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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - PALATIN TECHNOLOGIES INCptn_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - PALATIN TECHNOLOGIES INCptn_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - PALATIN TECHNOLOGIES INCptn_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - PALATIN TECHNOLOGIES INCptn_ex311.htm
EX-23 - CONSENTS OF EXPERTS AND COUNSEL - PALATIN TECHNOLOGIES INCptn_ex23.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - PALATIN TECHNOLOGIES INCptn_ex21.htm
EX-10.31 - SUPPLY AGREEMENT - PALATIN TECHNOLOGIES INCptn_ex1031.htm
EX-10.30 - MANUFACTURING SERVICES AGREEMENT - PALATIN TECHNOLOGIES INCptn_ex1030.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10 – K
 
☑ 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2020
 
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: 001-15543
 
 
PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4078884
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
4B Cedar Brook Drive
Cranbury, New Jersey
 
08512
(Address of principal executive offices)
 
(Zip Code)
 
(609) 495-2200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol
Name of Each Exchange
on Which Registered
Common Stock, par value $.01 per share
PTN
NYSE American
 
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 every Interactive Data File required to be submitted 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). Yes ☑   No ☐
 
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
 
 
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (December 31, 2019): $176,555,811
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date (September 24, 2020): 229,855,417
 

 
 
 
PALATIN TECHNOLOGIES, INC.
 
Table of Contents
 
 
Page
PART I
1
15
37
37
37
37
PART II
38
38
38
44
45
77
77
77
PART III
78
83
92
95
95
PART IV
96
99
 
 
 
i
 
 
Special Note Regarding Forward-Looking Statements
 
In this Annual Report on Form 10-K (this “Annual Report”) references to “we,” “our,” “us,” the “Company” or “Palatin” means Palatin Technologies, Inc. and its subsidiary.
 
Statements in this Annual Report, as well as oral statements that may be made by us or by our officers, directors, or employees acting on our behalf, that are not historical facts constitute “forward-looking statements,” which are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The forward-looking statements in this Annual Report do not constitute guarantees of future performance. Investors are cautioned that statements that are not strictly historical facts contained in this Annual Report, including, without limitation, the following are forward looking statements:
 
our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the novel strain of coronavirus (“COVID-19”) pandemic, such as, for example, increase in costs of and delays in conducting human clinical trials and the performance of our contractors and suppliers, and reduction in our productivity or the productivity of our contractors and suppliers;
our ability to successfully commercialize Vyleesi® (the trade name for bremelanotide) for the treatment of premenopausal women with hypoactive sexual desire disorder (“HSDD”) in the United States, which may be adversely affected by delays or disruptions related to the ongoing COVID-19 pandemic;
our ability to develop the infrastructure to successfully manufacture, through contract manufacturers, Vyleesi, and to successfully market and distribute Vyleesi in the United States;
our ability to meet post-marketing requirements of the U.S. Food and Drug Administration (“FDA”) to conduct two additional studies and one additional clinical trial for Vyleesi;
our expectations regarding the potential market size and market acceptance for Vyleesi for HSDD in the United States and elsewhere in the world;
our expectations regarding performance of our exclusive licensees of Vyleesi for the treatment of premenopausal women with HSDD, which is a type of female sexual dysfunction (“FSD”), including:
o
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun”), a subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., for the territories of the People’s Republic of China, Taiwan, Hong Kong S.A.R. and Macau S.A.R. (collectively, “China”), and
o
Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) for the Republic of Korea (“Korea”);
our expectations and the ability of our licensees to timely obtain approvals and successfully commercialize Vyleesi in countries other than the United States;
estimates of our expenses, future revenue and capital requirements;
our ability to achieve profitability;
our ability to obtain additional financing on terms acceptable to us, or at all, including unavailability of funds or delays in receiving funds as a result of the ongoing COVID-19 pandemic;
our ability to advance product candidates into, and successfully complete, clinical trials;
the initiation, timing, progress and results of future preclinical studies and clinical trials, and our research and development programs;
the timing or likelihood of regulatory filings and approvals;
and our other product candidates, if approved for commercial use;
our expectations regarding the clinical efficacy and utility of our melanocortin agonist product candidates for treatment of inflammatory and autoimmune related diseases and disorders, including ocular indications;
our ability to compete with other products and technologies treating the same or similar indications as our product candidates;
the ability of our third-party collaborators to timely carry out their duties under their agreements with us;
the ability of our contract manufacturers to perform their manufacturing activities for us in compliance with applicable regulations;
our ability to recognize the potential value of our licensing arrangements with third parties;
the potential to achieve revenues from the sale of our product candidates;
our ability to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other healthcare payers;
our ability to maintain product liability insurance at a reasonable cost or in sufficient amounts, if at all;
the performance of our management team, senior staff professionals, and third-party contractors and consultants;
 
