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EX-32.2 - EX-32.2 - TESARO, Inc.tsro-20171231ex322a6ff98.htm
EX-32.1 - EX-32.1 - TESARO, Inc.tsro-20171231ex32146ff48.htm
EX-31.2 - EX-31.2 - TESARO, Inc.tsro-20171231ex312f7b744.htm
EX-31.1 - EX-31.1 - TESARO, Inc.tsro-20171231ex311c6e6b1.htm
EX-23.1 - EX-23.1 - TESARO, Inc.tsro-20171231ex231725f7b.htm
EX-21.1 - EX-21.1 - TESARO, Inc.tsro-20171231ex211c8f50a.htm
EX-12.1 - EX-12.1 - TESARO, Inc.tsro-20171231ex1214c0a69.htm
EX-10.47 - EX-10.47 - TESARO, Inc.tsro-20171231ex10473785d.htm
EX-10.46 - EX-10.46 - TESARO, Inc.tsro-20171231ex10460adfc.htm
EX-10.4 - EX-10.4 - TESARO, Inc.tsro-20171231ex10446c072.htm
EX-10.38 - EX-10.38 - TESARO, Inc.tsro-20171231ex10389b632.htm
EX-10.37 - EX-10.37 - TESARO, Inc.tsro-20171231ex1037298bf.htm
EX-10.28 - EX-10.28 - TESARO, Inc.tsro-20171231ex1028d539a.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 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 001-35587

 

TESARO, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware

 

27-2249687

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1000 Winter Street

 

 

Waltham, Massachusetts

 

02451

(Address of Principal Executive Offices)

 

(Zip Code)

 

(339) 970-0900

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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.

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a 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 Act). Yes ☐ No ☒

The aggregate market value of the registrant’s voting stock held by non-affiliates as of June 30, 2017 was approximately $5,213,481,640 based on the closing price of $139.86 of the Common Stock of the registrant as reported on the NASDAQ Global Select Market on such date.  As of February 22, 2018, there were 54,563,915 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 


 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders, which is expected to be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

2


 

TESARO, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

    

 

    

Page

 

PART I 

 

 

 

 

 

ITEM 1. 

 

BUSINESS

 

5

 

ITEM 1A. 

 

RISK FACTORS

 

31

 

ITEM 1B. 

 

UNRESOLVED STAFF COMMENTS

 

58

 

ITEM 2. 

 

PROPERTIES

 

58

 

ITEM 3. 

 

LEGAL PROCEEDINGS

 

58

 

ITEM 4. 

 

MINE SAFETY DISCLOSURES

 

58

 

 

 

 

 

 

 

PART II 

 

 

 

 

 

ITEM 5. 

 

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

 

59

 

ITEM 6. 

 

SELECTED FINANCIAL DATA

 

61

 

ITEM 7. 

 

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

 

62

 

ITEM 7A. 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

83

 

ITEM 8. 

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

84

 

ITEM 9. 

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

126

 

ITEM 9A. 

 

CONTROLS AND PROCEDURES

 

126

 

ITEM 9B. 

 

OTHER INFORMATION

 

129

 

 

 

 

 

 

 

PART III 

 

 

 

 

 

ITEM 10. 

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

130

 

ITEM 11. 

 

EXECUTIVE COMPENSATION

 

130

 

ITEM 12. 

 

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

 

130

 

ITEM 13. 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

131

 

ITEM 14. 

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

131

 

 

 

 

 

 

 

PART IV 

 

 

 

 

 

ITEM 15. 

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

132

 

ITEM 16. 

 

FORM 10-K SUMMARY

 

132

 

 

 

 

 

 

 

 

 

SIGNATURES

 

139

 

 

 

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PART I

 

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

 

Examples of forward-looking statements contained in this report include statements regarding the following: our commercialization plans for niraparib and rolapitant, including the progress of the commercial launches of ZEJULA® (niraparib) in the U.S. and Europe, VARUBI®/VARUBY® (rolapitant) in the U.S. and Europe; our intent to in-license or acquire additional product candidates; our intent to commercialize our products in key markets; our expectations regarding product revenues and license, collaboration and other revenues; our expectations regarding product returns; our expectation that research and development and selling, general and administrative expenses will increase in the future; our expectations regarding the timing and design of our development plans, the timing of regulatory filings, and the timing of data from clinical trials, including with respect to each of our niraparib, TSR-042, TSR-022 and TSR-033 programs; our expected gross-to-net adjustment ranges for our products; our expectations regarding new clinical trials of our product candidates, including the commencement and timing thereof; our expectations regarding our discovery and development plans for immunotherapy antibodies, including the timing thereof; our anticipated milestone and royalty payment obligations; our expectations that our operating losses and negative operating cash flows will continue, and possibly increase, for the foreseeable future; the expected impact of the Tax Cuts and Jobs Act of 2017 and recent accounting pronouncements and guidance on our financial statements; and our needs for additional capital and the forecast of the period of time through which our financial resources will be adequate to support our operations.

 

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

 

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

 

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

 

4


 

ITEM 1. BUSINES

 

Overview

 

We are a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer.  Our primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies or in combinations.  We have in-licensed and are developing several oncology-related product candidates, and we have entered into several research collaborations with third parties for the discovery of new candidates.  We have also entered into arrangements with other companies for the development and commercialization of certain of our product candidates in specific indications and/or geographies.

 

To date, we have received regulatory approvals for the following products, which are currently marketed and sold in the U.S. and in certain countries in Europe:

 

·

The U.S. Food and Drug Administration, or FDA, approved ZEJULA® (niraparib) in March 2017 for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy.  The European Commission, or EC, approved ZEJULA in November 2017 as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.

 

·

VARUBI® (rolapitant) is a potent and long-acting neurokinin-1, or NK-1, receptor antagonist for the prevention of chemotherapy induced nausea and vomiting, or CINV.   The FDA approved VARUBI in oral formulation in September 2015 for use in combination with other antiemetic agents in adults for the prevention of delayed (24 to 120 hours after chemotherapy administration) nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  The EC approved VARUBY®, the brand name of oral rolapitant in Europe, in April 2017 for the prevention of delayed nausea and vomiting associated with highly and moderately emetogenic chemotherapy in adults.  The FDA approved the intravenous, or IV, formulation of VARUBI in October 2017.  In January 2018, after post-marketing reports of side effects experienced following the commercial introduction of VARUBI IV, we updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections, and issued a “Dear Healthcare Professional Letter” to healthcare providers to highlight the updates.  In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.

 

Development Programs

 

Niraparib

 

Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor.  Based on research related to PARP inhibitors generally, we believe niraparib may also be active in the treatment of several tumor types.  We are conducting several ongoing clinical trials evaluating niraparib for the treatment of various tumor types, as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets.  We expect to initiate additional clinical trials of niraparib during 2018.  We are also collaborating with various other organizations to evaluate niraparib in combination with other therapeutics for the treatment of various cancers.

 

Immuno-Oncology

 

Pursuant to our collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, we are developing several antibodies for immuno-oncology targets.  The antibodies and related development activities are summarized as follows:

 

·

TSR-042 (anti-PD-1): We initiated a Phase 1, dose escalation study of TSR-042 in March 2016.  We have also initiated expansion cohorts in patients with advanced solid tumors, including non-small cell lung cancer, or NSCLC, endometrial cancer and metastatic microsatellite instability-high, or MSI-H, tumors.  We plan to pursue an accelerated registration path for TSR-042 in metastatic MSI-H tumors.

5


 

 

·

TSR-022 (anti-TIM-3): We initiated a Phase 1, dose escalation study of TSR-022 in July 2016, evaluating TSR-022 as a monotherapy and in combination with TSR-042 in multiple tumor types.

 

·

TSR-033 (anti-LAG-3): We initiated a Phase 1, dose escalation study of TSR-033 in August 2017 in multiple tumor types.  We plan to initiate a combination trial of TSR-033 plus TSR-042 in 2018.

 

·

We have initiated pre-clinical research for TSR-075, our bi-specific anti-PD-1/LAG-3 candidate.

 

In addition, we are evaluating our immuno-oncology anti-tumor agents in combination studies with niraparib and other anti-tumor agents.  We have also entered into agreements with other third parties for the discovery of other potential oncology product candidates.  In addition to potential candidates arising from such agreements, we intend to continue to leverage the experience and competencies of our senior management team to identify, acquire, develop and commercialize cancer therapeutics, including those that are potentially safer and more effective than existing treatments.

 

Upon successful development and regulatory approval of any of our product candidates, we intend to pursue commercialization of them in key product markets.  At this time, we intend to focus on commercializing our products directly in North America and Europe, and in partnership with established companies in other key markets.

 

Our Strategy

 

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

 

Key components of our strategy include:

 

      Continue the Clinical Development of and Successfully Commercialize Niraparib for the Treatment of Cancers that are Susceptible to PARP Inhibition.  We are evaluating niraparib in several clinical trials in ovarian cancer with the goal of expanding the currently approved indication, and in other cancers.  We plan to initiate further clinical trials during 2018.  We are also evaluating niraparib in combination studies with our immuno-oncology anti-tumor agents, and with other therapeutics.

 

      Advance Potential Immuno-Oncology Antibody Product Candidates.  Under our collaboration and exclusive license agreement with AnaptysBio, we received exclusive rights to monospecific antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates.  We have clinical trials ongoing for each monospecific antibody, as monotherapies and in combinations.  We have initiated pre-clinical research for TSR-075, our bi-specific anti-PD-1/LAG-3 candidate.  In addition, we are evaluating our immuno-oncology candidates in combination studies with niraparib and other anti-tumor agents. 

 

      In-license or Acquire Additional Product Candidates to Create a Balanced Product Portfolio.  We intend to in-license or acquire additional product candidates across various stages of development.  While we do not have, nor do we intend to establish, our own drug discovery capabilities, we have entered into multiple research collaborations for the discovery of new product candidates.  We intend to focus on product candidates that we believe are differentiated from existing cancer therapeutics and that have well-defined, and potentially expeditious, clinical and regulatory pathways.  Our objective is to build a portfolio of cancer therapeutics that is balanced by stage of development, resource requirements and development risk.

 

      Build Global Capabilities to Maximize the Value of Our Product Candidates.    We have obtained exclusive worldwide rights to all of our current product candidates.  We intend for our product candidates to be developed and commercialized globally, by us in key markets and in collaboration with other companies for other geographies.  We are collaborating with other companies with regard to selected indications or geographical areas for our in-licensed product candidates.  We will also seek to acquire global rights for product candidates we acquire or in-license in the future.

 

6


 

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

 

Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells.  In January 2018, the American Cancer Society projected that there will be an estimated 1.7 million new cancer cases diagnosed and 609,640 cancer deaths in the United States in 2018.  Current treatments for cancer include surgery, radiation therapy, chemotherapy, hormone therapy, targeted therapy and immunotherapy.  The IQVIA Institute for Human Data Science reported in 2017 that total global spending on oncology medicines, including therapeutic treatments and supportive care, reached $113 billion in 2016.

 

Many marketed products and product candidates for treating cancer patients that are currently being developed by biopharmaceutical companies are cytotoxic chemotherapies that exert their anti-tumor effect on cancer generally through nonspecific damage to cellular components with the goal of causing cancer cell malfunction and cell death.  Other products and product candidates alter cell metabolism or internal repair mechanisms leading to the demise of the cancer cell. 

 

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

 

Treatment centers (such as hospitals and community cancer centers) and the healthcare professionals who treat cancer patients (physicians, nurse practitioners, physician assistants, nurses and pharmacists) utilize various combinations of cancer therapeutics and oncology supportive care products to extend and improve the quality of life of these patients.

 

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

 

Our strategy is aligned with these trends in cancer care; that is, to acquire, in-license and develop product candidates and to commercialize products that selectively treat cancers.

 

Our Product Candidates

 

Niraparib

 

Key Characteristics of Niraparib

 

Based on nonclinical and clinical data, we believe niraparib may have advantages as a treatment for certain cancers, including:

 

niraparib concentrations are higher in the tumor relative to plasma, deliver potent inhibition of PARP and demonstrated tumor growth inhibition in tumor models;

 

favorable pharmacokinetic properties in humans;

 

reduction of PARP activity in human subjects;

 

dosage formulation amenable to further clinical and commercial development;

 

7


 

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

 

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

 

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

 

Immuno-Oncology

 

Background

 

Antibodies to immune checkpoint receptors have demonstrated promise in the treatment of tumors, including metastatic melanoma, renal cell carcinoma and NSCLC.  Although the normal function of immune checkpoint receptors is to maintain immune homeostasis, they are co-opted by certain tumors to evade immune surveillance.  PD-1, TIM-3 and LAG-3 are each checkpoint regulators that modulate the function of the immune system via different mechanisms and, when activated and interacting with their respective ligands, may limit the ability of the immune system to respond effectively to tumors.  By blocking the interaction of PD-1, TIM-3 and LAG-3 with their respective ligands, antibodies targeting these checkpoint regulators aim to restore immune anti-cancer function in patients across a variety of tumor types.  We believe that therapeutic antibodies selected from our collaboration with AnaptysBio could form the basis of a strategic platform that will potentially enable us to develop novel monotherapy and combination-based approaches with immuno-oncology and other anti-cancer agents in a variety of new tumor indications, both with our existing product candidates and potentially with new candidates we either in-license or access through collaborative transactions with others.

