempting to develop therapeutics for our target indications.

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In addition, many of our competitors are large pharmaceutical companies that will have a greater ability to reduce prices for their competing drugs in an effort to gain or maintain market share and undermine the value proposition that we might otherwise be able to offer to payors.  Bevyxxa is indicated for the prophylaxis of VTE in adult patients hospitalized for an acute medical illness who are at risk for thromboembolic complications due to moderate or severe restricted mobility and other risk factors. The current standard of care for VTE prophylaxis in acute medically ill patients in the United States is a 6- to 14-day administration of enoxaparin, marketed as Lovenox® and also available in generic form, an indirect Factor Xa inhibitor. Enoxaparin is widely accepted by physicians, patients and third-party payors. As a result, we may face difficulties in marketing Bevyxxa as a substitute therapy in the hospital for the current standard of care, enoxaparin.

Furthermore, the FDA has already approved a number of therapies that, like Bevyxxa, are oral direct fXa inhibitors and that have already achieved substantial market acceptance. Although these products have not been approved for VTE prophylaxis in acutely ill medical patients, the owners of the products may decide to seek such approval or physicians may decide to prescribe these products for the treatment of VTE in acutely ill medical patients absent such approval, known as prescribing off-label. Further, our competitors may have the financial and other resources to conduct additional clinical studies in an effort to obtain regulatory approval for use of their drugs for VTE prophylaxis in acutely ill medical patients, even in cases where they have previously run clinical trials that have failed. For example, in March 2014, Bayer and Janssen announced the initiation of a new Phase 3 clinical trial to evaluate the safety and efficacy of rivaroxaban to reduce the risk of post-hospital discharge symptomatic VTE in patients hospitalized for acute medical illness.

While there are no therapies approved specifically as antidotes for fXa inhibitors, we are aware of at least one drug candidate that has been studied in early stage clinical trials as a potential antidote to fXa inhibitors. In addition, in December 2014, Bristol-Myers Squibb Company and Pfizer Inc. announced that a clinical trial of 15 healthy human subjects demonstrated that two 4-factor prothrombin complex concentrates reversed the steady-state pharmacodynamic effects of Eliquis (apixaban) in several coagulation assessments. Andexanet alfa, if approved, may compete with other currently approved treatments designed to enhance coagulation, such as fresh frozen plasma, prothrombin complex concentrates, recombinant Factor VIIa or whole blood. Although there is no clinical evidence supporting the use of such treatments in patients taking fXa inhibitors, physicians may choose to use them because of familiarity, cost or other reasons. In addition, we are aware that several companies have conducted preclinical research on compounds intended to be antidotes for fXa inhibitors.

Also, in October 2015, Boehringer Ingelheim Corporation obtained FDA and EMA approvals of idarucizumab for the reversal of the anticoagulant effect of Pradaxa (dabigatran) for emergency/urgent procedures or in life-threatening or uncontrolled bleeding. Although idarucizumab is a specific reversal agent for Pradaxa, a direct thrombin inhibitor, rather than a fXa inhibitor, to the extent the availability of a specific reversal agent leads to increased adoption of Pradaxa rather than fXa inhibitors or low molecular weight heparins, the demand for andexanet alfa as a specific reversal agent for fXa inhibitors and low molecular weight heparins could also be reduced.

There are also a number of products in clinical development for hematologic cancer, ophthalmological diseases, allergic rhinitis, allergic asthma and other inflammatory diseases that are potential indications for cerdulatinib or selective Syk inhibitors. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or noncompetitive. Many competing products are in later stages of development than our products and, therefore, may obtain FDA or other regulatory approval for their products before we obtain approval for ours.

Many of our competitors, including a number of large pharmaceutical companies that compete directly with us, 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, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or 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 study sites and patient registration for clinical studies, as well as in acquiring technologies complementary to, or necessary for, our programs.

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*We received a Complete Response Letter to our initial BLA for andexanet alfa from the FDA and we will need to successfully address deficiencies raised by the FDA in our resubmission.

In August 2016, we received a Complete Response Letter, or CRL, from the FDA regarding our BLA for andexanet alfa. This CRL has delayed the commercial launch of andexanet alfa and required us to resubmit our BLA with additional information requested by the FDA, and it presents additional risk that andexanet alfa will not be approved by the FDA or other regulatory authorities, including the EMA. In the CRL, the items raised by the FDA primarily related to the manufacturing process and analytical testing of andexanet alfa. The FDA also asked us for additional data to support the inclusion of edoxaban and enoxaparin in the label and indicated that it needs to finalize its review of the clinical studies required as post-marketing commitments. On August 3, 2017 we resubmitted our BLA to the FDA in an effort to resolve the items identified by the FDA in the CRL and obtain approval of our BLA. We can offer no assurances that the resubmission will resolve all items raised in the CRL to the satisfaction of the FDA or that the FDA will not raise previously unidentified issues. As a result, our ability to market, sell, distribute, obtain acceptable reimbursement for, set pricing for, and continue to operate, commercialize or continue the development of andexanet alfa may be further delayed, adversely affected or prevented altogether.