 
ii
 
 
the retention of key management, employees and third-party contractors;
the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology in the United States and throughout the world;
our compliance with federal and state laws and regulations;
the timing and costs associated with obtaining regulatory approval for our product candidates, including delays and additional costs related to the ongoing COVID-19 pandemic;
the impact of fluctuations in foreign exchange rates;
the impact of legislative or regulatory healthcare reforms in the United States;
our ability to adapt to changes in global economic conditions as well as competing products and technologies; and
our ability to remain listed on the NYSE American stock exchange.
 
Such forward-looking statements involve risks, uncertainties and other factors that could cause our actual results to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Our future operating results are subject to risks and uncertainties and are dependent upon many factors, including, without limitation, the risks identified under the caption “Risk Factors” and elsewhere in this Annual Report, and any of those made in our other reports filed with the U.S. Securities and Exchange Commission (the “SEC”). Except as required by law, we do not intend, and undertake no obligation, to publicly update forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
 
Palatin Technologies® and Vyleesi® are registered trademarks of Palatin Technologies, Inc. Other trademarks referred to in this report are the property of their respective owners.
 
 
iii
 
 
PART I
 
Item 1. Business.
 
Our Business Overview
 
Palatin is a specialized biopharmaceutical company developing first-in-class medicines based on molecules that modulate the activity of the melanocortin and natriuretic peptide receptor systems. Our product candidates are targeted, receptor-specific therapeutics for the treatment of diseases with significant unmet medical need and commercial potential.
 
In January 2020, our North American licensee for Vyleesi® (bremelanotide injection), AMAG Pharmaceuticals, Inc. (“AMAG”), announced that it had completed a strategic review of its product portfolio and business strategy, and was pursuing options to divest its female health products, including Vyleesi. On July 27, 2020, Palatin and AMAG announced that they had mutually terminated the license agreement for Vyleesi effective July 24, 2020, and that Palatin was assuming responsibility for manufacturing, marketing and distribution of Vyleesi in the United States.
 
Melanocortin Receptor System. The melanocortin receptor (“MCr”) system is hormone driven, with effects on food intake, metabolism, sexual function, inflammation and immune system responses. There are five melanocortin receptors, MC1r through MC5r. Modulation of these receptors, through use of receptor-specific agonists, which activate receptor function, or receptor-specific antagonists, which block receptor function, can have significant pharmacological effects.
 
Our lead product, Vyleesi, was approved by the FDA on June 21, 2019, and since July 24, 2020 we have been marketing Vyleesi in the United States. Prior to July 24, 2020, the product was marketed in North America by AMAG pursuant to a license agreement which was terminated on that date. Vyleesi, a melanocortin receptor agonist, is an “as needed” therapy used in anticipation of sexual activity and self-administered by premenopausal women with HSDD in the thigh or abdomen via a single-use subcutaneous auto-injector. The most common adverse events are nausea, flushing, injection site reactions, headache and vomiting. Vyleesi is contraindicated in women with uncontrolled hypertension or known cardiovascular disease. In addition, the Vyleesi label includes precautions that it may cause (i) small, transient increases in blood pressure with a corresponding decrease in heart rate; (ii) focal hyperpigmentation (darkening of the skin on certain parts of the body), including the face, gums (gingiva) and breasts; and (iii) nausea.
 
Our current new product development activities focus primarily on peptides which are agonists at MC1r, and in some instances additional melanocortin receptors, with potential to treat inflammatory and autoimmune diseases such as dry eye disease, which is also known as keratoconjunctivitis sicca, uveitis, diabetic retinopathy and inflammatory bowel disease. We believe that the MC1r agonist peptides we are developing have broad anti-inflammatory effects and appear to utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses. We are also developing peptides that are active at more than one melanocortin receptor, and MC4r peptide and small molecule agonists with potential utility in obesity and metabolic-related disorders, including rare disease and orphan indications.
 