 

Anti-PD-1 Antibodies

 

Programmed cell death protein 1 (PD-1, CD279) is a well-validated target for tumor immunotherapy.  PD-1 operates as a negative regulator of T-cell function and interacts with two ligands, PD-L1 and PD-L2.  Many tumor types up-regulate PD-L1 on the cell surface as a means of modulating the host immune system and avoiding anti-tumor responses.  Antibodies to PD-1 have now been studied in a number of clinical trials in several tumor types.  Anti-tumor responses of long duration have been noted, which may be further promoted through combination therapy with additional immuno-regulatory therapeutics.  Anti-PD-1 antibodies are now approved in multiple tumor types including, but not limited to, melanoma, NSCLC, bladder and renal carcinoma.

 

Anti-TIM-3 Antibodies

 

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

 

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

 

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

 

8


 

Clinical Development

 

Our current clinical development program includes the following trials:

 

·

QUADRA is a Phase 2, potential registration trial of niraparib for the treatment of patients with ovarian cancer who have received three or four regimens of therapy.  Enrollment in this trial is now complete.

 

·

PRIMA is a Phase 3 clinical trial of niraparib in the first-line maintenance setting in ovarian cancer patients.  This study includes patients who have responded to first-line platinum chemotherapy.

 

·

OVARIO is a Phase 2 trial of niraparib in combination with bevacizumab in patients with first-line ovarian cancer.

 

·

AVANOVA is an investigator-sponsored collaboration with the Nordic Society of Gynaecological Oncology (in collaboration with the European Network for Gynaecological Oncological Trial groups) in their Phase 1/2 trial, evaluating niraparib plus bevacizumab against bevacizumab alone, in ovarian cancer patients.

 

·

TOPACIO is a Phase 2 trial conducted in collaboration with Merck Sharp & Dohme Corp., a subsidiary of Merck, or Merck, to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® (pembrolizumab) in patients with triple negative breast cancer and patients with ovarian cancer.  In June 2017, we announced that initial data demonstrated a disease control rate of 69% in patients with platinum-resistant ovarian cancer.

 

·

GARNET is a Phase 1 dose escalation and cohort expansion study of TSR-042 in patients with advanced solid tumors, including NSCLC, endometrial cancer and metastatic MSI-H tumors.

 

·

AMBER is Phase 1 dose escalation and cohort expansion study evaluating TSR-022, as a monotherapy and in combination with TSR-042, in patients with advanced solid tumors.

 

·

CITRINO is a Phase 1 dose escalation trial of TSR-033.  

 

·

Phase 2 studies of niraparib in combination with TSR-042 in ovarian cancer and in NSCLC.

 

·

Pursuant to our collaboration with Janssen Biotech, Inc., or Janssen, Janssen is conducting clinical trials of niraparib for the treatment of prostate cancer.

 

In March 2017, following an interim analysis of data by the independent data monitoring committee, we ceased enrollment in our BRAVO study (assessing niraparib in patients with breast cancer who are germline BRCA mutation carriers) after a determination that it is unlikely to produce data that is interpretable and therefore suitable for registration in this indication. 

 

We expect our future clinical development of our current product portfolio to include a Phase 3 study of niraparib in combination with TSR-042 in first-line ovarian cancer, and a combination study of TSR-033 with TSR-042.

 

Licensing Agreements

 

License for Rolapitant

 

In December 2010, we entered into a license agreement with OPKO Health, Inc., or OPKO, to obtain an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell rolapitant.  Under the OPKO license, we are obligated to use commercially reasonable efforts to conduct all preclinical, clinical, regulatory and other activities necessary to develop and commercialize rolapitant.

 

Under the terms of the OPKO license, upon signing of the agreement, we paid OPKO $6.0 million and issued to OPKO convertible preferred stock, then valued at $0.6 million, which has since been converted to common stock.  We have made all development milestone payments to OPKO, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe.  In addition, for each of the development programs under the OPKO license, we are required to make

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

 

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

 

License for Niraparib

 

In May 2012, we entered into a license agreement with Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib for all therapeutic and prophylactic uses in humans.  Under the Merck license, we are obligated to use diligent efforts to develop and commercialize a licensed product.  In April 2016, we entered into an amendment to the license agreement with Merck in connection with the entry into our collaboration agreement with Janssen to develop and commercialize niraparib in prostate cancer patients.  Under the terms of the amendment, Merck agreed to waive or modify certain rights, including co-promotion, exclusivity, commercialization and diligence, solely with respect to products in prostate cancer developed or commercialized by Janssen.

 

Under the terms of the license agreement, we made an up-front payment to Merck of $7.0 million in June 2012.  We are required to make milestone payments to Merck of up to an aggregate of $57.0 million in U.S. and European development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives.  We have made $52.2 million in milestone payments to date.  We also pay Merck tiered royalties at percentage rates in the low teens based on worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis. We are responsible for all activities necessary to develop and commercialize niraparib.

 

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

 

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

 

License for Immuno-Oncology Platform

 

In March 2014, we entered into a collaboration and exclusive license agreement with AnaptysBio, a therapeutic antibody company.  We executed an amendment in November 2014 to add an additional bi-specific antibody product candidate.  We entered into another amendment in February 2016 to extend the term of the initial discovery period and our and AnaptysBio’s associated activities under the agreement.  Under the terms of the agreement, we possess an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of certain specified immunotherapy antibodies.  Specifically, we received exclusive rights to monospecific antibody product candidates targeting PD-1 (TSR-042), TIM-3 (TSR-022), LAG-3 (TSR-033) and certain bi-specific antibody product candidates, including TSR-075, a bi-specific anti-PD-1/LAG-3 candidate.  Under the agreement, AnaptysBio was responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in

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the treatment of cancer.  We were required to reimburse AnaptysBio for specified costs incurred by AnaptysBio for these activities, which are now complete.  We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.

 

Under the terms of this agreement, we made up-front, non-creditable and non-refundable cash payments of $19.0 million to AnaptysBio.  For each of the four development programs, we are required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications.  We have made $21.0 million in development milestone payments to date.  We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.

 

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

 

Competition

 

While we believe that our development experience and scientific knowledge provide us with competitive advantages, our industry is highly competitive and subject to rapid and significant technological change.  Compared to TESARO, many of our competitors may have significantly greater financial, technical and human resource capabilities.  Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors.  We may also face competition from smaller pharmaceutical and biotechnology companies, including specialty pharmaceutical companies and generic drug companies, academic institutions, government agencies and research institutions and others.

 

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

 

Our commercial opportunity could be reduced or eliminated if our competitors develop or market products or other novel technologies that are more effective, safer or less costly than any that will be commercialized by us, or obtain regulatory approval for their products more rapidly than we may obtain approval for ours.  Our success will be based in part on our ability to identify, develop, and manage a portfolio of drugs that are safer and more effective in the treatment and support of cancer patients.

 

Niraparib Competition

 

In addition to ZEJULA, there are currently two other commercially available PARP inhibitors.  AstraZeneca Plc’s LYNPARZATM (olaparib) was approved in December 2014 by the FDA for use in ovarian cancer patients with a germline BRCA mutation who have been treated with three or more prior lines of chemotherapy, and in August 2017 for the maintenance treatment of adult patients with recurrent epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.  LYNPARZA was also approved by the EC following a positive opinion by the European Medicines Agency, or EMA, for use as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed BRCA-mutated (germline and/or somatic) high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.  LYNPARZA was also approved in patients with deleterious or suspected deleterious germline BRCA-mutated, human epidermal growth factor receptor 2 (HER2)-negative metastatic breast cancer who have previously been treated with chemotherapy in the neoadjuvant, adjuvant or metastatic setting.  In February 2018, LYNPARZA received a positive opinion from the EMA’s Committee for Medicinal Products for Human Use, or CHMP, for a new tablet formulation and a broad maintenance label, which is expected to lead to an EC marketing authorization in the near future.  In July 2017, AstraZeneca and Merck announced a global oncology collaboration to co-develop and co-commercialize LYNPARZA for multiple cancer types.  Clovis Oncology, Inc.’s RUBRACATM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated with advanced ovarian cancer who have been treated

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with two or more chemotherapies.  RUBRACA is currently under FDA review for maintenance treatment following complete or partial response to platinum-based chemotherapy, and is under EMA review as a third-line treatment in advanced ovarian cancer patients with a deleterious BRCA-mutation.  In February 2018, the CHMP communicated a positive trend vote (meaning more voted yes than no) for RUBRACA to be authorized for the treatment of a subpopulation of platinum-sensitive ovarian cancer patients who also harbor a BRCA mutation.  A final vote will occur at the CHMP’s March 2018 meeting.  We believe the additional products in clinical development targeting the PARP pathway consist of: Pfizer’s talazoparib (MDV3800) and AbbVie’s veliparib (ABT-888), both currently in Phase 3 clinical trials; and AbbVie’s ABT-767, BeiGene/EMD Serono (Merck KGaA)’s pamiparib (BGB-290), Checkpoint Therapeutics’ CK-102 (formerly CEP-9722) and Hengrui’s fluzoparib, each currently in Phase 1 clinical trials.  Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval.

 

In addition to other PARP inhibitors, ZEJULA also competes with AVASTINTM (bevacizumab), Roche’s angiogenesis inhibitor.  AVASTIN is FDA- and EMA-approved in combination with chemotherapy for the treatment of recurrent ovarian cancer following platinum-containing chemotherapy (platinum-sensitive and platinum-resistant) and has been approved by the EMA, in combination with chemotherapy, for front-line treatment.  In the U.S., it is currently under FDA review for the front-line setting.

 

Rolapitant Competition

 

In addition to VARUBI, there are currently three other commercially available branded NK-1 receptor antagonists and two approved generic NK-1 receptor antagonists.  Oral aprepitant and its IV pro-drug fosaprepitant, which are both known by the brand name EMEND®, are marketed by Merck.  IV aprepitant, known by the brand name CINVANTITM, is marketed by Heron Therapeutics.  We believe the IV formulation of EMEND accounted for a significant majority of all EMEND usage in the U.S. in 2017.  A combination of netupitant and palonosetron, known by the brand name AKYNZEO®, is marketed by Helsinn Healthcare, or Helsinn, as a combination of NK-1 and 5-HT3 receptor antagonists.  Helsinn introduced AKYNZEO in capsule form in October 2014, and has an IV formulation under FDA review.  Sandoz launched a generic version of oral aprepitant in late 2016, which competes with oral VARUBI.  Glenmark Pharmaceuticals USA also has an FDA-approved generic aprepitant.

 

Immuno-Oncology Competition

 

We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our immuno-oncology programs.  There are currently two anti-PD-1 antibody products being marketed.  OPDIVO® (nivolumab), marketed by Bristol-Myers Squibb, is approved in a number of indications as a monotherapy or in combination with other products, including various forms of metastatic melanoma, metastatic NSCLC, advanced renal cell carcinoma, classical Hodgkin lymphoma, or cHL, recurrent or metastatic squamous cell carcinoma of the head and neck, or HNSCC, locally advanced or metastatic urothelial carcinoma, microsatellite instability-high, or MSI-H, or mismatch repair deficient, or dMMR, metastatic colorectal cancer, and hepatocellular carcinoma.  KEYTRUDA, marketed by Merck, is approved in a number of indications, including various forms of unresectable or metastatic melanoma, metastatic NSCLC, metastatic nonsquamous NSCLC in the front line setting, recurrent or metastatic HNSCC, refractory cHL, locally advanced or metastatic urothelial carcinoma, unresectable or metastatic MSI-H or dMMR solid tumors (which includes colorectal cancer), and recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma.

 

There are currently three approved anti-PD-L1 antibodies.  Roche’s anti-PD-L1 antibody TECENTRIQ® (atezolizumab) is approved in patients with various forms of locally advanced or metastatic urothelial carcinoma or metastatic NSCLC.   AstraZeneca’s IMFINZI® (durvalumab) was approved in 2017 for patients with various forms of locally advanced or metastatic urothelial carcinoma.  BAVENCIO® (avelumab, co-marketed by Merck KGa and Pfizer) was approved in 2017 for adults and pediatric patients 12 years and older with metastatic Merkel cell carcinoma and for patients with various forms of locally advanced or metastatic urothelial carcinoma.  We are aware of several companies that are developing or co-developing anti-PDL-1 and/or anti-PD-1 modulators for various indications, including Novartis, Regeneron/Sanofi, Eli Lilly, Incyte, Boehringer Ingelheim, Celgene/BeiGene, Incyte/Macrogenics, Agenus, CytomX, Symhogen, Checkpoint Therapeutics, and Janssen/Johnson & Johnson.

 

There are currently no anti-TIM-3 antibody products or anti-LAG-3 antibody products being marketed.  We are aware that two companies, Novartis and Eli Lilly, have anti-TIM-3 modulator antibodies in Phase 1/2 clinical development for

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various oncology indications.  We are also aware of several companies that have anti-LAG-3 modulators in development for various oncology indications, including Bristol-Myers Squibb, which has an anti-LAG-3 antibody in Phase 2 clinical development; Novartis, which has an anti-LAG-3 antibody in Phase 1/2 and Phase 2 clinical development; and Merck, Boehringer Ingelheim and Regeneron Pharmaceuticals, each of which has an anti-LAG-3 antibody in Phase 1 clinical development.  We are also aware of several other companies with immuno-oncology antibodies or programs in the preclinical or research phase.