Even if the outstanding items identified in the CRL are resolved to the satisfaction of the FDA by our resubmission, the agency retains the right not to approve the BLA or to require additional information, or to raise additional issues to support regulatory approval of andexanet alfa, which could further delay or prevent its approval or limit the approved indications for andexanet alfa. In addition, either the substance of the items identified by the FDA in the CRL, or the CRL itself, could have an adverse impact on our efforts to obtain marketing authorization for andexanet alfa from the EMA and other regulatory authorities. Also, in response to the CRL, we have suspended our efforts to expand post-approval supply based on an expanded generation 1 manufacturing process on the 6x2,000 liter Line C manufacturing line at CMC Biologics and are focusing our efforts on expanding post approval through our generation 2 manufacturing process at the 10,000 liter scale at Lonza. As a result, even if we obtain commercial marketing approval for andexanet alfa, our ability to market andexanet may be adversely impacted by limited supply or treatment indications.

*If clinical studies of our product candidates 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 our product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate the safety and efficacy of our product candidates in humans. Clinical studies are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more of our clinical studies could occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, clinical studies that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including the following:

 

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

 

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

 

the cost of clinical studies or the manufacturing of our product candidates may be greater 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;

 

we might have to suspend or terminate clinical studies of our product candidates for various reasons, including unanticipated serious side effects, other unexpected characteristics or unacceptable health risks;

 

regulators may not approve our proposed clinical development plans;

 

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

 

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; and

 

the supply or quality of our product candidates or other materials necessary to conduct clinical studies of our product candidates may be insufficient or inadequate.

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If we are required to conduct additional clinical studies or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical studies of our product candidates or other testing, if the results of these studies 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 that are not as broad as intended;

 

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

 

be subject to additional post-marketing testing requirements; or

 

be subject to restrictions on how the product is distributed or used.

Our product development costs may also increase if we experience delays in testing or approvals. We do not know whether any anticipated clinical studies will begin as planned, or whether anticipated or ongoing clinical studies will need to be restructured or will be completed on schedule, or at all. Significant clinical study 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, which would impair our ability to commercialize our product candidates and harm our business and results of operations.

The outcome of preclinical testing and early clinical studies may not be predictive of the success of later clinical studies, and interim results of a clinical study do not necessarily predict final results. For example, the favorable results from our Phase 2 proof-of concept studies of andexanet alfa, evaluating the effect of andexanet alfa in healthy volunteers taking apixaban, rivaroxaban, edoxaban or enoxaparin may not be predictive of success in our Phase 4 study or other later studies, if any. In addition, although part 1 of each of our Phase 3 ANNEXA-A (apixaban) and ANNEXA-R (rivaroxaban) studies demonstrated that, for the primary efficacy endpoint, an intravenous bolus of andexanet alfa immediately and significantly reversed the anticoagulation activity of apixaban and rivaroxaban, and part 2 of each of our ANNEXA-A and ANNEXA-R studies demonstrated that, for all the primary and secondary endpoints, an intravenous bolus of andexanet alfa followed by a continuous two-hour infusion sustained the reversal of anticoagulation activity of apixaban and rivaroxaban, these positive results may not be predictive of success in our ANNEXA-4 confirmatory study in certain patients receiving apixaban, rivaroxaban, edoxaban or enoxaparin who present with acute major bleeding. Further, the ANNEXA-4 clinical trial summary data published in August 2016 may not be predictive of the results of the complete ANNEXA-4 trial. We also do not know how the results from our ANNEXA trials will translate into clinical use in patients or the effect of repeat doses.  Finally, the favorable interim results from our Phase 2a proof-of-concept study for cerdulatinib in patients with NHL, or CLL, who have failed or relapsed on existing marketed therapies or products in development, including patients with identified mutations, may not be confirmed in future clinical studies or predictive of final results.

If serious adverse side effects are identified with respect to any of our product candidates or our approved product, we may need to abandon our development of that product candidate or discontinue sale of that product.

It is impossible to guarantee when or if any of our product candidates will prove safe enough to receive regulatory approval. There can be no assurance that our clinical studies will not fail due to safety issues. In such an event, we might need to abandon development of that product candidate or enter into a partnership to continue development.

For example, Bevyxxa, like all currently marketed inhibitors of fXa, carries some risk of life-threatening bleeding. In addition, patients taking betrixaban in our Phase 2 studies had an increased rate of gastrointestinal issues, such as diarrhea, nausea and vomiting, and other side effects such as back pain, dizziness, headaches, rashes and insomnia as compared to subjects taking a placebo or an active comparator.

While no serious adverse side effects have been observed in our completed healthy patient studies with andexanet alfa, there is a risk that adverse side effects could be observed through our ANNEXA-4 patient study results, additional clinical experience or repeat doses that are determined to have been caused by andexanet alfa. Some protein-based biologics have encountered problems with immunogenicity, that is, their tendency to trigger an unwanted immune response against themselves. To date, no neutralizing antibodies against andexanet alfa or antibodies to fXa have been detected; however there is still a risk that such antibodies could be identified through our ANNEXA-4 patient study results, additional clinical experience or from repeat doses. In addition, reversing the anticoagulant activity of fXa inhibitors in patients with underlying medical conditions requiring anticoagulation is associated with an increased risk of thrombotic events.

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Even for Bevyxxa or any of our product candidates that may receive marketing approval, if a regulatory agency discovers adverse events of unanticipated severity or frequency it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. Among other legal and administrative actions, a regulatory agency may:

 

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

 

suspend any regulatory approvals;

 

suspend any ongoing clinical trials;

 

refuse to approve pending applications or supplements to approved applications filed by us, our partners or our potential future partners;

 

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

 

seize or detain products or require a product recall.

In addition, the occurrence of any of the foregoing, even if promptly remedied, could negatively impact the perception of us or the relevant product among the medical community, patients or third party payors.

Delays in the enrollment of patients in any of our clinical studies could increase our development costs and delay completion of our clinical studies and associated regulatory submissions.