Natriuretic Peptide Receptor System. The natriuretic peptide receptor (“NPR”) system regulates cardiovascular functions, and therapeutic agents modulating this system have potential to treat fibrotic diseases, cardiovascular diseases, including reducing cardiac hypertrophy and fibrosis, heart failure, acute asthma, pulmonary diseases and hypertension. We have designed and are developing potential NPR candidate drugs selective for one or more different natriuretic peptide receptors, including natriuretic peptide receptor-A (“NPR-A”), natriuretic peptide receptor B (“NPR-B”), and natriuretic peptide receptor C (“NPR-C”).
 
Our Business Strategy. Key elements of our business strategy include:
 
Maximizing revenue from Vyleesi by marketing Vyleesi in the United States, supporting our existing licensees for China and South Korea, and licensing Vyleesi for the United States and additional regions;
 
Assembling and maintaining a team to create, develop and commercialize MCr and NPR products addressing unmet medical needs;
 
Entering into strategic alliances and partnerships with pharmaceutical companies to facilitate the development, manufacture, marketing, sale, and distribution of product candidates that we are developing;
 
Partially funding our product development programs with the cash flow generated from existing license agreements, as well as any future research, collaboration or license agreements; and
 
Completing development and seeking regulatory approval of certain of our other product candidates.
 
 
1
 
 
Pipeline Overview
 
The following chart illustrates the status of our drug development programs and Vyleesi, which has been approved by the FDA for the treatment of premenopausal women with acquired, generalized HSDD.
 
 
Melanocortin Receptor Programs
 
Vyleesi for HSDD. Vyleesi, the registered trademark for bremelanotide injection, was approved by the FDA on June 21, 2019 for the treatment of premenopausal women with acquired, generalized HSDD. AMAG, which had exclusively licensed Vyleesi for North America, initiated sales and marketing efforts for Vyleesi in the United States in August 2019, with a national launch in September 2019. In January 2020, AMAG announced that, based on a review of their business strategy, including an adverse outcome of an FDA advisory panel review of their lead health product Makena® (hydroxyprogesterone caproate injection), they made a decision to divest Vyleesi and another female healthcare product. In July 2020, Palatin and AMAG entered into a termination agreement, pursuant to which the license agreement was terminated, Palatin regained all North America rights for Vyleesi, and AMAG made a $12.0 million payment to Palatin at closing and will make a $4.3 million payment to Palatin by March 31, 2021. Palatin has assumed Vyleesi manufacturing agreements, and AMAG has transferred information, data and assets related exclusively to Vyleesi, including existing inventory. AMAG is providing certain transition services to Palatin for a period to ensure continued patient access to Vyleesi during the transition period. Palatin will reimburse AMAG for the agreed upon costs of the transition services.
 
Vyleesi faces competition primarily from Addyi® (flibanserin), which was introduced into the market in October 2015 for the treatment of HSDD in pre-menopausal women and is marketed by Sprout Pharmaceuticals, Inc. We are not aware of any company actively developing another melanocortin receptor agonist drug for the treatment of HSDD. However, we are aware of several other drugs at various stages of development, most of which are being developed for the treatment of HSDD that are to be taken on a chronic, typically once-daily, basis. There may be other companies developing new drugs for FSD indications other than HSDD, which may compete with Vyleesi, some of which may be in clinical trials in the U.S. or elsewhere. Vyleesi may also compete with products prescribed “off-label” by healthcare providers.
 
Vyleesi is distributed nationally through specialty pharmacies. Our marketing strategy focuses on efforts to establish Vyleesi as the preferred option for women and healthcare providers seeking a treatment for HSDD, which we implement through media such as direct-to-consumer marketing in search and social media channels. We also focus our Vyleesi marketing efforts towards healthcare professionals, who play a significant role in increasing HSDD and Vyleesi awareness among their patients. As the potential of Vyleesi is demonstrated, Palatin will explore licensing marketing and distribution rights for the United States to a marketing partner.
 
In January 2017, we entered into a license agreement with AMAG, pursuant to which we granted AMAG an exclusive license in all countries of North America, with the right to grant sublicenses, to research, develop and commercialize products containing Vyleesi. Upon the license agreement becoming effective on February 2, 2017, AMAG paid us $60.0 million as a one-time initial payment, and has reimbursed us $25.0 million for direct out-of-pocket expenses incurred in development and regulatory activities necessary to file an NDA, less certain expenses directly paid by AMAG. Upon the FDA acceptance of the Vyleesi NDA filing for HSDD, AMAG paid us a $20.0 million milestone payment less agreed deductions for expenses incurred by AMAG, and upon FDA approval of Vyleesi, AMAG paid us a $60.0 million milestone payment.
 