 

For more information on the market for cancer therapeutics and oncology supportive care products, our competitors and the products that may compete with our product candidates, see “—Overview of the Market for Cancer Therapeutics and Oncology Supportive Care Products”, “—Our Product Candidates—Niraparib” and “—Our Product Candidates— Immuno-Oncology.

 

Commercial Operations

 

Our U.S.-based commercial operations team consists of approximately 190 employees.  Our European commercial operations team consists of approximately 55 employees in nine countries including those at our international headquarters office in Zug, Switzerland.  The commercial infrastructure includes a targeted, oncology sales force to establish relationships with a focused group of oncologists, oncology nurses and pharmacists.  Personnel in sales management, internal sales training, sales operations, marketing, marketing operations and distribution support the sales force.  Additionally, the sales, marketing and market access teams manage relationships with key accounts such as managed care organizations, group purchasing organizations, hospital systems, oncology group networks, and government accounts.  To further develop our commercial infrastructure in the event that any other product candidates receive regulatory approval, we expect to invest significant financial and management resources, much of which will be committed at the risk that any such product candidate may not be approved by any regulatory agency.

 

Government Regulation

 

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

 

Development and Approval

 

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

 

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

 

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

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

 

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

 

·

Phase 1 clinical trials include the initial administration of the investigational drug to humans, typically to a small group of healthy human subjects, but occasionally to a group of patients with the targeted disease or disorder.  Phase 1 clinical trials generally are intended to determine the metabolism and pharmacologic actions of the drug, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.

 

·

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

 

·

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

 

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

 

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

 

FDA performance goals generally provide for action on an application within 12 months of submission, but that deadline is extended in certain circumstances.  Moreover, the review process is often significantly extended by FDA requests for additional information or clarification.  The FDA also has programs intended to expedite the development and review of new drugs intended to address unmet medical needs for serious or life-threatening conditions.  Through priority review designation, for example, the FDA can expedite the target action date to eight months from application submission, if the agency finds that a drug is intended to treat a serious condition and, if approved, would provide a significant improvement in

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safety or effectiveness.  Another example is fast-track designation, which the FDA may grant to a drug that is intended to treat a serious condition and that demonstrates the potential to address an unmet medical need.  Under the fast track program, the FDA allows a sponsor to submit completed portions of an NDA on a rolling basis, rather than requiring the entire application to be submitted before review begins.  Product candidates with fast-track designation also may be eligible for more frequent meetings or correspondence with the agency during the development process.

 

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

 

After review of an NDA or BLA, the FDA may decide to not approve the application or issue a complete response letter outlining the deficiencies in the submission.  The complete response letter also may request additional information, including additional preclinical or clinical data.  Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval.  Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor.  Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials.  Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug or require post-approval commitments, including the completion within a specified time period of additional clinical studies, which often are referred to as “Phase 4” or “post-marketing” studies.

 

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

 

Post-Approval Regulation

 

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

 

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

 

Advertising and Promotion.  The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs and biologics through, among other things, standards and regulations for direct-to-consumer advertising, advertising and promotion to healthcare professionals, communications regarding unapproved uses, industry-sponsored

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

 

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

 

Hatch-Waxman Act

 

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

 

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

 

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

 

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

 

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

 

A product that is not an NCE may qualify for a three-year period of exclusivity if the NDA contains new clinical data, derived from studies conducted by or for the sponsor, that were necessary for approval.  In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD.  Additionally, the exclusivity

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applies only to the conditions of approval that required submission of the clinical data.  For example, if an NDA is submitted for a product that is not an NCE, but that seeks approval for a new indication, and clinical data were required to demonstrate the safety or effectiveness of the product for that use, the FDA will not finally approve an ANDA or 505(b)(2) application for another product with that active moiety for that use until the expiration of the applicable three-year period.

 

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

 

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

 

The Biologics Price Competition and Innovation Act

 

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

 

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

 

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America Invents Act

 

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

 

Other Exclusivities

 

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

 

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

 

21st Century Cures Act

 

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

 

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

 

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Foreign Regulation

 

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

 

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

 

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

 

In the EU, a marketing authorization for a medicinal product can be obtained through a centralized, mutual recognition, decentralized procedure, or national procedure (single EU Member State).  In accordance with the centralized procedure, the applicant can submit a single application for marketing authorization to the EMA that will provide a positive opinion regarding the application if it meets certain quality, safety, and efficacy requirements.  Following the opinion of the EMA, the EC makes a final decision to grant a centralized marketing authorization that permits the marketing of a product in all 28 EU Member States and three of the four European Free Trade Association, or EFTA, States, Iceland, Liechtenstein and Norway.  The centralized procedure is mandatory for certain medicinal products, including orphan medicinal products, medicinal products derived from certain biotechnological processes, advanced therapy medicinal products and certain other medicinal products containing a new active substance for the treatment of certain diseases, and optional for certain other products, including medicinal products that are a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public or animal health.  Under the centralized procedure in the EU, the maximum timeframe for the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP).  Accelerated evaluation may be granted by the CHMP in exceptional cases.  These are defined as circumstances in which a medicinal product is expected to be of a “major public health interest”.  Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease, such as heavy disabling or life-threatening diseases, to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; and anticipation of high therapeutic benefit.  In these circumstances, the EMA ensures that the opinion of the CHMP is given within 150 days.

 

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

 

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

 

A medicinal product may be granted an orphan designation in the EU if: (i) it would be used to treat or prevent a life-threatening or chronically debilitating condition and either affects no more than five in 10,000 people in the EU or for economic reasons would be unlikely to be developed without incentives; and (ii) no satisfactory method of diagnosis, prevention or treatment of the condition concerned exists, or, if such a method exists, the medicinal product would be of

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significant benefit to those affected by the condition.  The application for orphan designation must be submitted to the EMA and approved prior to market authorization.  Once authorized, orphan medicinal products are entitled to ten years of market exclusivity.  During this ten-year period, with limited exceptions, neither the competent authorities of the EU Member States, the EMA, nor the EC are permitted to accept applications or grant marketing authorization for other similar medicinal products with the same therapeutic indication.  However, marketing authorization may be granted to a similar medicinal product with the same orphan indication during that period with the consent of the holder of the marketing authorization or if the manufacturer of the product is unable to supply sufficient quantities.  Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if the latter product is safer, more effective or otherwise clinically superior to the original product.  The period of market exclusivity may be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity.

 

Once an applicant receives marketing authorization in an EU Member State, through any application route, the applicant is then required to engage in pricing discussions and negotiations with a separate pricing authority in that country.  The legislators, policymakers and healthcare insurance funds in the EU Member States continue to propose and implement cost-containing measures to keep healthcare costs down, due in part to the attention being paid to health care cost containment and other austerity measures in the EU.  Certain of these changes could impose limitations on the prices pharmaceutical companies are able to charge for their products.  The amounts of reimbursement available from governmental agencies or third-party payors for these products may increase the tax obligations on pharmaceutical companies such as ours, or may facilitate the introduction of generic competition with respect to our products.  Furthermore, an increasing number of EU Member States and other foreign countries use prices for medicinal products established in other countries as “reference prices” to help determine the price of the product in their own territory.  Consequently, a downward trend in prices of medicinal products in some countries could contribute to similar downward trends elsewhere.  In addition, the ongoing budgetary difficulties faced by a number of EU Member States, including Greece and Spain, have led and may continue to lead to substantial delays in payment and payment partially with government bonds rather than cash for medicinal products, which could negatively impact our revenues and profitability.  Moreover, in order to obtain reimbursement of our medicinal products in some countries, including some EU Member States, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies.  There can be no assurance that our medicinal products will obtain favorable reimbursement status in any country.

 

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

 

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

 

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

 

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

 

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

 

Failure to comply with the EU Member State laws implementing the Community Code on medicinal products, and EU rules governing the promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices, with the EU Member State laws that apply to the promotion of medicinal products, statutory health insurance, bribery and anti-corruption or with other applicable regulatory requirements can result in enforcement action by the EU Member State authorities, which may include any of the following: fines, imprisonment, orders forfeiting products or prohibiting or suspending their supply to the market, or requiring the manufacturer to issue public warnings, or to conduct a product recall.

 

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

 

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

 

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

 

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, warning letters or untitled letters, injunctions, civil, administrative, or criminal penalties, monetary fines or imprisonment, suspension or withdrawal of regulatory approvals, suspension of ongoing clinical studies, refusal to approve pending

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applications or supplements to applications filed by us, suspension or the imposition of restrictions on operations, product recalls, the refusal to permit the import or export of our products or the seizure or detention of products.

 

Coverage and Reimbursement

 

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

 

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

 

In the past, payors have implemented reimbursement metrics and periodically revised those metrics as well as the methodologies used as the basis for reimbursement rates, such as average sales price, or ASP, average manufacturer price, or AMP, and actual acquisition cost.  The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates.  The Centers for Medicare and Medicaid Services, or CMS, surveys and publishes retail pharmacy acquisition cost information in the form of National Average Drug Acquisition Cost, or NADAC, files to provide state Medicaid agencies with a basis of comparison for their own reimbursement and pricing methodologies and rates.  It may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover our products for which we receive regulatory approval.

 

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

 

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

 

Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologics, were reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012.  Subsequent legislation extended the 2% reduction, on average, to 2027.  This

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may cause Medicare Part D plans to seek lower prices from manufacturers.  Other legislative or regulatory cost containment provisions, as described below, could have a similar effect.

 

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

 

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

 

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

 

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

 

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

 

In the physician office setting, Medicare Part B generally pays for covered drugs, which would include VARUBI IV and in limited circumstances could also include the oral formulation, at a rate of 106% of the drug’s ASP.  ASP is defined by statute based on sales and price concession data, including rebates and chargebacks, for a defined period of time and manufacturers submit the required information to CMS on a quarterly basis.  Prior to the quarter in which the payment rate will go into effect, CMS calculates and publishes the ASP-based payment rate.  Under this methodology, payment rates change on a quarterly basis, and significant downward fluctuations in ASP, and therefore reimbursement rates, could negatively impact sales of a product.  Because the ASP-based payment rate is defined by statute, changes to Medicare payment methodologies generally require a legislative change.  While the statute requires Medicare Part B payments for most drugs furnished in the physician office setting to be at 106% of ASP, the statute does not have a similar requirement for hospital outpatient departments.  For that setting, the Medicare payment for many covered Part B drugs also is at 106% of ASP, provided that the product exceeds a per day cost threshold.  For those products that do not meet the threshold, as is true for many oral anti-emetic products, there is no separate payment for the drug when furnished in a hospital outpatient department.  For those products that meet the threshold, the current 106% of ASP payment rate could be changed by CMS in future years through regulations,

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without any intervening legislation.  The 106% of ASP payment rates for the physician office and hospital outpatient settings are subject to the 2% sequestration cuts mandated by federal statute as described above.

 

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

 

The ACA requires pharmaceutical manufacturers of branded prescription drugs to pay a branded prescription drug fee to the federal government.  Each such manufacturer is required to pay a prorated share of the branded prescription drug fee of $4.1 billion in 2018 and $2.8 billion in each year thereafter, based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.  The ACA also expanded the Public Health Service’s 340B Drug Pricing Program, or the 340B program (described below), to include additional types of covered entities.  Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners, and a number of provisions have only recently become effective.  It appears likely that the ACA will continue the pressure on pharmaceutical pricing, especially under the Medicare and Medicaid programs, and may also increase our regulatory burdens and operating costs.  Legislative changes to the ACA, including a possible repeal of the statute, remain possible under the Trump Administration.  Certain changes, such as the removal of the ACA’s individual health insurance mandate, have already been made by Congress via the enactment of the Tax Cuts and Jobs Act of 2017, and the effects of such legislative changes to the ACA are unknown.  Even if we obtain favorable coverage and reimbursement status for ZEJULA, VARUBI, or any other products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

 

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

 

Fraud and Abuse Laws

 

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

 

The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare programs.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other.  Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly and practices that involve remuneration to those who prescribe, purchase, or recommend pharmaceutical and biological products, including certain

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discounts, or engaging consultants as speakers or consultants, may be subject to scrutiny if they do not fit squarely within the exemption or safe harbor.  Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.  Moreover, there are no safe harbors for many common practices, such as educational and research grants or patient assistance programs.

 

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

 

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

 

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

 

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

 

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

 

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

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a business advantage for the company.  Liability under the UK Bribery Act is strict, but a defense of having in place adequate procedures designed to prevent bribery is available.

 

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

 

Patents and Proprietary Rights

 

We have in-licensed and continue to develop several patent portfolios, including for our rolapitant, niraparib, and immunotherapeutic antibodies programs.