We may not be able to initiate or continue clinical studies for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these studies as required by the FDA or other regulatory authorities. Even if we are able to enroll a sufficient number of patients in our clinical studies, if the pace of enrollment is slower than we expect, the development costs for our product candidates may increase, and the completion of our studies may be delayed or our studies could become too expensive to complete.

For example, the ANNEXA-4 study of andexanet alfa is our first experience in patients with major bleeding who are receiving a fXa inhibitor. Because we have limited first-hand enrollment experience in this patient population, our enrollment forecasts are estimated based on our understanding of enrollment experience of similar studies conducted by others in similar patient populations. Our current forecasts suggest that enrolling up to 350 patients should ensure that a sufficient number are able to be included in the primary analysis. However, if after enrolling 350 patients, the true number of evaluable patients is less than required, it may be necessary to continue enrolling additional patients beyond the planned 350. Enrollment of additional patients (or slower than anticipated enrollment) could increase the cost and duration of the study, and could result in alterations of the clinical plan including, but not limited to, opening of additional sites or geographic regions, both of which would result in increased costs. In addition, our cerdulatinib clinical studies will require enrollment of patients who have failed current therapies or have relapsed due to mutations. Finding and enrolling a sufficient number of patients for our expansion Cohorts could be difficult, time consuming and expensive because enrollment of clinical patients in the oncology space is often highly competitive and we have limited experience enrolling oncology patients in clinical trials.

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*Even if andexanet alfa is approved by the FDA, this approval may be limited to certain indications, additional clinical studies and regulatory applications may be required to expand andexanet alfa indications and we can provide no assurances that such additional clinical studies or regulatory applications will be successful.

We are developing andexanet alfa as a universal antidote for patients receiving a fXa inhibitor anticoagulant when reversal of anticoagulation is needed, such as in life-threatening or uncontrolled bleeding or for emergency surgery/urgent procedures. Our ANNEXA-4 Phase 4 study is being conducted in patients receiving either a direct or indirect fXa inhibitor who present with an acute major bleed, and our ANNEXA Phase 3 registration-enabling studies have been conducted on healthy volunteers. It is not certain at this time which indications, if any, the FDA will approve based on this data. For example, in the CRL, the FDA stated that we have not provided sufficient information to permit labeling of andexanet alfa for safe and effective use for the proposed indication. The FDA has also asked us for additional data to support the inclusion of edoxaban and enoxaparin in the label, and indicated it needed to finalize its review of the clinical studies required as post-marketing commitments. These observations in the CRL create greater risk concerning our efforts to obtain U.S. approval for andexanet alfa as a universal antidote for fXa inhibitors as the issues raised and information requested by the FDA have been, and may continue to be, costly and time-consuming to address and generate. As a result of these observations, we have decided to seek our initial approval on a more narrow indication relating to serious bleeds among patients on the two most broadly used fXa inhibitors, apixaban and rivaroxaban. Our studies have also not included patients requiring emergency surgery or urgent procedures and we do not anticipate obtaining this indication without clinical data. Additional clinical studies will be required to support our targeted indications, which will require additional time and expense and may not prove successful. Limitations in our label for andexanet alfa will reduce the number of patients for whom andexanet alfa is indicated and could reduce the size of the anticipated market and our financial prospects. Further, there is no guarantee that any efforts that we decide to undertake will meet the FDAs requirements, and we may not receive approval at all for andexanet alfa, even in a more narrow indication despite such efforts.

We are seeking regulatory approval of andexanet alfa in the United States through an Accelerated Approval process, and since we have limited experience with this process, the development or commercialization of andexanet alfa could be delayed or abandoned.

In November 2013, the FDA granted breakthrough therapy designation for andexanet alfa which allows for an Accelerated Approval process. The Accelerated Approval regulations allow drugs that are being developed to treat an unmet medical need to be approved substantially based on evidence of an effect on a surrogate biomarker endpoint that is considered reasonably likely to predict clinical benefit rather than a clinical endpoint such as survival or irreversible morbidity. We have asked the FDA for priority review of our biologics license application, or BLA, a process that provides a shortened timetable to approval. Our use of an Accelerated Approval process requires that a Phase 4 clinical study with clinical endpoints that will correlate to a surrogate endpoint(s) must be ongoing at the time our BLA is submitted and some early patient data will be required by the FDA to support the BLA. This study will continue into commercialization. Because of the accelerated timelines required for Accelerated Approval, and following receipt of the CRL, we expect to require more time and incur greater costs than originally anticipated and may not succeed in timely manufacture of drug supply or in obtaining regulatory approval of andexanet alfa. In addition, the FDA may subsequently determine that the studies conducted by us, including any additional studies conducted as a result of the CRL or other FDA responses, were insufficient to support approval for all or some of the marketed direct or indirect fXa inhibitors or proposed indications, require us to conduct extensive post-approval studies or make modifications to our ongoing ANNEXA-4 study.

*There are risks associated with scaling up manufacturing to commercial scale. We will not be able to launch Bevyxxa until our commercial manufacturing process is successfully validated. Our commercial manufacturing strategy for andexanet alfa is particularly complex and challenging and is currently subject to increased uncertainty due to the CRL. If our manufacturers are unable to manufacture our products on a commercial scale using validated manufacturing processes or scale to increased production levels, this will likely delay regulatory approval and/or commercialization and materially adversely affect our results of operations and growth prospects.