 
2
 
 
In early September 2017, we entered into a license agreement with Fosun for exclusive rights to commercialize Vyleesi in China. We received an upfront payment of $5.0 million, less required tax withholding, and when regulatory approval for a Vyleesi product is obtained in China we will receive a $7.5 million milestone payment. We may receive up to $92.5 million in sales related milestones and will receive high-single digit to low double-digit royalties on net sales in China. In November 2017, we entered into a license agreement with Kwangdong for exclusive rights to commercialize Vyleesi in Korea, and received an upfront payment of $0.5 million, less required tax withholding. Upon the first commercial sale of Vyleesi in Korea we will receive a $3.0 million milestone payment and will receive mid-single digit to low double-digit royalties on all net sales and may receive up to $37.5 million in sales related milestones.
 
We retain worldwide rights for Vyleesi for HSDD and all other indications outside Korea and China. We are actively seeking potential partners for marketing and commercialization rights for Vyleesi for HSDD outside the licensed territories, including entering into a license agreement for marketing and commercialization rights for Vyleesi in the United States. However, we may not be able to enter into suitable agreements with potential partners on acceptable terms, if at all.
 
Our Current Product Development Strategy. We are designing and developing potent and highly selective MC1r agonist peptides and agonist peptides specific for more than one melanocortin receptor for treatment of a variety of inflammatory and autoimmune indications. In animal models our peptides agonists, as well as the endogenous agonist alpha-MSH, can reduce inflammation and potentially resolve chronic inflammatory conditions. We believe that our agonist peptides suppress certain inflammatory cytokines, and modulate the activities of immune cells, such as monocytes and T cells, to reduce immune response, and may utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses.
 
We have conducted preclinical animal studies with MC1r and multiple MCr peptide drug candidates for selected inflammatory disease and autoimmune indications. MC1r plays a role in many diseases, including inflammatory bowel disease and ocular indications such as uveitis, diabetic retinopathy and dry eye disease. Work with rodent animal models have demonstrated therapeutic responses that are statistically significant compared to placebo, and that are equal to or superior to established positive controls in animal models. However, success in animal models does not necessarily mean that any of our drug candidates will be able to successfully treat diseases in human patients.
 
PL9643 for Dry Eye Disease and Anti-Inflammatory Ocular Indications. PL9643, a peptide melanocortin agonist active at multiple MCrs, including MC1r and MC5r, is our lead clinical development candidate for anti-inflammatory ocular indications, including dry eye disease, which is also known as keratoconjunctivitis sicca. Dry eye disease is a syndrome with symptoms including irritation, redness, discharge and blurred vision. It may result from an autoimmune disease such Sjögren’s syndrome, an ocular lipid or mucin deficiency, blink disorders, abnormal corneal sensitivity or environmental factors. It is estimated to affect over 30 million people in the United States.
 
We have developed an aqueous eye drop formulation which will be used in clinical trials in a single use delivery device. We held a pre-Investigational New Drug (“IND”) meeting with the FDA on Phase 2 study design and the overall development program through Phase 3 registration studies, submitted the IND to the FDA, and initiated the Phase 2 clinical trial in February 2020. The Phase 2 study is a multi-center, randomized double-masked and placebo-controlled study evaluating the efficacy and safety of PL9643 ophthalmic solution (topical eye drops) compared to placebo for the treatment of the signs and symptoms of dry eye. The study completed enrollment in July 2020, with 160 participants enrolled at three sites in the US. Patients were randomized in a 1:1 ratio into two arms, PL9643 or placebo, and undergo twelve weeks of treatment. The two primary endpoints are inferior corneal fluorescein staining and ocular discomfort, and data is expected as early as the fourth quarter of calendar year 2020. If results from the Phase 2 study support advancing to Phase 3, we will initiate a Phase 3 efficacy study as early as mid-2021.
 
Systemic PL8177 for COVID-19 Related Indications. We are developing PL8177 as a potential treatment for patients with COVID-19, the disease caused by infection with the SARS-CoV-2 virus, and having hypoxemic respiratory failure with or without acute respiratory distress syndrome. This decision was based on positive results in preclinical multiple inflammatory disease models and a lung injury model, which showed the ability of PL8177 to reduce inflammation, protect lung tissue and reduce lung fibrosis. We are conducting additional preclinical studies to support the filing of an IND with the FDA for this indication, and thereafter initiate a Phase 2 study. We are seeking support for the proposed Phase 2 study from the federal government and other sources, and if external support is not available we may determine not to initiate Phase 2 studies.
 