 

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

 

Our PARP inhibitor portfolio includes patent families relating to niraparib.  The patent families in-licensed from Merck are being prosecuted or maintained by Merck in consultation with us.  Our patent families relating to niraparib include applications and patents directed to compositions of matter, methods of treatment (including treatment of cancer and other diseases), particular salts of niraparib, niraparib formulations, and methods of preparing niraparib.  The Merck portfolio for niraparib comprises of a number of issued United States and non-United States patents.

 

Our immunotherapeutic antibodies portfolios presently consist of patent and patent applications pending in multiple jurisdictions, which cover particular antibodies and binding fragments thereof to identified targets of interest, as well as their use individually and in combination.  We have rights to all patents owned or controlled by our collaborator, AnaptysBio, to the extent that they claim the manufacture, composition, or use of an antagonist antibody developed under the program.

 

Intellectual Property Protection Strategy

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

PARP Inhibitor

 

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

 

A United States patent claiming the composition of matter of niraparib has been granted and, with patent term adjustment, has a patent term until at least March 2030.  Corresponding patent applications and issued patents in multiple foreign jurisdictions have similar claims and have a patent term until at least January 2028.  Additional patent families claiming certain compounds, salt forms, methods of use, formulations, and processes to make niraparib have been filed in the United States and multiple foreign jurisdictions and, if granted, will have patent terms until at least 2027 to 2038.

 

Many jurisdictions also grant patent term extensions, typically up to five years, for post-issuance regulatory delay.  In the United States, only one patent may be extended per approved product.  We have applied for patent term extension for niraparib in the United States, and we believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for niraparib’s composition of matter up to March 2031 in the United States.  With respect to Europe, we intend to file supplementary protection certificates (which are issued on a country-by-country basis) in available countries.  We believe that supplementary protection certificates could be available to extend our patent exclusivity for niraparib in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval.  In general, supplementary protection certificates are available up to a maximum of five years and, if granted, any available supplementary protection certificate extension will be capped at fifteen years from the first approval.  There is no guarantee that any extension will be granted in either the United States or Europe, and even if granted, the extension may be less than the maximum allowable extension.

 

NK-1 Receptor Antagonists

 

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

 

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

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

 

We have applied for patent term extension for rolapitant in the United States, and we believe that patent term extension under the Hatch-Waxman Act could be available to extend our patent exclusivity for rolapitant up to August 2028 in the United States.  With respect to Europe, we believe that supplementary protection certificates could be available to extend our patent exclusivity for rolapitant in each European country in which a patent is issued and in which supplementary protection certificates are available, with the period of extension depending on the timing of our first approval.  We have filed for supplementary protection certificates in available European countries based upon our EC approval.  If granted, the supplementary protection certificates could extend our patent exclusivity for rolapitant’s composition of matter to December 2027.  There is no guarantee that the maximum allowable extension (generally 15 years) will be granted in either the United States or Europe, and any extension granted may be shorter than this, or not granted at all.

 

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

 

Immuno-Oncology

 

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

 

A patent has issued from the relevant patent filings, and any patents granted from the patent filings will be expected to have terms that extend into the mid to late 2030s.  Ultimate expiration dates, which may differ by jurisdiction, may depend on, for example, patent term adjustments or patent term extensions available for patent office and/or regulatory delays, payment of annuities and/or maintenance fees, and/or terminal disclaimers of related cases.

 

Manufacturing

 

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

 

Employees

 

As of December 31, 2017, we had 715 full-time employees, 150 of whom hold Ph.D. or M.D. degrees.  Of these full-time employees, 272 were directly engaged in development activities, 232 were engaged in selling, marketing and related activities, 72 in medical affairs, with the remainder serving in primarily general and administrative and commercial support capacities.  None of our employees are represented by labor unions or covered by collective bargaining agreements.  We consider our relationship with our employees to be good.

 

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Research and Development

 

We have dedicated a significant portion of our resources to our efforts to develop our product candidates.  We incurred research and development expenses, including acquired in-process research and development, of $157.4 million, $254.1 million and $318.7 million during the years ended December 31, 2015, 2016 and 2017, respectively.  We anticipate that a significant portion of our operating expenses will continue to be related to research and development in 2018 as we continue to advance our product candidates through clinical development.

 

Available Information

 

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

 

We currently operate in one segment.  For additional information regarding our financial results, including our comprehensive loss, revenues and assets, refer to Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS

 

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

 

Risks Related to Our Financial Position and Capital Needs

 

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

 

We are a biopharmaceutical company with a limited operating history.  Investment in biopharmaceutical product development and commercialization is highly speculative because, among other things, it entails substantial up-front capital expenditures and significant risk that product candidates will fail to gain regulatory approval or approved products will fail to become commercially successful.  We have recognized limited revenue from product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations.  As a result, we are not profitable and have incurred losses in each period since our inception in 2010.  We reported a net loss of $496.1 million for the year ended December 31, 2017 and had an accumulated deficit of $1.5 billion as of December 31, 2017. 

 

Although we have obtained approval from regulatory authorities and launched ZEJULA® (niraparib) in the U.S. and European Union, or the EU, VARUBI® (rolapitant) IV and tablets in the United States and VARUBY® (rolapitant) tablets in the EU, we expect to continue to incur losses for the foreseeable future.  These losses may increase as we continue to invest in product development and commercialization activities for our products and continue our development of, and seek regulatory approvals for, all of our product candidates.  We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.  The size of our future net losses will depend, in large part, on the rate of future growth of our expenses, and our ability to generate and continue to grow revenues from our products and any product candidates.  Because of the numerous risks and uncertainties associated with product development, including the risk that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict with certainty the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability.  Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.  Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

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

 

To date, we have recognized limited product revenues from sales of ZEJULA and VARUBI/VARUBY, and we have not generated any revenues from sales of any other product candidates.  Our ability to continue to generate revenue and become profitable depends upon our ability to successfully commercialize our products, including ZEJULA, and our other product candidates, including niraparib in additional indications as both a monotherapy and in combination with other assets, including our own immuno-oncology assets.  Even if we are able to successfully achieve regulatory approval for additional product candidates, we do not know when any of those product candidates will generate revenue for us, if at all.

 

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

 

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

 

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

 

Our operations have consumed substantial amounts of cash since inception.  We expect to continue to spend substantial amounts to advance the development of our product candidates, including niraparib as a monotherapy and in combination with other therapeutics, and our immuno-oncology assets, and to continue to commercialize ZEJULA and VARUBI/VARUBY.  We also may spend substantial amounts for any additional product candidates that we may acquire or in-license in the future.  We may require additional capital for these and other needs.  If additional capital is needed and not obtained on a timely basis, we would be required to change our current operating plans to reduce our future expenses. 

 

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

 

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

 

·

our ability to generate sufficient revenues from sales of ZEJULA and, if approved, our other product candidates;

 

·

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

 

·

the outcome, timing and cost of regulatory approvals by the U.S. Food and Drug Administration, or FDA, and comparable foreign regulatory authorities and the potential that the FDA or comparable foreign regulatory authorities may require that we perform more studies than those that we currently expect;

 

·

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

 

·

the cost and timing of preclinical and clinical development and manufacturing activities associated with our immuno-oncology antibody product candidates;

 

·

our obligations to make milestone payments, royalty payments, or both under our in-licensing agreements;

 

·

the cost of in-licensing or acquiring additional product candidates;

 

·

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

 

·

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

 

·

our need to repay amounts due under our loan agreement dated November 21, 2017, or the Loan Agreement.

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

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

 

Risks Related to Our Business and Industry

 

Our current business plan relies heavily on our ability to successfully commercialize ZEJULA.  Our products may not achieve market acceptance or be commercially successful.

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

our ability to enforce our intellectual property rights;

 

·

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

 

·

our ability to maintain compliance with all applicable regulatory requirements.

 

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

 

Our future success is dependent primarily on our ability to obtain regulatory approvals for and successfully commercialize our product candidates, including additional indications for niraparib as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets.

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The success of our business depends heavily upon our ability to develop and commercialize product candidates.  We have recognized only limited product revenue from sales of ZEJULA and VARUBI/VARUBY, and our only later clinical-stage programs include niraparib as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets.

 

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

 

Despite the results reported in clinical trials for niraparib, we do not know whether the clinical trials we are continuing to conduct or may in the future conduct will demonstrate adequate efficacy and safety to result in regulatory approval for niraparib in any additional indications, as a monotherapy or in combination with other assets, or in any particular jurisdiction or jurisdictions other than those for which niraparib has already been approved.  If we do not obtain regulatory approvals for niraparib in the various additional indications and/or combinations for which it is being developed, or do not obtain such approvals in a timely manner, it would negatively affect our ability to generate revenue in the future, our ability to become profitable, and our growth prospects.

 

We face substantial competition for our marketed products, ZEJULA and VARUBI/VARUBY, which could limit our ability to generate significant product sales.

 

The development and commercialization of new drug products is highly competitive.  Many of our competitors are more established companies and may therefore have competitive advantages due to their size, cash flows, and institutional experience.  We may be unable to compete successfully against these more established companies.

 

There are a number of large pharmaceutical and biotechnology companies that market and sell products or are pursuing the development of products that compete or we expect will compete with ZEJULA.  There are currently two commercially available PARP inhibitors other than ZEJULA.  AstraZeneca Plc’s LYNPARZATM (olaparib) was initially approved by the FDA for use by ovarian cancer patients with a germline BRCA mutation, and was granted a new approval in August 2017 by the FDA for use as a maintenance treatment for recurrent, epithelial ovarian, fallopian tube or primary peritoneal adult cancer who are in response to platinum-based chemotherapy, regardless of BRCA status.    In February 2018, LYNPARZA received a positive opinion from the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, for a new tablet formulation and a broad maintenance label, which is expected to lead to an EC marketing authorization in the near future.  In addition, Clovis Oncology, Inc.’s RUBRACATM (rucaparib) was approved in December 2016 by the FDA for use as a monotherapy for the treatment of patients with deleterious BRCA mutation (germline and/or somatic) associated advanced ovarian cancer who have been treated with two or more chemotherapies.  Clovis has filed with the FDA for expanded approval of RUBRACA as a second-line and later maintenance treatment for all women with ovarian cancer who have responded to their latest treatment with platinum chemotherapy, regardless of BRCA status, and has filed for initial approval with the European Commission as a third-line treatment in advanced ovarian cancer patients with a deleterious BRCA-mutation.  In February 2018, the CHMP communicated a positive trend vote (meaning more voted yes than no) for RUBRACA to be authorized for the treatment of a subpopulation of platinum-sensitive ovarian cancer patients who also harbor a BRCA mutation.  A final vote will occur at the CHMP’s March 2018 meeting.  We believe there are also several additional products in clinical development targeting the PARP pathway, as detailed in Part I, Item 1, “Business – Competition”.  Both LYNPARZA and rucaparib have received “orphan drug designation” from the EMA, which provides certain benefits including market exclusivity for up to ten years in the approved indication post-approval.  In addition to other PARP inhibitors, ZEJULA also competes with AVASTINTM (bevacizumab), Roche’s angiogenesis inhibitor.  AVASTIN is FDA- and EMA-approved in combination with chemotherapy for the treatment of recurrent ovarian cancer following platinum-containing chemotherapy (platinum-sensitive and platinum-resistant) and has been

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approved by the EMA, in combination with chemotherapy, for front-line treatment.  In the U.S., it is currently under FDA review for the front-line setting.

 

We also face substantial competition with respect to oral and IV formulations of VARUBI and with respect to VARUBY.  VARUBI/VARUBY competes with EMEND, an NK-1 receptor antagonist marketed by Merck, as well as AKYNZEO, an oral combination NK-1 receptor antagonist and 5-HT3 receptor antagonist (netupitant plus ALOXI (palonosetron HCl)) that is marketed by Helsinn Healthcare, and Sandoz’s generic version of aprepitant.  Additionally, Heron Therapeutics recently received FDA approval, and launched marketing of, its aprepitant IV formulation product, CINVANTITM.  VARUBI/VARUBY would face additional competition if additional generics are introduced to the market, or other products are developed and approved, for the treatment and prevention of CINV, or if an IV formulation of AKYNZEO is developed.

 

We are aware of several companies that have antibody-based products on the market or in clinical development that are directed at the same biological targets as some of our immuno-oncology programs.  There are currently two anti-PD-1 antibody products and three anti-PD-L1 antibody products being marketed.  OPDIVO® (nivolumab, marketed by Bristol-Myers Squibb) is approved in a number of indications as a monotherapy or in combination with other products; KEYTRUDA® (pembrolizumab, marketed by Merck) is approved in a number of indications; TECENTRIQ® (atezolizumab, marketed by Roche) is approved in patients with various forms of locally advanced or metastatic urothelial carcinoma or metastatic NSCLC; IMFINZI® (durvalumab, marketed by AstraZeneca) was approved in 2017 for patients with various forms of locally advanced or metastatic urothelial carcinoma; and BAVENCIO® (avelumab, co-marketed by Merck KGa and Pfizer) was approved in 2017 for adults and pediatric patients 12 years and older with metastatic Merkel cell carcinoma and for patients with various forms of locally advanced or metastatic urothelial carcinoma.  Although there are currently no anti-TIM-3 antibody products or anti-LAG-3 antibody products being marketed, we are aware that two companies, Novartis and Eli Lilly, have anti-TIM-3 modulator antibodies in Phase 1/2 clinical development for various indications.  We are also aware of several companies that have anti-LAG-3 modulators in development for various indications, including Bristol-Myers Squibb, which has an anti-LAG-3 antibody in Phase 2 clinical development; Novartis, which has an anti-LAG-3 antibody in Phase 1/2 and Phase 2 clinical development; and Merck, Boehringer Ingelheim and Regeneron Pharmaceuticals, each of which has an anti-LAG-3 antibody in Phase 1 clinical development.