We are still in the process of validating our commercial process for Bevyxxa manufacturing and qualifying an additional manufacturing facility at our primary supplier. As a part of our commercial scale-up plan, we plan to validate our commercial process at our initial Hovione manufacturing facility and to move commercial production to a different Hovione production facility that has greater manufacturing capacity. Before we can use material manufactured at these facilities, we are required to successfully validate the manufacturing process at the original facility and to demonstrate a successful process transfer and obtain post-marketing regulatory approval for the second facility.  Our process validation may take longer than we initially anticipated due to a modification we are planning to make in release specifications for which we are in active dialogue with the FDA. We recently submitted a request to the FDA for a post-approval  change in a release specification that is related specifically to a known polymorph variability that was described in our NDA and that requires a revision at our contract manufacturer. It is possible that this release specification change could delay our commercial launch of Bevyxxa. A significant delay in the commercial launch of Bevyxxa could materially adversely affect our business, financial condition, results of operations and growth prospects.

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There are other risks associated with scaling up manufacturing to commercial volumes including, among others, cost overruns, technical problems with process scale-up, process reproducibility, stability issues, lot consistency, regulatory approvals and timely availability of raw materials. There is no assurance that our manufacturers will be able to manufacture our products to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand. If we and our manufacturers are unable to produce sufficient quantities of our products for commercialization, either on a timely basis or at all, our commercialization efforts would be impaired, which would have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We have experienced particular uncertainties and risks associated with scaling up the manufacturing for andexanet alfa. The manufacture of biologics involves complex processes, typically including developing cell lines or cell systems to produce the biologic, growing large quantities of such cells and harvesting and purifying the biologic produced by them. The cost to manufacture biologics is generally far higher than traditional small molecule chemical compounds, and the manufacturing process is more complex and can be difficult to reproduce. Even though we have completed our process validation campaign for generation 2 commercial scale manufacturing, there is no guarantee we will be successful in obtaining regulatory approval for this process. Due to the high cost to manufacture andexanet alfa and the inherent uncertainty related to manufacturing costs, there is a relatively greater risk that andexanet alfa may not be commercially viable.

Our initial commercial manufacturing strategy for andexanet alfa is also subject to substantial uncertainty due to items identified by the FDA in the CRL. Changes to our manufacturing strategy, and addressing the manufacturing items in the CRL, has required and will continue to require additional time and capital and may not be successful. For example, we have suspended our efforts to expand post-approval supply based on an expanded generation 1 manufacturing and are focusing our efforts on expanding supply post-approval through our generation 2 manufacturing process. We still intend to seek commercial approval based on generation 1 supply from CMC Biologics. However, our generation 1 manufacturing process was designed to produce andexanet alfa for our clinical studies on a small scale and is capable of manufacturing only limited supply to support a commercial launch in relation to projected demand. We are currently discussing options with the FDA and our commercial manufacturing organizations for expanding commercial supply post-approval. Without material from an expanded capacity manufacturing facility, even if approved, commercial supply of andexanet alfa at launch will likely be limited to our generation 1 supply until such time as we can the obtain approval for generation 2 material.

In order to obtain FDA approval of generation 2 material produced by Lonza, the vendor’s manufacturing facility will need to pass a pre-approval regulatory inspection and we will need to demonstrate that such material is comparable to the clinical material we previously used and material produced in our generation 1 process. Demonstrating comparability can require significant pre-clinical and clinical studies. The material may also be considered a new biological entity and a new clinical program, possibly commencing with Phase 1, and a full BLA submission may be required for approval, resulting in additional time and expense. If we are not able to establish a commercial-scale manufacturing process for andexanet alfa, our business, financial condition, results of operations and growth prospects would be materially adversely affected.

RISKS RELATED TO OUR RELIANCE ON THIRD PARTIES

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

We do not independently conduct clinical studies of our product candidates. We rely on third parties, such as contract research organizations, or CROs, clinical data management organizations, medical institutions and clinical investigators, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We remain responsible for ensuring that each of our clinical studies is conducted in accordance with the general investigational plan and protocols for the study.

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 studies to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patients in clinical studies are protected. 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 studies in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize Bevyxxa or our product candidates.

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

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*We rely on third-party contract manufacturing organizations to manufacture and supply Bevyxxa and our product candidates for us. If one of our suppliers or manufacturers fails to perform adequately or fulfill our needs, we may be required to incur significant costs and devote significant efforts to find new suppliers or manufacturers. We may also face significant delays in the development and commercialization of our product candidates.

We do not own facilities for commercial or clinical-scale manufacturing, and we rely on third-party suppliers to manufacture Bevyxxa and our product candidates. For example, we have entered into a manufacturing agreement with Hovione Limited for the manufacture of Bevyxxa and expect to rely on this manufacturing organization to supply Bevyxxa for U.S. commercial launch. If Hovione fails for any reason to deliver adequate quantities of Bevyxxa, the commercial launch of Bevyxxa will be delayed or disrupted. We have contracted with CMC Biologics to manufacture andexanet alfa bulk drug substance to support our potential U.S. commercial launch, and we have engaged Lonza to develop a new, higher-capacity and lower cost process for andexanet alfa bulk drug substance in order to support our broader, worldwide commercialization strategy. We also rely on other third-party providers for raw materials, drug substance and drug product manufacturing, packaging, labeling and supply chain distribution. If we and our suppliers cannot agree to the terms and conditions for them to provide the drug supply necessary for our clinical and commercial needs, or if any single source supplier breaches an agreement with us, or terminates the agreement in response to an alleged breach by us or otherwise becomes unable to fulfill its supply obligations, we would not be able to manufacture and distribute the affected product or product candidate until a qualified alternative supplier is identified, which could also significantly delay or disrupt the development of, and impair our ability to commercialize, our product candidates.