Oral PL8177 for Inflammatory Bowel Diseases. PL8177, a selective MC1r agonist peptide, is our lead clinical development candidate for inflammatory bowel diseases, including ulcerative colitis. PL8177 is a cyclic peptide comprised of seven amino acids. We filed an IND application on PL8177 in late 2017 and in 2018 successfully completed subcutaneous dosing of human subjects in a Phase 1 single and multiple ascending dose clinical safety study.
 
 
 
3
 

For ulcerative colitis and other inflammatory bowel diseases we will administer PL8177 in an oral formulation designed to deliver PL8177 to the interior wall of the diseased bowel. PL8177 activates MC1r present on the interior wall of the bowel in ulcerative colitis and other inflammatory bowel diseases. We believe that delivering PL8177 directly to MC1r in the bowel wall will maximize treatment effect while minimizing any systemic or off-target effects.
 
A Phase 2 study in ulcerative colitis using the oral, delayed-release, polymer formulation of PL8177 is scheduled to start in the first half of calendar year 2021, and may take up to one year to complete.
 
Systemic PL8177 for Non-Infectious Uveitis. PL8177 has been granted orphan drug designation by the FDA for the treatment of non-infectious intermediate, posterior, pan and chronic anterior uveitis. Non-infectious uveitis is a group of inflammatory diseases that produces swelling and destroys eye tissue and can result in vision loss. A Phase 2 program in non-infectious uveitis using a systemic delivery formulation of PL8177 is under development.
 
Melanocortin Peptides for Diabetic Retinopathy. We are conducting preclinical studies with melanocortin peptides in diabetic retinopathy models and are scheduled to complete these studies by the first half of calendar year 2021. If results support advancing the program, we would conduct required safety studies and manufacture drug product under Good Manufacturing Practices (“GMP”) regulations preparatory to filing an IND and initiating clinical studies.
 
Natriuretic Peptide Receptor Programs
 
Natriuretic Peptide Receptor Systems. The NPR system has numerous cardiovascular functions, and therapeutic agents modulating this system may be useful in treatment of cardiovascular and fibrotic diseases. While the therapeutic potential of modulating this system is well appreciated, development of therapeutic agents has been difficult due, in part, to the short biological half-life of native peptide agonists. We have made potential NPR candidate drugs that are selective for one or more different natriuretic peptide receptors, including NPR-A, NPR-B, and NPR-C.
 
PL3994 for Mechanism of Action Studies. PL3994 is an NPR-A agonist and synthetic mimetic of the endogenous neuropeptide hormone atrial natriuretic peptide (“ANP”). PL3994 activates NPR-A, a receptor known to play a role in cardiovascular homeostasis. Consistent with being an NPR-A agonist, PL3994 increases plasma cyclic guanosine monophosphate (“cGMP”) levels, a pharmacological response consistent with the effects of endogenous natriuretic peptides on cardiovascular function and smooth muscle relaxation. PL3994 also decreases activity of the renin-angiotensin-aldosterone system (“RAAS”), a hormone system that regulates blood pressure and fluid balance. The RAAS system is frequently over-activated in heart failure patients, leading to worsening of cardiovascular function.
 
In conjunction with clinicians at a major research institution, PL3994 is entering Phase 2A clinical trial supported by a grant from the American Heart Association in the fourth quarter of calendar year 2020. We have conducted Phase 1 safety studies with PL3994, with no serious or severe adverse events. Consistent with the PL3994 mechanism of action, elevations in plasma cGMP levels, increased diuresis and increased natriuresis were all observed for several hours after single subcutaneous doses.
 
Because of the limited patent term remaining on PL3994, we do not intend to pursue PL3994 as a pharmaceutical product but are utilizing it to establish the mechanism of action and pharmaceutical utility of synthetic mimetics of ANP.
 
PL5028 for Cardiovascular and Fibrotic Disease. PL5028, a dual NPR-A and NPR-C agonist we developed, is in preclinical development for cardiovascular and fibrotic diseases, including reducing cardiac hypertrophy and fibrosis. We have ongoing academic collaborations with several institutions with PL5028.
 
Technologies We Use
 
We used a rational drug design approach to discover and develop proprietary peptide, peptide mimetic and small molecule agonist compounds, focusing on melanocortin and natriuretic peptide receptor systems. Computer-aided drug design models of receptors are optimized based on experimental results obtained with peptides and small molecules that we develop. With our approach, we believe we are developing an advanced understanding of the factors which drive agonism.
 