 

For further detail on the specific competition that VARUBI/VARUBY, ZEJULA and our immuno-oncology antibody product candidates face, see Part I, Item 1, “Business – Competition”.

 

Many of the approved drugs with which our products or product candidates may compete are well-established therapies or products and are widely accepted by physicians, patients and third-party payors.  Insurers and other third-party payors may also encourage the use of generic products.  Any of our product candidates that are approved may be priced at a significant premium over competitive generic products.

 

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

 

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

 

Even after regulatory approval is obtained, products are still subject to ongoing requirements of the FDA and comparable foreign regulatory authorities, including requirements related to manufacturing, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. 

 

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

 

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If we, our approved products or product candidates, or the manufacturing facilities for our approved products or product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·

issue warning letters or untitled letters;

 

·

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

 

·

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

 

·

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

 

·

suspend, vary or withdraw regulatory approval;

 

·

suspend any ongoing clinical studies;

 

·

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

 

·

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

 

·

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

 

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

 

Advertising and promotion of our products and any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services Office of Inspector General, or the HHS OIG, state attorneys general, members of Congress, and the public.  Violations of applicable advertising and promotion laws and regulations, including promotion of our products for unapproved (or off-label) uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA.  Advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign regulatory authorities.  In the United States, engaging in impermissible promotion of approved products for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines and agreements that materially restrict the manner in which a company promotes or distributes drug products.  Advertising and promotion of our products are similarly subject to close scrutiny in the EU. 

 

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

 

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

 

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

 

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain.  Failure can occur at any time during the clinical trial process.  We have various ongoing clinical trials related to our development

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programs for ZEJULA and our various immuno-oncology assets including in various combinations with each other and other assets.  We may experience delays in our ongoing or future clinical trials, and we do not know whether planned clinical trials will begin or enroll subjects on time, need to be redesigned, or be completed on schedule, if at all.  Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, including the rate of patient enrollment, and other factors, such as:

 

·

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

 

·

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

 

·

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

 

·

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the inability of a site to participate due to prior engagement in other clinical trial programs, including some that may be for the same indication;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

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

 

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

 

The time required to obtain approval by the FDA and comparable foreign regulatory authorities for a product candidate is unpredictable, but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of regulatory authorities.  In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions.  Although we have obtained FDA and EMA regulatory approval for ZEJULA and VARUBI/VARUBY, we may not ever obtain regulatory approval for our current product

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candidates or any other product candidates, including ZEJULA in additional indications, as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets.

 

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

 

Certain of our product candidates, including ZEJULA in additional indications, as a monotherapy and in combination with other therapeutics, including our immuno-oncology assets, could be approved or deemed approvable by the FDA or equivalent foreign regulatory authorities only in combination with a diagnostic test for certain uses, which could increase the risk that the product candidate does not receive approval by the relevant regulatory authorities, or receives approval under conditions that adversely impact the commercial potential of the product candidate. 

 

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

 

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

 

In addition, if any product candidate is approved in a particular indication for use only in connection with such a companion diagnostic test by the FDA or any comparable foreign regulatory agencies, the commercial opportunity for such product candidate may be more limited, and we may have difficulty achieving adoption of the product candidate, if the diagnostic test is not commercially available or if the diagnostic test is restricted in its use by payors or other market forces. 

 

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

 

The safety profile of our products will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval.  If we, the FDA or comparable foreign regulatory authorities become aware of new safety information about any of our products or product candidates after approval, we or those authorities may issue labeling changes, or the authorities may require the establishment of a REMS, or similar strategy, impose restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.  For example, in January 2018, after post-marketing events of anaphylaxis, anaphylactic shock, and other serious hypersensitivity reactions, some requiring hospitalization were reported to us following the commercial launch of VARUBI IV, we updated the package insert for the IV formulation of VARUBI in collaboration with the FDA to include certain warnings

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and precautions with respect to these events.  We also issued what is commonly referred to as a “Dear Healthcare Professional Letter” in connection with the updates to the package insert to inform healthcare providers of these changes.  In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.

 

Undesirable side effects caused by any of our products or product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials, could result in a more restrictive label, or could result in the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities.  Drug-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete a clinical trial, and could result in potential product liability claims.  Such side effects, such as those experienced with VARUBI IV following the commercial introduction of the product, could also materially limit the commercial potential for such product, especially if competing products are not associated with similar side effects.  Any of these occurrences may harm our ability to generate revenues from the affected product and adversely affect our business, financial condition and prospects.

 

Additionally, if we or others identify undesirable side effects caused by our marketed products, such as those we have observed with VARUBI IV, a number of potentially significant negative consequences could result, including:

 

·

we may suspend marketing of such product;

 

·

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

 

·

regulatory authorities may withdraw approvals of such product;

 

·

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

 

·

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

 

·

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

 

·

we may record significant inventory impairment charges to write down the value of inventories to estimated net realizable value;

 

·

we may experience significant product returns;

 

·

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

 

·

our reputation may suffer.

 

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

 

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

 

In order to market and sell any of our product candidates in Europe or any other foreign jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements.  The approval procedure varies among countries and can involve additional testing.  The time required to obtain approval may differ substantially from that required to obtain FDA approval.  The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval.  In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country.  We or our licensees may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all.  Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.  We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in

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any market.  If we are unable to obtain approval of any of our product candidates by regulatory authorities in Europe or other foreign territories, the commercial prospects of that product candidate may be diminished and our business prospects could be adversely impacted.

 

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

 

Our ability to successfully market and commercialize our current and future products will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations.  If these third-party payors do not sufficiently cover and reimburse the cost of our products and related procedures or services or these products are considered too costly for general use, physicians may prescribe them less frequently, adversely affecting our future revenues and profitability.

 

The Medicare program and certain government pricing programs, including the Medicaid drug rebate program, the Public Health Service’s 340B Drug Pricing Program, or the 340B program, and the pricing program under Section 603 of the Veterans Health Care Act of 1992, or the VHCA, impact the revenues we may derive from current and future products that we may commercialize.  Any future legislation or regulatory actions altering these programs or imposing new compliance requirements could have a significant adverse effect on our business. Any such measures could indirectly impact demand for pharmaceutical products because they can cause payors and providers to apply heightened scrutiny and/or austerity actions to their entire operations, including pharmacy budgets.

 

Also, the trend toward managed health care in the U.S., as well as the implementation of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, together the ACA, and the concurrent growth of organizations such as managed care organizations, accountable care organizations and integrated delivery networks, may result in increased pricing pressures for pharmaceutical products, including any products that may be offered by us in the future.  Moreover, legislative and regulatory changes to the ACA, including a possible repeal, remain possible under the Trump Administration.  Certain changes, such as the removal of the ACA’s individual health insurance mandate, have already been made by Congress via the enactment of the Tax Cuts and Jobs Act of 2017, and the effects of such legislative changes to the ACA are unknown.  In addition, third-party payors are increasingly making patients responsible for a higher percentage of the total cost of drugs in the outpatient setting.  This can lower the demand for our products if the increased patient cost sharing obligations are more than they can afford.  We are unable to predict what changes in legislation or regulation relating to the health care industry or third-party coverage and reimbursement, including possible repeal of the ACA, may be enacted in the future or what effect such legislation or regulation would have on our business.

 

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

 

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

 

We are required to calculate and report certain pricing data to the U.S. federal government in connection with federal drug pricing programs as a pre-condition to: (i) the availability of federal funds to pay for our products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs, or the VA, and by covered entities under the 340B program.  Pharmaceutical manufacturers have been prosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government.  The rules governing the calculation of certain reported prices are highly complex.  Although it is our intention to maintain and follow strict procedures to ensure the maximum possible integrity for our federal price calculations, the process for making the required calculations involves subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws.  We cannot assure you that our pricing submissions will not be found to be incomplete or incorrect.  Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid.

 

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The Medicaid rebate amount for each manufacturer is computed each quarter based on the manufacturer’s submission to the Centers for Medicare and Medicaid Services, or CMS, of its current average manufacturer price, or AMP, and, in the case of innovator products like ZEJULA and VARUBI, best price figures, for the quarter.  If we become aware that our AMP or best price reporting for a prior quarter was incorrect, or has changed, we are obligated to resubmit the corrected data, increasing our costs for complying with the laws and regulations governing the Medicaid drug rebate program.  Any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction.  Price recalculations also may affect the ceiling price at which we would be required to offer our products to certain covered entities, such as safety-net providers, under the 340B program.

 

We are liable for errors associated with our submission of average sales price, or ASP, pricing data under Medicare Part B.  In addition to retroactive rebates and the potential for 340B program refunds, if we are found to have knowingly submitted false AMP, ASP, or best price information to the government, we may be liable for significant civil monetary penalties.  Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which we participate in the Medicaid program and receive federal payments under Medicaid or Medicare Part B for our covered outpatient drugs.

 

To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased by certain federal agencies and certain federal grantees, we also must participate in the VA FSS pricing program.  To participate, we are required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs” available at pricing that is based on a weighted average wholesaler price known as the Non-FAMP.  Knowing provision of false information in connection with a Non-FAMP filing or failure to make necessary disclosures and/or to identify contract overcharges can subject us to substantial penalties for each item of false information as well as allegations against us under the False Claims Act and other laws and regulations.  Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

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

 

Healthcare providers, specialty distributors, specialty pharmacies, physicians and third-party payors play a primary role in the distribution, recommendation and prescription of any pharmaceutical product for which we obtain marketing approval.  Our arrangements with third-party payors and customers are governed by applicable federal and state healthcare laws and regulations, including the following:

 

·

the federal healthcare Anti-Kickback Statute;

 

·

the federal civil False Claims Act;

 

·

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act;

 

·

the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program;

 

·

analogous state laws and regulations, such as state anti-kickback and false claims laws; and

 

·

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

 

The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or pharmaceutical company may fail to comply fully with one or more of these requirements.  Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs.  If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.  Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of

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significant resources and generate negative publicity, which could harm our financial condition and divert resources and the attention of our management from operating our business.

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

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

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

 

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

 

If we fail to meet our obligations under our agreements with our licensors, including Merck, OPKO and AnaptysBio, our licensors have the right to terminate our exclusive licenses and re-obtain the licensed technology as well as aspects of any intellectual property controlled by us and developed during the period the agreements were in force that relate to the licensed technology.  This means that our licensors could effectively take control of the development and commercialization of our products and product candidates after an uncured, material breach of our license agreements by us.  This would also generally be the case if we voluntarily terminated the agreements.  While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek to preserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all.  Any uncured, material breach under the licenses could result in our loss of exclusive rights and may lead to a complete termination of our product development and any commercialization efforts for the applicable product or product candidate.

 

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

 

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

 

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

 

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

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

 

We face an inherent risk of product liability exposure in connection with the commercialization of ZEJULA, VARUBI/VARUBY, and any of our current or future product candidates and in connection with the testing of our product candidates in human clinical trials.  Product liability claims may be brought against us by patients, healthcare providers or others using, administering or selling our products, or subjects enrolled in our clinical trials.  If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities and financial and reputational harm, regardless of merit or eventual outcome, including:

 

·

significant costs to defend the related litigation;

 

·

substantial monetary awards to patients or trial subjects;

 

·

loss of revenue; and

 

·

diversion of management and scientific resources from our business operations.

 

We currently hold what we believe to be a commercially reasonable amount of product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur.  Insurance coverage is increasingly expensive.  A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could consume significant amounts of our cash and adversely affect our business.

 

We market our products in certain countries and territories outside of the United States, including Europe, and are subject to the risks of doing business outside of the United States, but we have limited experience operating internationally.

 

We only recently initiated our operations outside of the United States, including the addition of international employees in the EU and other European countries.  Because we market ZEJULA, VARUBY, and if approved, our other product candidates, outside of the United States, we will need to continue to grow our international operations over the next several years.  Accordingly, our business is subject to risks associated with doing business outside of the United States, including our own limited experience operating internationally, the cost and time required to develop an international sales, marketing and distribution organization, changes in a specific country’s or region’s political, cultural or economic condition, unexpected changes in foreign laws and regulations, inadequate intellectual property protection in foreign countries, difficulty of effective enforcement of contractual provisions in local jurisdictions, and significant adverse changes in foreign currency exchange rates.

   

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

 

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

 

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

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limitations, which could potentially result in increased future tax liability to us.  In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

 

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

 

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

 

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

 

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

 

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

 

As of December 31, 2017, we had 715 full-time employees compared to 446 at the end of 2016.  As our development and commercialization plans and strategies for our existing products and product candidates continue to develop, we will need to continue to add managerial, operational, sales, marketing, financial and other resources.  The management, personnel and systems that we currently have in place may not be adequate to support our recent or future growth.  Such growth will impose significant added responsibilities on members of management.