The manufacture of pharmaceutical products in compliance with the FDAs current good manufacturing practices, or cGMPs, requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, including difficulties with production costs and yields, quality assurance, including stability of the product candidate and quality control testing, shortages of qualified personnel, as well as compliance with strictly enforced cGMP requirements, other federal and state regulatory requirements and foreign regulations. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us or under applicable regulations and agreements, our ability to provide the drug supply necessary for our clinical studies and commercial needs would be jeopardized. Any delay or interruption in the supply of clinical study materials could delay the completion of our clinical studies, increase the costs associated with maintaining our clinical study programs and, depending upon the period of delay, require us to commence new studies at significant additional expense or terminate the studies completely.

All manufacturers of our product candidates must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. The FDA or similar foreign regulatory agencies may also implement new standards at any time, or change their interpretation and enforcement of existing standards for manufacturing, packaging or testing of products. We have limited control over our manufacturers compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay or interruption of clinical studies, regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or adversely affect our reputation.

Although alternative sources of supply exist, the number of third-party suppliers with the necessary manufacturing and regulatory expertise and facilities to manufacture biologics is limited, and it could be expensive and take a significant amount of time to arrange for alternative suppliers, which could have a material adverse effect on our business. New suppliers of any product candidate would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing the product candidate. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs which may be passed on to us.

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We may enter into collaborations that place the development of our product candidates outside our control, require us to relinquish important rights or may otherwise be on terms unfavorable to us, and if our collaborations are not successful, our product candidates may not reach their full market potential.

We may enter into additional collaboration agreements with third parties with respect to our product candidates for the commercialization of the candidates outside the United States., or for other purposes. For example, we have out-licensed development and commercial rights to andexanet alfa in Japan. In addition, depending on our capital requirements, development and commercialization costs, need for additional therapeutic expertise and other factors, it is possible that we will enter into broader development and commercialization arrangements with respect to our product candidates. Our likely collaborators for any distribution, marketing, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. We will have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenue from these arrangements will depend in part on our collaborators abilities to successfully perform the functions assigned to them in these arrangements.

Collaborations involving our product candidates are subject to numerous risks, which may include the following:

 

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

 

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on clinical study results, changes in their strategic focus due to the acquisition of competitive products, availability of funding or other external factors, such as a business combination that diverts resources or creates competing priorities;

 

collaborators may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product candidate, repeat or conduct new clinical studies 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;

 

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to their marketing and distribution;

 

collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

 

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

 

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

 

collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such intellectual property.

Any termination or disruption of our collaboration with potential collaborators could result in delays in the development and commercialization of our product candidates, increases in our costs to develop and commercialize the product candidate, or the termination of development of a product candidate.

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RISKS RELATED TO THE OPERATION OF OUR BUSINESS

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 William Lis, our Chief Executive Officer, and the other principal members of our executive and scientific teams. Under the terms of their employment, our executives may terminate their employment with us at any time. The loss of the services of any of these people could impede the achievement of our research, development and commercialization objectives. We maintain key person insurance for Mr. Lis but not for any other executives or employees. Any insurance proceeds we may receive under our key person insurance on Mr. Lis would not adequately compensate us for the loss of his services.

Recruiting and retaining other qualified 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 and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

Over the next several years, we expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, regulatory affairs, quality, commercial compliance, medical affairs, and sales and marketing. 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.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to existing and new public company compliance and reporting regulations.

As a public company, we incur significant legal, accounting and other expenses. For example, the Sarbanes-Oxley Act, and rules of the SEC and those of The NASDAQ Stock Market, or the NASDAQ, have imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel have and will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations are continuously being revised, have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we are required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting. Our compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires us to incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

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Our ability to successfully implement our business plan and comply with Section 404, as applicable, requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting. This, in turn, could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.

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

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical studies, and the manufacturing, distribution and sale of Bevyxxa, and will face an even greater risk if we commercially sell any other products that we may develop. For example, the manufacturers of currently marketed fXa inhibitors and other manufacturers of anticoagulants have faced substantial litigation due to certain alleged bleeding risks. If we cannot successfully defend ourselves against claims that Bevyxxa or our product candidates caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

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

 

injury to our reputation and significant negative media attention;

 

withdrawal of patients from clinical studies or cancellation of studies;

 

significant costs to defend the related litigation;

 

substantial monetary awards to patients;

 

loss of revenue; and

 

the inability to commercialize any products that we may develop.

We currently hold $10.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on research programs and product candidates for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products.

If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing, or other royalty arrangements in cases in which it would have been advantageous for us to retain sole development and commercialization rights.

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. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally 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.

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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 that may be asserted against us in connection with our storage or disposal of biological or hazardous materials. In addition, we may be required to incur substantial costs 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.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our corporate headquarters is located in California near major earthquake faults. Our operations and financial condition could suffer in the event of a major earthquake, fire or other natural or manmade disaster.

If we obtain approval to commercialize any products outside the United States, a variety of risks associated with international operations could materially adversely affect our business. If any product candidates that we may develop are approved for commercialization outside the United States, we will be subject to additional risks related to entering into international business relationships, including:

 

different regulatory requirements for drug approvals in foreign countries;

 

reduced protection for intellectual property rights;

 

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

economic weakness, including inflation or political instability in particular foreign economies and markets;

 

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

foreign taxes, including withholding of payroll taxes;

 

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

In connection with our Bevyxxa and andexanet alfa development, we are currently utilizing certain suppliers outside of the United States, which subjects us to certain of the above risks.

Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our drug development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. In particular, the incidence and severity of data theft, ransomware and other forms of computer system hacking have increased significantly in recent years, and biotechnology companies like us have been specifically targeted in many such attacks. While, to our knowledge, we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical study data from completed or ongoing clinical studies for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our product candidates could be delayed.

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RISKS RELATED TO INTELLECTUAL PROPERTY

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to intellectual property license agreements with third parties, including with respect to Bevyxxa, cerdulatinib, one of our selective Syk inhibitors, and our PCSK9 program, and we expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we may not be able to develop and market any product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms or our not having sufficient intellectual property rights to operate our business. The occurrence of such events could materially harm our business.

Our ability to successfully commercialize our technology and products may be materially adversely affected if we are unable to obtain and maintain effective intellectual property rights for our technologies and product candidates.

Our success depends in large part on our and our licensors ability to obtain and maintain patent and other intellectual property protection in the United States and in other countries with respect to our proprietary technology and products. In some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or products that we license from third parties. Therefore, we cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. In addition, if third parties who license patents to us fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated.

We have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and products that are important to our business. 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. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technologies or from developing competing products and technologies.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unresolved. In recent years patent rights have been the subject of significant litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our licensors patent rights are highly uncertain. Our and our licensors pending and future patent applications may not result in patents being issued which protect our technology or products 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. 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 or our licensors were the first to make the inventions claimed in our owned and licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, prior to March 16, 2013, in the United States, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. On March 16, 2013, under the America Invents Act, the United States moved to a first to file system.

The effects of these changes are currently unclear as the United States Patent and Trademark Office, or USPTO, has only recently implemented various regulations, the courts have only just begun to issue decisions addressing these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. We may become involved in opposition or other proceedings challenging our patent rights or the patent rights of others, and the outcome of any proceedings are highly uncertain. For example, in November 2013, Zentiva k.s. and Günter SÖLCH separately filed papers with the European Patent Office opposing European Patent 2101760, assigned to Millennium Pharmaceuticals, Inc., to which we have an exclusive license. The European Patent Office decided in favor of revoking the European patent. Portola will appeal this revocation. This patent is related to a formulation of Bevyxxa. Should the appeal or other proceedings be unsuccessful, this 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.

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Even if our owned and licensed 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. The issuance of a patent is not conclusive as to its 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 patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping 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 owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide us with a competitive advantage.

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

Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

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, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. We may become party to, or be threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the USPTO. An interference proceeding is a proceeding before the USPTO to determine the priority among multiple patents or patent applications. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. If we are found to infringe a third-partys 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. 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 can have a similar negative impact on our business.

We may be unable to protect the confidentiality of our trade secrets, thus harming our business and competitive position.

In addition to our patented technology and products, we rely upon trade secrets, including unpatented know-how, technology and other proprietary information to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and consultants that obligate them to assign their inventions to us. However, it is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or otherwise become known or be independently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect our intellectual property to the same extent as the laws of the United States. If our trade secrets are disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business.

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We may be subject to claims that our employees have wrongfully used or disclosed intellectual property of their former employers. Intellectual property litigation or proceedings could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

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 employees former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation 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 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 our resources available for development 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 substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other intellectual property-related proceedings could have a material adverse effect on our ability to compete in the marketplace.

RISKS RELATED TO GOVERNMENT REGULATION

The regulatory approval process is expensive, time consuming and uncertain and may prevent us from obtaining additional approvals for the commercialization of our product candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We will not be permitted to market our product candidates in the United States until we receive approval of an NDA or a BLA, from the FDA. Obtaining approval of an NDA or BLA can be a lengthy, expensive and uncertain process that may not be successful. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including the following:

 

warning letters;

 

civil or criminal penalties and fines;

 

injunctions;

 

suspension or withdrawal of regulatory approval;

 

suspension of any ongoing clinical studies;

 

voluntary or mandatory product recalls and publicity requirements;

 

refusal to accept or approve applications for marketing approval of new drugs or biologics or supplements to approved applications submitted by us;

 

restrictions on operations, including costly new manufacturing requirements; or

 

seizure or detention of our products or import bans.

Prior to receiving approval to commercialize any of our product candidates in the United States or abroad, we must demonstrate with substantial evidence from well-controlled clinical studies, and to the satisfaction of the FDA and other regulatory authorities abroad, that such product candidates are safe and effective for their intended uses. Results from preclinical studies and clinical studies can be interpreted in different ways. Even if we and our collaboration partners believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any of our product candidates to humans may produce undesirable side effects, which could interrupt, delay or cause suspension of clinical studies of our product candidates and result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications.

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Regulatory approval of an NDA or BLA is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical studies, or perform additional preclinical studies and clinical studies. The number of preclinical studies and clinical studies that will be required for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address and the regulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to, the following:

 

a product candidate may not be deemed safe or effective;

 

FDA officials may not find the data from preclinical studies and clinical studies sufficient;

 

the FDA may find our manufacturing data insufficient to support approval

 

the FDA might not approve our or our third-party manufacturers processes or facilities; or

 

the FDA may change its approval policies or adopt new regulations.

If any of our product candidates fails to demonstrate safety and efficacy in clinical studies or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.

Unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives could harm our business.