We have developed a series of proprietary technologies used in our drug development programs. One technology employs novel amino acid mimetics in place of selected amino acids. These mimetics provide the receptor-binding functions of conventional amino acids while providing structural, functional and physiochemical advantages. The amino acid mimetic technology is employed in PL3994, our compound in development for treatment of heart failure.
 
 
4
 
 
Some compound series have been derived using our proprietary and patented platform technology, called MIDAS™, or Metal Ion-induced Distinctive Array of Structures. This technology employs metal ions to fix the three-dimensional configuration of peptides, forming conformationally rigid molecules that remain folded specifically in their active state. These MIDAS molecules are generally simple to synthesize, are chemically and proteolytically stable, and have the potential to be orally bioavailable. In addition, MIDAS molecules are information-rich and provide data on structure-activity relationships that may be used to design small molecule, non-peptide drugs.
 
Competition
 
General. Our products under development will compete on the basis of quality, performance, cost effectiveness and application suitability with numerous established products and technologies. We have many competitors, including pharmaceutical, biopharmaceutical and biotechnology companies. Furthermore, there are several well-established products in our target markets that we will have to compete against. Other companies may also introduce products using new technologies that may be competitive with our proposed products. Most of the companies selling or developing competitive products have financial, technological, manufacturing and distribution resources significantly greater than ours and may represent significant competition for us. In addition, approved products such as Vyleesi may eventually face competition from generic versions that will sell at significantly reduced prices, be preferred by managed care and health insurance payers, and be eligible for automatic pharmacy substitution even when a prescriber writes a prescription for our product. The timing and extent of future generic competition is dependent upon both our intellectual property rights and the FDA regulatory process but cannot be accurately predicted.
 
The pharmaceutical and biotechnology industries are characterized by extensive research efforts and rapid technological change. Many biopharmaceutical companies have developed or are working to develop products similar to ours or that address the same markets. Such companies may succeed in developing technologies and products that are more effective or less costly than any of those that we may develop. Such companies may be more successful than us in developing, manufacturing and marketing products.
 
We cannot guarantee that we will be able to compete successfully in the future or that developments by others will not render our proposed products under development or any future product candidates obsolete or noncompetitive or that our collaborators or customers will not choose to use competing technologies or products.
 
Vyleesi for Treatment of HSDD. There is competition and financial incentive to develop, market and sell drugs for the treatment of HSDD and other forms of FSD. Flibanserin, sold under the trade name Addyi®, is the only drug other than Vyleesi currently approved in the United States for treatment of HSDD. Flibanserin, a non-hormonal oral serotonin 5-HT1A agonist, 5-HT2A antagonist, which requires chronic dosing, was approved by the FDA on August 18, 2015 for treatment of premenopausal women with HSDD. The FDA approval, included a risk evaluation and mitigation strategy (“REMS”) because of the increased risk of severe hypotension and syncope due to the interaction between flibanserin and alcohol, and a Boxed Warning to highlight the risks of severe hypotension and syncope in patients who drink alcohol during treatment with flibanserin, in those who also use moderate or strong CYP3A4 inhibitors, and in those who have liver impairment. The Boxed Warning was modified by FDA in April 2019 to clarify that there remains a concern about consuming alcohol close in time to taking flibanserin, but that alcohol does not have to be avoided completely. Specifically, the Boxed Warning reflects women should discontinue drinking alcohol at least two hours before taking flibanserin at bedtime, or to skip the flibanserin dose that evening. We are aware of several other drugs at various stages of development, most of which are taken on a chronic, typically once-daily, basis. There are other companies reported to be developing new drugs for FSD indications, some of which may be in clinical trials in the United States or elsewhere. We are not aware of any other company actively developing a melanocortin receptor agonist drug for HSDD.
 
Melanocortin Receptor 1 Agonist Drug Products for Inflammatory and Autoimmune Diseases. Many inflammatory disease-related indications are treated using systemic steroids or immunosuppressant drugs, all of which have side effects that can be dose limiting. There are a number of approved biological drugs and other biological drugs under development for treatment of inflammatory disease-related indications, which typically affect only one pathway in the inflammatory response. Many of these drugs address symptoms, but do not resolve the underlying inflammatory or autoimmune disease process.
 