 

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

 

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

 

Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees.  Because of the specialized scientific nature of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel.  Our ability to compete and grow depends in large part upon the continued service of our senior management team, including our co-founders, Leon O. Moulder, Jr., our Chief Executive Officer, and Mary Lynne Hedley, Ph.D., our President and Chief Operating Officer.  The loss of one or more of our senior executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner.  The competition for qualified personnel in the biopharmaceutical field is intense and as a result, we may be unable to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.  Although we have letter agreements with our key executives, these agreements are at will and do not prevent them from terminating their employment with us at any time.  We do not maintain “key person” insurance for any of our executives or other employees. 

 

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

 

From time to time, we evaluate acquisition opportunities and may, in the future, make acquisitions of, or investments in, companies that we believe have products or capabilities that are a strategic or commercial fit with our current product candidates and business or otherwise offer opportunities for our company.  In connection with these acquisitions or investments, we may issue stock that would dilute our stockholders’ percentage of ownership, incur debt and assume liabilities, incur amortization expenses related to intangible assets, or incur large and immediate write-offs.    We may be unable to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all.  If we do complete an acquisition, we cannot assure you that it will ultimately strengthen our competitive position, that it will not be viewed negatively by customers, financial markets or investors, or that we can effectively integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

We are subject to U.S. data protection laws and regulations (i.e., laws and regulations that address privacy and data security) at both the federal and state levels.  The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data security issues which may affect our business.  Numerous federal and state laws and regulations, including state security breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, disclosure and protection of health-related and other personal information.  Failure to comply with such laws and regulations could result in government enforcement actions and create liability for us (which could include civil and/or criminal penalties), private litigation, and/or adverse publicity that could negatively affect our business.  Finally, a data breach affecting sensitive personal information, including health information, could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

 

EU Member States, Switzerland and other countries have also adopted data protection laws and regulations, which impose significant compliance obligations and impose substantial fines for breaches of the data protection rules.  Data protection authorities from the different EU Member States may interpret the various laws and regulations differently and impose additional requirements, which add to the complexity of processing personal data in the EU.  The various laws and regulations will increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules.  Our failure to comply with these laws, or changes in the way in which these laws are implemented, could lead to government enforcement actions and significant penalties against us, and adversely impact our operating results.

 

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

 

In June 2016, a majority of voters in the United Kingdom, or the UK, elected to withdraw from the EU in a national referendum.  The UK government initiated the formal withdrawal procedure on March 29, 2017.  The procedure involves a two-year negotiation period in which the UK and the EU must agree to terms of the UK’s withdrawal and arrangements for the UK’s future relationship with the EU.  This negotiation period could be extended by a unanimous decision of the European Council, in agreement with the UK.  The referendum has created significant uncertainty about the future relationship between

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the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate in the event of a withdrawal.  From a regulatory perspective, the UK’s withdrawal could bear significant complexity and risks.  A basic requirement related to the grant of a marketing authorization for a medicinal product in the EU is that the applicant is established in the EU.  Following the withdrawal of the UK from the EU, marketing authorizations previously granted to applicants established in the UK may no longer be valid.  We currently hold the European marketing authorizations for both ZEJULA and VARUBY through a subsidiary in the UK.

 

Depending upon the exact terms of the UK’s withdrawal, the scope of a marketing authorization for a medicinal product granted by the European Commission pursuant to the centralized procedure might not, in the future, include the UK.  In these circumstances, an authorization granted by competent UK authorities would be required to place medicinal products on the UK market.  In addition, the laws and regulations that will apply after the UK withdraws from the EU would affect the manufacturing sites that hold a certification issued by the UK competent authorities.  Our capability to rely on these manufacturing sites for products intended for the EU market would also depend upon the exact terms of the UK withdrawal.

 

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

 

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

 

In the U.S., we currently sell our products principally to a limited number of specialty distributors and specialty pharmacy providers and therefore a significant portion of our net product revenue is generated by a small number of customers.  Three customers accounted for 93% of our net product revenue during 2017 and two customers accounted for 80% of our accounts receivable balance at December 31, 2017.  The loss of, material reduction in sales volume to, or a significant adverse change in our relationship with any of our key wholesalers or customers could have a material adverse effect on our revenue in any given period and may result in significant annual or quarterly revenue fluctuations.

 

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

 

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

 

Risks Related to Our Dependence on Third Parties

 

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

 

We do not own or operate facilities for the manufacture of our products or product candidates.  Our ability to successfully develop and commercialize our products and our product candidates will require us to establish large scale manufacturing capabilities through our contract manufacturing organizations, or CMOs.  We currently have no plans to build our own clinical or commercial scale manufacturing capabilities.  We currently work with two CMOs for the production of

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ZEJULA drug substance, and one other CMO, for ZEJULA drug product supply, for our clinical and commercial needs.  We currently work with one CMO for the production of rolapitant drug substance used for VARUBI (oral and IV) and VARUBY, one CMO for commercial production of VARUBI (oral) and VARUBY, and one other CMO for commercial production of VARUBI IV. 

 

As our drug development pipeline matures and we continue to commercialize ZEJULA and VARUBI/VARUBY and, if approved, our other product candidates, including our immuno-oncology assets, we will have a greater need for both clinical study supply and commercial manufacturing capacity.  We have limited experience manufacturing pharmaceutical products on a commercial scale, and some of our suppliers will need to continue to increase their scale of production to meet our projected needs for commercial manufacturing.  Manufacturing commercial quantities of our products to meet our projections may require our third-party manufacturers to invest substantial additional funds to increase capacity and to hire and retain additional personnel who have applicable large-scale commercial manufacturing experience.  Our third-party manufacturers may not successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all.  Because of the complex nature of our compounds, our manufacturers may not be able to manufacture our compounds at an acceptable cost or in sufficient quantities or in a timely manner necessary to make commercially successful products, or may require us to pay significant costs, including for capital improvements to their facilities.  If our contract manufacturers or other third parties fail to deliver our products for commercial sale on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or to develop our own manufacturing capabilities, we may be required to delay or suspend commercialization of our current products or other potential future products.   

 

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

 

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

 

Any significant disruption in our supplier relationships could harm our business.  We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers.  For example, we source key raw materials for ZEJULA drug substance from one supplier.  Such suppliers may not sell these key materials to us or our manufacturers at the times we need them or on commercially reasonable terms.  In certain cases, we do not have any control over the process or timing of the acquisition of these key materials by our manufacturers.  Any significant delay in the supply of a product or product candidate or its key materials for an ongoing clinical study could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates.  If our manufacturers or we are unable to purchase these key materials for products or product candidates after regulatory approval, the commercial launch of our product candidates could be delayed or there could be a shortage in supply, which would impair our ability to generate revenues from the sale of our products and product candidates.

 

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

 

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

 

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

 

Because we have relied and plan to continue to rely on third parties for the foregoing preclinical and clinical functions, our internal capacity to perform these functions is limited.  Switching or adding additional CROs involves additional cost, requires management time and focus, and could result in substantial delays in our development programs.  Identifying, qualifying and managing the performance of third-party service providers can be difficult, time consuming and cause delays in our development programs.  In addition, there is a natural transition period when a new CRO commences work and the new CRO may not provide the same type or level of services as the original provider.  If any of our relationships with our third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms.

 

Risks Related to Our Intellectual Property

 

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

 

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

 

The steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both inside and outside the United States.  The rights already granted under any of our currently issued patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking.  If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficient, our

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competitors could develop and commercialize technology and products similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.  Further, under our agreement with Merck for niraparib, Merck is responsible, subject to certain exceptions, for prosecuting the licensed patents, and we are reliant on them to do so in a diligent fashion, subject to our right to review and approve their prosecution activities.  If Merck fails to conduct such activities diligently, does not take approved actions, or otherwise fails to adequately protect our licensed patent rights, we may not obtain or maintain broad proprietary protection for niraparib.

 

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

 

The patent prosecution process is expensive and time-consuming, and we or our licensors (where applicable) may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.  It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization activities before it is too late to obtain patent protection on them.  Further, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.  We expect to seek extensions of patent terms where they are available in any countries where we are prosecuting patents.  This includes in the United States under the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, which permits a patent term extension of up to five years beyond the expiration of the patent.  However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request.  If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.  Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.  The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and these foreign laws may also be subject to change.  Publications of discoveries in the scientific literature lag behind actual discoveries, and patent applications in the United States and other jurisdictions typically are not published until 18 months after filing, or in some cases not at all.  Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

 

Previously, in the United States, assuming the other requirements for patentability are met, the first to make the claimed invention was entitled to the patent.  Outside the United States, the first to file a patent application is entitled to the patent.  In March 2013, the United States transitioned to a ‘first to file’ system in which the first inventor to file a patent application will be entitled to the patent.  Under either the previous or current system, third parties will be allowed to submit prior art prior to the issuance of a patent by the U.S. Patent and Trademark Office, or the USPTO, and may become involved in opposition, derivation, reexamination, post-grant review proceedings or interference proceedings challenging our patent rights or the patent rights of others.  For example, in March 2017, Teva Pharmaceutical Industries Ltd. filed an opposition in the EPO seeking revocation of European Patent No. 20046464, or the ‘464 patent, covering the crystalline hydrochloride sale of

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rolapitant, the active ingredient in VARUBY.  The natural term of the ‘464 patent is set to expire in April 2027.  In December 2017, the Opposition Division of the EPO issued a summons to attend oral proceedings on this case, which are scheduled for June 2018.  An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position with respect to third parties.

 

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

 

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

 

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

 

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates, and to use our proprietary technologies without infringing the proprietary rights of third parties.  The patent landscape for our products and product candidates is continuously evolving due in part to the fact that patent applications in the United States and many other jurisdictions are maintained in secrecy for at least 18 months following their earliest filing date.  We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the USPTO.  Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future.  For example, we are aware of third-party patents that contain claims potentially relevant to certain therapeutic uses of immune checkpoint inhibitors, and we are also aware of ongoing litigation involving third parties in the area, in each case which could impact the development of the various assets in our immuno-oncology portfolio.  If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and commercializing our products and technology, which could impact the profitability of our products.  However, we may not be able to obtain any required license on commercially reasonable terms or at all.  Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us.  We could be forced, including by court order, to cease commercializing the infringing technology or product.  In addition, in any such proceeding or litigation, we could be found liable for monetary damages.  A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.  Any claims by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact on our business.

 

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

 

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position.  We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties.  We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants.  Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.  Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the

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outcome is unpredictable.  In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets.  If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

 

Risks Related to Ownership of Our Common Stock

 

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

 

The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.  From January 1, 2016 through December 31, 2017, the price of our common stock on the NASDAQ Global Select Market ranged from $29.51 per share to $192.94 per share.  In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, these factors include:

 

·

the success of competitive products or technologies;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

the recruitment or departure of key personnel;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

announcement or expectation of additional financing efforts;

 

·

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

 

·

changes in the structure of healthcare payment systems;

 

·

market conditions in the pharmaceutical and biotechnology sectors;

 

·

the publication of inaccurate or unfavorable research about us, end of coverage, or failure to publish reports regularly on us, in each case by any securities or industry analysts who publish research on us; and

 

·

general economic, industry and market conditions.

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

 

Forecasting sales of ZEJULA, VARUBI/VARUBY, and if approved our other product candidates, may be difficult, and if our revenue projections are inaccurate, our business may be harmed and our stock price may decline.

 

Our sales of ZEJULA and VARUBI/VARUBY are difficult to forecast, and we expect sales of any future products would also be difficult to forecast.  Factors that increase the difficulty of forecasting sales of each of our current and future products include the following:

 

·

the cost and availability of reimbursement for the product;

 

·

treatment guidelines issued by government and non-government agencies;

 

·

the timing of market entry relative to competitive products;

 

·

the availability of alternative therapies;

 

·

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

 

·

the rates of returns and rebates;

 

·

uncertainty about the pace of acceptance of the product;

 

·

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

 

·

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

 

·

the extent and success of our marketing efforts; and

 

·

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

 

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

 

An adverse determination in any securities class action lawsuit against us could have a material adverse effect on us.

 

A putative class action complaint was filed on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086.  The complaint alleges that we and our Chief Executive Officer and our Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Rule 10b-5 thereunder.  The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of our common stock between March 14,

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2016 and January 12, 2018.  We believe that the allegations contained in the complaint are without merit and intend to defend the case vigorously.  However, whether or not the plaintiff's claims are successful, this type of litigation is often expensive and diverts management's attention and resources, which could adversely affect the operation of our business.  If we are ultimately required to pay significant defense costs, damages or settlement amounts, such payments could adversely affect our operations.

 

We may be the target of similar litigation in the future.  Any future litigation could result in substantial costs and divert our management's attention and resources, which could cause serious harm to our business, operating results and financial condition.  We maintain liability insurance; however, if any costs or expenses associated with this or any other litigation exceed our insurance coverage, we may be forced to bear some or all of these costs and expenses directly, which could be substantial.