There is increasing pressure on biotechnology companies to reduce healthcare costs. In the United States, these pressures come from a variety of sources, such as managed care groups, institutional, and government purchasers. Increased purchasing power of entities that negotiate on behalf of federal healthcare programs and private sector beneficiaries could increase pricing pressures in the future. Such pressures may also increase the risk of litigation or investigation by the government regarding pricing calculations. The biotechnology industry will likely face greater regulation and political and legal action in the future.

The regulations that govern marketing approvals, pricing and reimbursement for new therapeutic products vary widely from country to country. Some countries, including European Union, or EU, member countries, require approval of the sale price of a product before it can be marketed. In many countries, including EU member 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. In some foreign markets, including the EU member countries, current standard of care and/or competitive products may be used as a benchmark or reference to determine pricing and reimbursement level for novel products such as andexanet alfa and betrixaban. To the extent that comparators are available at lower prices than our anticipated pricing for andexanet alfa or betrixaban, the pricing and reimbursement level of our products in the EU could be negatively impacted. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in that country, or even reduce the commercial viability of the product to an extent that prevents the launch altogether.

Adverse pricing limitations may hinder our ability to recoup our investment in Bevyxxa or one or more of our product candidates, even if our product candidates obtain regulatory approval. Adverse pricing limitations prior to approval will also adversely affect us by reducing our commercial potential. Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments becomes 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 pay for and establish reimbursement levels.

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products 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 that we successfully develop.

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There may be significant delays in obtaining reimbursement for approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed and may be incorporated into existing payments for other services. Net prices for products 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 products from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payors for Bevyxxa or new 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.

Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our products internationally.

We may pursue commercialization of Bevyxxa and our future products in international markets, either through distribution and marketing partners or our own commercial organization. In order to market our future products in the European Economic Area, or EEA, and many other foreign jurisdictions, we must obtain separate regulatory approvals. Specifically, in the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting the MA, the EMA or the competent authorities of the member states of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

We have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical studies conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to submit for regulatory approvals and even if we submit we may not receive necessary approvals to commercialize our products in any market.

*Healthcare reform measures could hinder or prevent the commercial success of Bevyxxa or our product candidates.

In the United States, there have been and we expect there will continue to be a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenue and profitability and the future revenue and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the Affordable Care Act, was enacted in 2010. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things:

 

imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell branded prescription drugs, effective 2011;

 

increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%, effective 2011;

 

could result in the imposition of injunctions;

 

expanded Medicaid drug rebates to cover drugs paid by Medicaid managed care organizations;

 

changes the Medicaid rebate rates for line extensions or new formulations of oral solid dosage form;

 

expands the types of entities eligible for the Section 340B discounts for outpatient drugs;

48


 

 

requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable branded drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturers outpatient drugs to be covered under Medicare Part D; and

 

creates a process for approval of biologic therapies that are similar or identical to approved biologics.

Legislative changes to or regulatory changes under the Affordable Care Act remain possible and appear likely in the 115th U.S. Congress and under the Trump Administration.  The American Health Care Act of 2017, or AHCA, which would repeal and replace key portions of the Affordable Care Act was passed by the U.S. House of Representatives but remains subject to passage by the U.S. Senate.  In addition, in January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.  We cannot assure that the Affordable Care Act, as currently enacted or as amended in the future, will not adversely affect our business and financial results and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011, or Budget Control Act, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, which triggered the legislations automatic reduction to several government programs, including aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by the sequestration provisions of the Budget Control Act. The ATRA, among other things, also reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. In March 2013, the President signed an executive order implementing sequestration, and in April 2013, the 2% Medicare reductions went into effect. In December 2013, Congress amended the Budget Control Act to provide greater discretionary spending in 2014 and 2015 than originally budgeted and provide relief from the FDA user fee for two years. This amendment also extended the prohibition against reducing payments to Medicare providers by more than 2% until 2023. In December 2014, Congress passed the Consolidated and Further Continuing Appropriations Act, 2015 and a tax extenders bill, both of which may negatively impact coverage and reimbursement of healthcare items and services.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

 

our ability to set a price we believe is fair for our products;

 

our ability to generate revenue and achieve or maintain profitability; and

 

the availability of capital.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

Pharmaceutical companies are heavily regulated by federal, state and local regulations in the countries in which business activities occur. Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients rights are and will be applicable to our business. We could be subject to laws and regulations governing healthcare fraud and abuse, advertising and other promotional activities, data privacy and patient rights by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include, without limitation:

 

the federal Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs;

 

the federal Physician Payment Sunshine Act or Open Payments Program provisions and the implementing regulations which will require extensive tracking of physician and teaching hospital payments, maintenance of a payments database, and public reporting of the payment data;

49


 

 

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government;

 

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

the Foreign Corrupt Practices Act and similar statutes and regulations in foreign jurisdictions, which makes it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business;

 

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

 

the Drug Quality and Security Act which requires manufacturers and other distribution parties to create systems to trace certain prescription drugs as they are distributed in the United States; and

 

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

The Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to substantial penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

*Our stock price may be volatile, and investors in our common stock could incur substantial losses.

Our stock price has fluctuated in the past and may be volatile in the future. The stock market in general, and the market for 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, investors may experience losses on their investment in our stock. The market price for our common stock may be influenced by many factors, including the following:

 

our ability to meet the expectations of investors related to the commercialization of Bevyxxa;

 

inaccurate sales or cash forecasting of Bevyxxa;

 

the timing and amount of revenues generated from sale of Bevyxxa;

 

changes in laws or regulations applicable to Bevyxxa;

 

legislation or regulatory actions or decisions affecting betrixaban, including the timing and outcome of any potential future EMA decision relating to betrixaban, or product candidates, including those of our competitors;

 

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

 

results of clinical trials or regulatory actions with respect to our product candidates;

 

market conditions in the pharmaceutical and biotechnology sectors;

 

actual or anticipated changes in earnings estimates or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;

 

trading volume of our common stock;

 

sales of our common stock by us or our stockholders;

50


 

 

general economic, industry and market conditions; and

 

the other risks described in this Risk factors section.