Oral PL8177 for Inflammatory Bowel Diseases/Ulcerative Colitis. FDA-approved drugs used in treatment of ulcerative colitis include aminosalicylates such as mesalazine and related drugs, immunosuppressive drugs such as cyclosporine and azathioprine, corticosteroids such as prednisone and other steroids, and various biologic drugs, including tumor necrosis factor inhibitors such as infliximab and adalimumab. There are a number of drugs in development for ulcerative colitis, including Janus kinase inhibitors, monoclonal antibodies specific for one or more immune system cytokine signaling molecules, and additional classes of immunomodulatory drugs. There are no reported MC1r agonist drugs in clinical trials for inflammatory bowel diseases, including ulcerative colitis. If one or more of the competing products under development are approved and can effectively treat ulcerative colitis with an acceptable side effect profile, such products could reduce the market for oral PL8177 for inflammatory bowel diseases, including ulcerative colitis.
 
 
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Systemic PL8177 for Non-Infectious Uveitis. FDA-approved drugs used in treatment of non-infectious uveitis include immunosuppressive medications such as adalimumab, sold under the brand name Humira® and other brand names, and corticosteroids such as prednisone and other steroids. There are other products in development, including tumor necrosis factor inhibitors and interleukin receptor agonists such as gevokizumab, as well as formulations of glucocorticoid receptor agonists. There are no reported MC1r agonist drugs in clinical trials for non-infectious uveitis. If one or more the competing product candidates under development is approved and can resolve non-infectious uveitis with an acceptable side effect profile, it could reduce the market for systemic PL8177 for this indication.
 
Systemic PL8177 for Treatment of Patients with COVID-19. On a global level there are numerous vaccines, anti-viral drugs for treating COVID-19 and drugs for treating symptoms of COVID-19 in development, and there is a concerted effort by the federal government to develop effective therapies. There is also intense pressure for federal funding, through a number of programs, for developing effective therapies. If one or more competing product candidates under development is approved and can resolve COVID-19 and effectively treat symptoms and sequela of COVID-19, it could reduce the market for systemic PL8177 for treatment of patients with COVID-19.
 
PL9643 for Anti-Inflammatory Ocular Indications. PL9643 is under development for dry eye diseases and may also have utility for other inflammatory ocular indications. Mild to moderate dry eye disease and other ocular inflammatory diseases may be treated with artificial tear eye drops, lubricating tear ointments, hot compresses or punctual plugs, but more severe disease may be treated with topical immunosuppressants such as cyclosporine ophthalmic emulsions, including Restasis® marketed in the United States by Allergan, Inc., or with drugs inhibiting inflammatory cell binding, such as lifitegrast, including Xiidra® marketed in the United States by Shire US Inc. In addition, there are a number of drugs in clinical development for treatment of dry eye disease, with over 20 agents reported to be in or have completed Phase 2 development. Products under development include tumor necrosis factor agonists, alpha-2 adrenergic receptor agonist, calcineurin inhibitors and nicotinic receptor agonists, among others. There are no reported MC1r agonist drugs in clinical trials for dry eye disease. If one or more of these competing product candidates is approved and either treats the signs and symptoms of dry eye disease or reduces the frequency of flares of dry eye in patients, it could reduce the market for PL9643 for dry eye disease.
 
Obesity and Related Indications. There are a number of FDA-approved drugs and medical devices for the treatment of obesity, and a large number of products in clinical development by other companies, including products which target melanocortin receptors. Rhythm Pharmaceuticals, Inc. is reported to have completed Phase 3 clinical trials with an MC4r agonist peptide drug for rare genetic disorders of obesity.
 
PL5028 for Cardiovascular and Fibrotic Indications. We are evaluating potential clinical indications for PL5028, and have not determined a specific indication for initial studies. There are many approved drugs and drugs in clinical studies for cardiovascular diseases, including drugs that directly modulate the NPR system, such as nesiritide (sold under the trade name Natrecor®), a recombinant NPR-B peptide drug, and a combination drug comprised of sacubitril and valsartan (sold under the trade name Entresto®), which inhibits both the angiotensin II receptor and neprilysin, which is an enzyme that inactivates endogenous active natriuretic peptides. This combination drug results in increases of endogenous active ANP levels. In addition, there are a number of approved drugs and drugs in development for treatment of cardiovascular and fibrotic diseases through mechanisms or pathways other than agonism of NPR-A.
 
Patents and Proprietary Information
 
Patent Protection. Our success will depend in substantial part on our ability to obtain, defend and enforce patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and abroad. We own a number of issued United States patents and have pending United States patent applications, many with issued or pending counterpart patents in selected foreign countries. We seek patent protection for our technologies and products in the United States and those foreign countries where we believe patent protection is commercially important.
 