 

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

 

Our executive officers, directors and their respective affiliates beneficially owned approximately 29.7% of our voting stock as of December 31, 2017.  This group of stockholders has the potential ability to control us through their ownership position.  Acting together, these stockholders may be able to influence the outcomes of certain matters requiring stockholder approval.  For example, this group may be able to influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction.  This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.  The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

 

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

 

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

 

Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts.  We have limited experience complying with Section 404, and if in the future we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.  Furthermore, we cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future.  For example, in 2017, we began to implement an enterprise resource planning, or ERP system, which automated many of our internal controls over financial reporting.  Because the ERP is a new system and we have no prior experience with it, there is an increased risk that one or more of our financial controls may fail.  Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows.  If our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the NASDAQ, the SEC, or other regulatory authorities.  Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

 

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

 

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

 

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

 

As of December 31, 2017, we had 54,464,039 shares of common stock outstanding.  Sales of a substantial number of shares of our common stock or other securities in the public market or in private placements could occur at any time.  These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.  Of these outstanding shares, 16,187,911 are currently held by directors, executive officers and other parties that may be deemed to be their affiliates and are available for sale subject to volume limitations and other restrictions under securities laws.  We also have registered shares of common stock that we may issue under our equity compensation plans.  These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates.

 

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

 

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

 

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

 

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

 

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

 

Pursuant to our equity incentive plans, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and other employees and service providers, including officers, employees and service providers of our subsidiaries and affiliates.  As of December 31, 2017, there were 1,810,240 shares of our common stock reserved for issuance under our 2012 Omnibus Incentive Plan and 198,433 shares of our common stock available for future grant under our 2015 Non-Employee Director Stock Incentive Plan.  Future stock option grants and issuances of common stock under our equity plans may have an adverse effect on the market price of our common stock.

 

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

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

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

 

Risks Related to Our Indebtedness

 

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

 

In addition to our obligations to make payments on our existing indebtedness as discussed above, we and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt.  The indenture governing the Convertible Notes and the Loan Agreement allow us to incur additional indebtedness, subject to certain limitations, and do not restrict our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity.  If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on the Convertible Notes or our Loan Agreement, or to make payments under the indenture governing the Convertible Notes in connection with any fundamental change or pay any cash due upon conversion.

 

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

 

In the event the conditional conversion feature of the Convertible Notes is triggered, holders of notes will be entitled to convert their notes at any time during specified periods at their option.  If one or more holders elect to convert their notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity.  In addition, even if holders do not elect to convert their notes, we could be required

55


 

under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The terms of our Loan Agreement place restrictions on our operating flexibility.

 

The terms of our Loan Agreement contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on our ability to transfer currently owned U.S. intellectual property rights related to ZEJULA and VARUBI (the collateral under the Loan Agreement), incur additional indebtedness, incur additional liens and security interests on the collateral granted under the Loan Agreement, pay or make dividends, share repurchases and other distributions, and prepay subordinated indebtedness (other than the Convertible Notes). These terms may restrict our ability to operate our business in the manner we deem most effective or desirable, and may restrict our ability to fund our operations.

56


 

 

Nonpayment of principal, interest and other amounts, failure to comply with covenants, the occurrence of a material adverse change in our ability to perform our obligations, the rendering of judgments or orders or the acceleration or payment default by us in respect of other indebtedness in excess of $10 million, or bankruptcy could constitute an event of default that, if continued beyond the cure period, would allow the Collateral Agent, at the request of the lenders holding a majority of the outstanding principal amount under the Loan Agreement, to stop advancing money or extending credit for our benefit under the Loan Agreement and to declare all of our obligations under the Loan Agreement immediately due and payable, either of which would harm our business. 

 

Our ability to comply with the various terms and conditions in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

 

 

57


 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.   PROPERTIES

 

As of December 31, 2017, our principal offices were located in a facility in Waltham, Massachusetts, where we leased office space totaling approximately 260,000 square feet, which we use primarily for corporate functions.  The terms of the leases under which we lease this space continue through June 30, 2020 for a majority of the space and December 18, 2022 for the remainder of the space.  We also lease office space in several locations throughout Europe.  We believe our facilities are adequate for our current needs.  If we determine that additional or new facilities are needed in the future, we believe that sufficient options would be available to us on commercially reasonable terms.

 

ITEM 3.  LEGAL PROCEEDINGS

 

A putative class action complaint was filed by a putative stockholder on January 17, 2018 in the United States District Court for the District of Massachusetts, entitled Roger Bowers v. TESARO Incorporated (sic), et. al., Case No. 18-10086.  The complaint alleges that we and our Chief Executive Officer and our Chief Financial Officer violated certain federal securities laws, specifically under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, by making false and/or misleading statements about and/or failing to disclose information regarding certain side effects of VARUBI. The plaintiff seeks unspecified damages on behalf of a purported class of purchasers of our common stock between March 14, 2016 and January 12, 2018.  The Court has not set a trial date for this matter.  We believe that the allegations contained in the complaint are without merit and intend to defend the case vigorously.  We have not recorded an estimated liability associated with this legal proceeding as we do not believe that such a liability is probable.

 

ITEM 4.   MINE SAFETY DISCLOSURES

 

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

58


 

PART II

 

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

 

Market Information and Holders

 

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

 

 

 

 

 

 

 

 

 

 

    

HIGH

    

LOW

 

Year Ended December 31, 2016:

 

 

 

 

 

 

 

First quarter

 

$

51.57

 

$

29.51

 

Second quarter

 

$

84.91

 

$

36.68

 

Third quarter

 

$

110.48

 

$

80.35

 

Fourth quarter

 

$

148.74

 

$

96.52

 

Year Ended December 31, 2017:

 

 

 

 

 

 

 

First quarter

 

$

192.94

 

$

131.60

 

Second quarter

 

$

168.92

 

$

125.05

 

Third quarter

 

$

143.45

 

$

106.64

 

Fourth quarter

 

$

129.10

 

$

76.13

 

 

On February 22, 2018, the last reported sale price of our common stock was $60.89 per share.  As of the close of business on February 22, 2018, there were approximately 31 holders of record of our common stock.  Because many of the common shares are registered in “nominee” or “street” names, we believe that the total number of beneficial owners is considerably higher.

 

Dividends

 

We have never declared or paid any cash dividends on our capital stock.  We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business.  We do not intend to pay cash dividends on our common stock for the foreseeable future.  Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

59


 

Performance Graph (1)

 

The following graph presents a comparison from December 31, 2012 through December 31, 2017 of cumulative total return on assumed investment of $100.00 in cash in our common stock, the NASDAQ Composite Index and the NASDAQ Biotechnology Index.  Such returns are based on historical results and are not intended to suggest future performance.  Data for the NASDAQ Composite Index and the NASDAQ Biotechnology Index assume reinvestment of dividends.

 

Picture 4

 


(1)

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

60


 

ITEM 6. SELECTED FINANCIAL DATA

 

The table below sets forth certain of our selected historical financial data at the dates and for the periods indicated.  The selected historical statement of operations data presented below for the years ended December 31, 2015 (as revised), 2016 (as revised), and 2017 and the historical balance sheet data as of December 31, 2016 (as revised) and 2017, have been derived from our audited consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K.  The historical statement of operations data for the years ended December 31, 2013 and 2014 and the historical balance sheet data as of December 31, 2013, 2014 and 2015 (as revised) have been derived from financial statements not included in this Annual Report on Form 10-K.    All financial information presented has been consolidated and reflects the operations of TESARO, Inc. and its wholly-owned subsidiaries.  Our historical results are not necessarily indicative of results expected in any future period.  The selected historical financial data presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, which are included elsewhere in this Annual Report on Form 10-K.  The selected historical financial information in this section is not intended to replace our consolidated financial statements and the related notes thereto.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

2013

    

2014

    

2015 (1)

    

2016 (1)

    

2017 (2)

 

Consolidated Statements of Operations Data:

(in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Product revenue, net

$

 —

 

$

 —

 

$

2,026

 

$

5,174

 

$

120,700

 

     License, collaboration and other revenues

 

 —

 

 

 —

 

 

2,012

 

 

52,844

 

 

102,626

 

Total revenues

 

 —

 

 

 —

 

 

4,038

 

 

58,018

 

 

223,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

92,445

 

 

167,260

 

 

236,421

 

 

415,720

 

 

702,845

 

Loss from operations

 

(92,445)

 

 

(167,260)

 

 

(232,383)

 

 

(357,702)

 

 

(479,519)

 

Net loss

$

(92,362)

 

$

(171,012)

 

$

(247,749)

 

$

(374,224)

 

$

(496,126)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

(2.93)

 

$

(4.79)

 

$

(6.29)

 

$

(7.85)

 

$

(9.17)

 

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

 

31,559

 

 

35,739

 

 

39,387

 

 

47,652

 

 

54,080

 

 

(1)

Statement of operations data for the years ended December 31, 2015 and 2016 have been revised to reflect our adoption of Financial Accounting Standards Board Accounting Standards Update, or ASU, No. 2014-09 effective January 1, 2017, with full retrospective application to January 1, 2015.  This ASU creates a new Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, replacing previous revenue guidance.

 

(2)

Total operating expenses for the year ended December 31, 2017 include a $16.7 million write-down of VARUBI inventories.  For additional details, see “Results of Operations – Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 – Cost of Sales - Product” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

    

2013

    

2014

    

2015 (3)

    

2016 (3)

    

2017

Consolidated Balance Sheet Data:

 

(in thousands)

Cash and cash equivalents

 

$

130,310

 

$

256,861

 

$

230,146

 

$

785,877

 

$

643,095

Total assets

 

 

135,578

 

 

260,385

 

 

258,676

 

 

842,293

 

 

862,185

Long-term debt, net

 

 

 

 

111,964

 

 

121,325

 

 

131,775

 

 

437,105

Other long-term obligations

 

 

 3

 

 

 

 

113

 

 

5,391

 

 

9,788

 

(3)

Balance sheet data as of December 31, 2015 and 2016 have been revised to reflect our adoption of ASU No. 2014-09 effective January 1, 2017, with full retrospective application to January 1, 2015.

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a commercial-stage biopharmaceutical company devoted to providing transformative therapies to people bravely facing cancer.  Our primary focus is to develop treatments for solid tumors using various approaches, including small molecules and immuno-oncology antibodies, as monotherapies or in combinations.  We have in-licensed and are developing several oncology-related product candidates, and we have entered into several research collaborations with third parties for the discovery of new candidates.  We have also entered into arrangements with other companies for the development and commercialization of certain of our product candidates in specific indications and/or geographies.  Our two currently marketed products, ZEJULA® (niraparib) and VARUBI®/VARUBY® (rolapitant), are approved in both the U.S. and the European Union, or EU.

 

The U.S. Food and Drug Administration, or FDA, approved ZEJULA in March 2017 for the maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in a complete or partial response to platinum-based chemotherapy.  The European Commission, or EC, approved ZEJULA in November 2017 as a monotherapy for the maintenance treatment of adult patients with platinum-sensitive relapsed high grade serous epithelial ovarian, fallopian tube, or primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy.  We have in-licensed exclusive rights to niraparib from Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., or Merck.

 

VARUBI is approved in the U.S. in oral and intravenous, or IV, formulations for use in combination with other antiemetic agents in adults for the prevention of delayed nausea and vomiting associated with initial and repeat courses of emetogenic cancer chemotherapy, including, but not limited to, highly emetogenic chemotherapy.  The EC approved VARUBY (oral formulation), which is the brand name in Europe, in the EU in April 2017 for the prevention of delayed nausea and vomiting associated with highly and moderately emetogenic chemotherapy in adults.  We have in-licensed exclusive rights to rolapitant from OPKO Health, Inc., or OPKO.

 

The FDA approved the IV formulation of VARUBI in October 2017, and we commenced sales of the product in November 2017.  In January 2018, we updated the VARUBI IV package insert, including modifications to the contraindications, warnings and precautions, and adverse reactions sections.  In February 2018, we determined that we would cease marketing and distribution of VARUBI IV and pursue strategic alternatives for the VARUBI brand, including potentially out-licensing the VARUBI product line.

 

Research and Development

 

Our current development programs include:

 

·

Niraparib is an orally active and potent poly (ADP-ribose) polymerase, or PARP, inhibitor.  Based on research related to PARP inhibitors generally, we believe niraparib may also be active in the treatment of several tumor types.  We have several ongoing clinical trials evaluating niraparib for the treatment of various tumor types, as a monotherapy and in combination with other therapeutics, including our own immuno-oncology assets.  We expect to initiate additional clinical trials during 2018.  We are also collaborating with various other organizations to evaluate niraparib in combination with other therapeutics for the treatment of various cancers.  In March 2017, following an interim analysis of data by the independent data monitoring committee, we ceased enrollment in our BRAVO study (assessing niraparib in patients with breast cancer who are germline BRCA mutation carriers) after a determination that it is unlikely to produce data that is interpretable and therefore suitable for registration in this indication.

 

·

Immuno-Oncology: Pursuant to our collaboration and exclusive license agreement with AnaptysBio, Inc., or AnaptysBio, we are developing several antibodies for immuno-oncology targets.  TSR-042, which targets PD-1, TSR-022, which targets TIM-3, and TSR-033, which targets LAG-3, are currently in Phase 1 studies.  We are conducting pre-clinical research for TSR-075, a bi-specific antibody candidate targeting PD-1/LAG-3.  We are also evaluating our immuno-oncology anti-tumor agents in pre-clinical and clinical combination studies with niraparib and other anti-tumor agents. 