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of managements attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.

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

The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts may cease to publish research on our company at any time in their discretion. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline. In addition, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If our operating results fail to meet the forecasts of analysts, our stock price will likely decline.

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

Provisions in our corporate charter 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, 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. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include the following:

 

our board of directors is divided into three classes with staggered three-year terms which may delay or prevent a change of our management or a change in control;

 

our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

our stockholders may not act by written consent or call special stockholders meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders meetings or special stockholders meetings called by the board of directors, the chairman of the board, the chief executive officer or the president;

 

our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company; and

 

our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

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.

51


 

Our agreements with our executive officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change in control of us, which could harm our financial condition or results or discourage third parties from seeking business combinations.

Our executive officers are parties to agreements that contain change in control and severance provisions providing for aggregate cash payments of up to approximately $ 3.9 million for severance and other benefits and acceleration of vesting of equity awards with a value of approximately $ 46.3 million as of June 30, 2017, based on the closing price of our common stock on such date in the event of a termination of employment in connection with a change in control of us. The accelerated vesting of equity awards could result in dilution to our existing stockholders and harm the market price of our common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

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

We have never declared or paid cash dividends on our common 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 existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders sole source of gain for the foreseeable future.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

 

 

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

A list of exhibits filed with this Quarterly Report on Form 10-Q or incorporated herein by reference is found in the Index to Exhibits immediately following the signature page of this report and is incorporated into this Item 6 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.

 

 

 

PORTOLA PHARMACEUTICALS, INC.

 

 

Date: August 9, 2017

 

By:

 

/s/    William Lis

 

 

 

 

William Lis

 

 

 

 

Chief Executive Officer

 

 

Date: August 9, 2017

 

By:

 

/s/    Mardi C. Dier

 

 

 

 

Mardi C. Dier

 

 

 

 

Chief Financial Officer

 

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EXHIBIT INDEX

 

 

 

 

 

Incorporation By Reference

Exhibit

Number

 

Exhibit Description

 

Form

 

SEC File No.

 

Exhibit

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

    3.1

 

Amended and Restated Certificate of Incorporation of Portola Pharmaceuticals, Inc.

 

8-K

 

001-35935

 

3.1

 

5/28/2013

 

 

 

 

 

 

 

 

 

 

 

    3.2

 

Amended and Restated Bylaws of Portola Pharmaceuticals, Inc.

 

8-K

 

001-35935

 

3.2

 

5/28/2013

 

 

 

 

 

 

 

 

 

 

 

    4.1

 

Reference is made to Exhibits 3.1 through 3.2.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.2

 

Form of Common Stock Certificate of Portola Pharmaceuticals, Inc.

 

S-1

 

333-187901

 

4.1

 

5/17/2013

 

 

 

 

 

 

 

 

 

 

 

    4.3

 

Third Amended and Restated Investor Rights Agreement, dated as of November 11, 2011, by and among Portola Pharmaceuticals, Inc., and certain of its stockholders.

 

S-1

 

333-187901

 

10.6

 

4/12/2013

 

 

 

 

 

 

 

 

 

 

 

    4.4

 

Warrant to Purchase Shares of Series A Preferred Stock by and between the registrant and General Electric Capital Corporation, dated January 21, 2005.

 

10-Q

 

001-35935

 

4.4

 

11/06/2013

 

 

 

 

 

 

 

 

 

 

 

    4.6

 

Warrant to Purchase Shares of Series B Preferred Stock by and between Portola Pharmaceuticals, Inc., and Comerica Incorporated, dated September 29, 2006.

 

10-Q

 

001-35935

 

4.6

 

11/06/2013

 

 

 

 

 

 

 

 

 

 

 

    4.7

 

Warrant to Purchase Shares of Common Stock by and between the registrant and Laurence Shushan and Magdalena Shushan Acosta, Trustees, The Laurence and Magdalena Shushan Family Trust, Under Agreement Dated October 8, 1997, dated December 15, 2006.

 

10-Q

 

001-35935

 

4.7

 

11/06/2013

 

 

 

 

 

 

 

 

 

 

 

    4.8

 

Warrant to Purchase Shares of Common Stock by and between Portola Pharmaceuticals, Inc., and HCP Life Science Assets TRS, LLC, dated December 15, 2006.

 

10-Q

 

001-35935

 

4.8

 

11/06/2013

 

 

 

 

 

 

 

 

 

 

 

    4.9

 

Warrant to Purchase Shares of Common Stock by and between Portola Pharmaceuticals, Inc., and Bristow Investments, L.P., dated December 15, 2006.

 

10-Q

 

001-35935

 

4.9

 

11/06/2013

 

 

 

 

 

 

 

 

 

 

 

  10.38+

 

Amended and Restated Offer Letter by and between Portola Pharmaceuticals, Inc. and John T. Curnutte, M.D., Ph.D., dated May 3, 2017.

 

8-K

 

001-35935

 

10.1

 

5/08/2017

 

 

 

 

 

 

 

 

 

 

 

  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 amended.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  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 amended.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  32.1*

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

*

Filed herewith

+

Management contract or compensatory plan

(1)

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

 

54