 

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We are also engaged in other research and mid- and early-stage development programs, including via third-party collaborations for the discovery, development and commercialization of therapies for various cancers, including the following:

 

·

Janssen Biotech, Inc., or Janssen: Under our global prostate cancer collaboration and license agreement with Janssen, we granted Janssen licenses under certain patent rights and know-how relating to niraparib, for prostate cancer worldwide, except for Japan.

 

·

Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda:  This agreement includes the clinical development and commercialization of niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea, Taiwan, Russia and Australia.

 

·

Zai Lab (Shanghai) Co., Ltd., or Zai Lab: We have granted Zai Lab an exclusive license to develop and commercialize niraparib for the territories of China, Hong Kong and Macao, or the China Territories, except for prostate cancer.  This agreement also provides us with the right of first refusal with respect to licenses for two novel, discovery-stage immuno-oncology programs from Zai Lab.

 

·

Merck Sharp & Dohme B.V., a subsidiary of Merck: We  have a research agreement with Merck Sharp & Dohme B.V. to perform the TOPACIO trial to evaluate the preliminary safety and efficacy of niraparib plus KEYTRUDA® (pembrolizumab) in patients with triple negative breast cancer and patients with ovarian cancer.  Enrollment of the TOPACIO trial is complete in both cohorts, and in June 2017, we announced that initial data from this trial demonstrated a disease control rate of 69% in patients with platinum-resistant ovarian cancer.

 

·

Jiangsu Hengrui Medicine Co., Ltd., or Hengrui: We have granted Hengrui a license of rights to develop, manufacture and commercialize rolapitant in the China Territories.

 

For further discussion of license and collaboration agreements, see Note 14, “License and Collaboration Agreements”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.

 

License Agreements

 

Our in-license agreements with Merck, OPKO and AnaptysBio are summarized below.

 

Rolapitant.  In December 2010, we entered into a license agreement with OPKO to obtain exclusive worldwide rights to research, develop, manufacture, market and sell rolapitant.  We have made all development milestone payments to OPKO, totaling $30.0 million, based on achieving specified regulatory milestones in the U.S. and Europe.  In addition, for each of the development programs under the OPKO license, we are required to make milestone payments to OPKO of up to an aggregate of $85.0 million if specified levels of annual net sales of rolapitant are achieved.  We pay OPKO tiered royalties on annual net sales achieved in the U.S. and Europe at percentage rates that range from the low teens to the low twenties, which we expect will result in an effective royalty rate in the low teens.  The royalty rate on annual net sales outside of the U.S. and Europe is slightly above the single digits.  We will pay royalties on rolapitant until the later of (i) the date that all of the patent rights licensed from OPKO and covering rolapitant expire, are invalidated or are not enforceable, and (ii) 12 years from the first commercial sale of the product, in each case, on a country-by-country and product-by-product basis.  Under certain circumstances, we are also required to pay OPKO an annual minimum royalty of $2.5 million in each of the first five full calendar years of commercial sales of VARUBI/VARUBY.  If we elect to develop and commercialize rolapitant in Japan through a third-party licensee, we will share equally with OPKO all amounts we receive in connection with such activities under our agreement with such third party, subject to certain exceptions and deductions.  We are responsible for all activities necessary to develop and commercialize rolapitant.

 

Niraparib.  In May 2012, we entered into a license agreement with Merck, under which we obtained exclusive, worldwide rights to certain patents and non-exclusive rights to certain Merck know-how, to research, develop, manufacture, market and sell niraparib for all therapeutic and prophylactic uses in humans.  We are required to make milestone payments to Merck of up to an aggregate of $57.0 million in U.S. and European development and regulatory milestones for the first indication, up to an aggregate of $29.5 million in development and regulatory milestones for each successive indication, and up to $87.5 million in one-time sales milestones based on the achievement of annual sales objectives.  We have made $52.2 million in milestone payments to date.  We also pay Merck tiered royalties at percentage rates in the low teens based on

63


 

worldwide annual net sales, until the later of the expiration of the last patent licensed from Merck covering or claiming niraparib, or the tenth anniversary of the first commercial sale of niraparib, in either case, on a country-by-country basis.  We are responsible for all activities necessary to develop and commercialize niraparib.

 

Immuno-Oncology Platform.   In March 2014, we entered into a collaboration and exclusive license agreement (later amended) with AnaptysBio, a therapeutic antibody company.  Under the terms of this agreement, we possess an exclusive, royalty-bearing, sublicensable worldwide license to research, develop, manufacture, market and sell products based on AnaptysBio’s proprietary technology for the discovery, generation and optimization of immunotherapy antibody product candidates targeting PD-1, TIM-3 and LAG-3, and certain bi-specific antibody product candidates.  We are responsible for all subsequent preclinical, clinical, regulatory, manufacturing and other activities necessary to develop and commercialize antibodies selected under each of four development programs, and we are obligated to use commercially reasonable efforts to research, develop or commercialize at least one product under each development program.

 

AnaptysBio was responsible for performing initial discovery and development of therapeutic antibodies against immune checkpoint proteins, with the goal of generating immunotherapy antibodies for use in the treatment of cancer.  We were required to reimburse AnaptysBio for specified costs incurred by AnaptysBio for these activities, which are now complete.  For each of the four development programs, we are required to make milestone payments to AnaptysBio of up to an aggregate of $18.0 million if certain research and development milestone events are achieved, and up to an additional $90.0 million of milestone payments if certain U.S. and non-U.S. regulatory submissions and approvals occur in initial and subsequent indications.  We have made $21.0 million in development milestone payments to date.  We will also be required to pay AnaptysBio tiered single-digit royalties, on a product-by-product basis, on worldwide annual net sales, and additional commercial milestone payments if specified levels of annual net sales of a product are attained.

 

Financial Operations Overview

 

We have incurred losses every year since inception in 2010.  We expect to incur losses for the foreseeable future, and these losses may increase as we continue to invest in product development and commercialization activities for our products and continue our development of, and seek regulatory approvals for, all of our product candidates, including commercial initiatives for ZEJULA and VARUBI/VARUBY, growing our commercial infrastructure, developing niraparib and our immuno-oncology platform, expanding our international operations, and incur increased interest expenses.  Because of the numerous risks and uncertainties associated with product development and regulatory actions, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability.  If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

 

Revenue

 

Product revenue is currently derived from sales of our two commercial products, ZEJULA and VARUBI/VARUBY, in the United States and Europe.  License, collaboration and other revenues relate to our license agreements with Janssen, Takeda, Zai Lab and Hengrui.  For further discussion of our revenue recognition policy, see “Critical Accounting Policies and Significant Judgments and Estimates” below.  Our ability to generate revenue and become profitable depends upon our ability to successfully commercialize products, including any of our products and product candidates that we have in-licensed (rolapitant, niraparib, and products potentially resulting from our immuno-oncology collaborations) or other products or product candidates that we may in-license or acquire in the future. 

 

We adopted new revenue accounting guidance during 2017 (Accounting Standards Codification Topic 606, Revenues from Contracts with Customers,  or Topic 606) that impacts the amount and timing of our revenue recognition, and resulted in revisions of revenues previously recognized in our published financial statements.  For further discussion, see Note 13, “Revenue Recognition”, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K.    The references “revised” and “as revised” used herein refer to revisions of data for the years ended December 31, 2015 and 2016, as a result of our adoption of the new revenue guidance with full retrospective application to January 1, 2015.

 

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Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

 

·

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

 

·

fees and expenses incurred under agreements with contract research organizations, investigative sites, research consortia and other entities in connection with the conduct of clinical trials and preclinical studies and related services, such as administrative, data management, laboratory and biostatistics services;

 

·

the cost of acquiring, developing and manufacturing active pharmaceutical ingredients for product candidates that have not received regulatory approval, clinical trial materials and other research and development materials;

 

·

pre-commercial license fees and milestone payments related to the acquisition of in-licensed product candidates, which are reported on our statements of operations as acquired in-process research and development;

 

·

fees and costs related to regulatory filings and activities;

 

·

facilities, depreciation and other expenses, which include direct and allocated expenses for rent, utilities, maintenance of facilities, insurance and other supplies; and

 

·

other costs associated with clinical, preclinical, discovery and other research activities.

 

Research and development costs are expensed as incurred.  License fees and development milestone payments related to in-licensed products and technology are expensed as acquired in-process research and development if it is determined at that point that they have no established alternative future use.  Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and information provided to us by our vendors.

 

Research and development activities are central to our business model.  Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials and manufacturing costs.  We expect that our total future research and development costs will continue to increase over current levels, depending on the progress of our clinical development programs.  We also anticipate increasing costs associated with our collaborations, manufacturing activities, and potential development milestone payments. Factors we expect to drive such increases include: continuing our currently ongoing clinical trials and initiating new trials for niraparib, immuno-oncology candidates and other potential product candidates; continuing manufacturing development and validation, and initiating additional investigative and collaborative studies related to niraparib;  incurring increased discovery, development and manufacturing-related expenses associated with our immuno-oncology platform; conducting regulatory activities; incurring potential milestone obligations; incurring expenses associated with non-clinical research and our research collaborations; leasing additional facility space; and hiring additional personnel.

 

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval.  We may never succeed in achieving regulatory approval for any of our currently unapproved product candidates.  The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates, and significant and changing government regulation.  In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.  We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as based on an assessment of each product candidate’s commercial potential.  If we experience delays in the completion of, or the termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our future ability to generate product revenues from any of these product candidates will be delayed or jeopardized.  These occurrences would harm our business, financial condition and prospects, perhaps significantly, which would require us to alter our current operation plan and potentially delay, scale back, or discontinue the development or commercialization of one or more programs and/or other areas of the business in order to reduce our future expenses and continue to fund our remaining operations.

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The following table presents research and development expenses and acquired in-process research and development expenses on a program-specific basis for our in-licensed products and product candidates for the years ended December 31, 2015, 2016 and 2017, respectively (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

    

2015

    

2016

    

2017

Rolapitant Expenses

 

 

 

 

 

 

 

 

 

Acquired in-process research and development

 

$

 —

 

$

 —

 

$

 —

Research and development

 

 

25,799

 

 

16,628

 

 

9,604

Rolapitant total

 

 

25,799

 

 

16,628

 

 

9,604

 

 

 

 

 

 

 

 

 

 

Niraparib Expenses

 

 

 

 

 

 

 

 

 

Acquired in-process research and development

 

 

 —

 

 

9,940

 

 

 —

Research and development

 

 

60,982

 

 

104,778

 

 

88,346

Niraparib total

 

 

60,982

 

 

114,718

 

 

88,346

 

 

 

 

 

 

 

 

 

 

Immuno-Oncology Expenses

 

 

 

 

 

 

 

 

 

Acquired in-process research and development

 

 

2,000

 

 

9,000

 

 

10,000

Research and development:

 

 

 

 

 

 

 

 

 

TSR-042

 

 

8,026

 

 

11,285

 

 

36,392

TSR-022

 

 

5,642

 

 

9,242

 

 

16,650

TSR-033

 

 

1,256

 

 

8,003

 

 

6,743

Combinations and other

 

 

5,460

 

 

6,116

 

 

16,059

Immuno-Oncology total

 

 

22,384

 

 

43,646

 

 

85,844

 

 

 

 

 

 

 

 

 

 

Personnel and Other Expenses

 

 

48,225

 

 

79,092

 

 

134,948

 

 

 

 

 

 

 

 

 

 

Total

 

$

157,390

 

$

254,084

 

$

318,742

 

For further discussion of the changes in our research and development expenses with respect to the year ended December 31, 2017 and the corresponding period of 2016, see “Results of Operations — Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 — Research and Development Expenses” below.

 

Personnel-related costs, depreciation and stock-based compensation are not allocated to any programs, as they are deployed across multiple projects under development and, as such, are separately classified as personnel and other expenses in the table above.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist principally of salaries and related costs, including stock-based compensation, for our commercial personnel, including our field sales force, certain medical education professionals and other commercial support personnel, as well as personnel in executive and other administrative or non-research and development functions.  Other selling, general and administrative expenses include certain facility-related costs, information technology costs, pre-commercial and commercial consulting, advertising, market research, and other activities necessary to prepare for and support product launches, and professional fees for legal, patent review, consulting and accounting services.

 

We anticipate that our selling, general and administrative expenses will continue to increase in the future in support of our commercial and pre-commercial activities related to ZEJULA and VARUBI/VARUBY and potential other products, and continued research and development activities, as well as the continued costs of operating as a public multinational company.  These increases will likely include increased costs related to the hiring of additional personnel, executing marketing and promotional programs, hiring consultants, leasing of additional facility space, enhancing information technology systems, and legal and other professional fees, among other expenses.

 

66


 

Other Income and Expense

 

Other income and expense consists primarily of interest expense related to our debt instruments and interest income earned on cash and cash equivalents.  A portion of the interest expense is non-cash expense relating to accretion of debt discounts and amortization of issuance costs.

 

Results of Operations

 

Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

Change

(data in thousands)

 

2016

    

2017

    

 

Amount

 

Percentage

 

 

 

(as revised)