We own three issued United States patents and a pending patent application in the United States for methods of treating FSD with Vyleesi, with related patents issued in Australia, South Africa, the Republic of Georgia, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Mexico, New Zealand, Netherlands, Norway, Philippines, Poland, Spain, Sweden, Switzerland, Turkey, Ukraine and the United Kingdom and related patent applications pending in Brazil, Canada, China, Hong Kong, India, Indonesia, Korea, Malaysia, and Vietnam. We do not know the full scope of patent coverage we will obtain, or whether any patents will issue other than the patents already issued. Issued patents and pending applications in the United States and elsewhere in the world have a presumptive term, if a patent is issued, until 2033.
 
 
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We own two issued United States patents claiming the Vyleesi drug substance. The issued United States patents have a term until 2020, and applications have been filed to extend the term of one patent for a maximum period of five years as compensation for patent term lost during drug development and the FDA regulatory review process, pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Amendments. An interim extension for a period of one year from the original expiration date of both patents of June 28, 2020, was granted in May 2020, but the length of the final extension which may be granted under the Hatch-Waxman Amendments has not been determined. In addition, the claims of issued patents covering Vyleesi may not provide meaningful protection. Further, third parties may challenge the validity or scope of any issued patent, and under the Hatch-Waxman Amendments, potentially receive approval of a competing generic version of our product or products even before a court rules on the validity or infringement of our patents.
 
We own patents on an alternative class of melanocortin receptor-specific peptides for treatment of sexual dysfunction and other indications, including obesity, consisting of two issued patents in the United States. The presumptive term of the issued patents is until 2029. We also have patents and pending patent applications for a second class of alternative melanocortin receptor-specific peptides for treatment of sexual dysfunction and other indications, including obesity, consisting of three issued patents in the United States and issued patents in Australia, Canada, China, France, Germany, Ireland, Japan, Israel, Korea, New Zealand, Russia, South Africa, Switzerland and the United Kingdom and pending patent applications on the same class in Brazil, China, India, and Mexico. The presumptive term of the issued patents and pending patent applications is until 2030. Until one or more product candidates covered by a claim of one of these patents and patent applications are developed for commercialization, which may never occur, we cannot evaluate the duration of any potential patent term extension under the Hatch-Waxman Amendments.
 
We own five issued patents in the United States, and issued patents in Australia, Belgium, Canada, China, France, Germany, Ireland, Israel, Japan, Korea, Mexico, New Zealand, Russia, South Africa, Sweden, Switzerland and the United Kingdom claiming highly selective MC1r agonist peptides, including for treatment of inflammation-related diseases and disorders and related indications, and pending patent applications in Australia, Brazil, and India. The presumptive term of the issued patents and pending patent applications is until 2030. Until one or more product candidates covered by a claim of one of these patent applications are developed for commercialization, which may never occur, we cannot evaluate the duration of any potential patent term extension under the Hatch-Waxman Amendments.
 
We own two issued United States patents claiming the PL3994 substance and other natriuretic peptide receptor agonist compounds that we have developed and an issued United States patent claiming a precursor molecule to the PL3994 substance, both of which expire in 2027. Corresponding patents on the PL3994 substance and other natriuretic peptide receptor agonist compounds were issued in a number of countries throughout the world, but we do not intend to develop a PL3994 product for commercialization and will cease maintaining patents outside the United States. We also own an issued United States patent claiming use of the PL3994 substance for treatment of acute asthma and chronic obstructive pulmonary disease, which expires in 2031. We additionally have 35 issued United States patents on melanocortin receptor specific peptides and small molecules, and five issued United States patents on natriuretic peptide receptor agonist compounds, but we are not actively developing any product candidate covered by a claim of any of these patents.
 
In the event that a third party has also filed a patent application relating to an invention we claimed in a patent application, we may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office (“USPTO”) to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost, even if the eventual outcome is favorable to us. An adverse outcome could result in the loss of patent protection for the subject of the interference, subjecting us to significant liabilities to third parties, the need to obtain licenses from third parties at undetermined cost, or requiring us to cease using the technology. Additionally, the claims of our issued patents may be narrowed or invalidated by administrative proceedings, such as interference or derivation, inter partes review, post grant review or reexamination proceedings before the USPTO.
 
Future Patent Infringement. We do not know for certain that our commercial activities will not infringe upon patents or patent applications of third parties, some of which may not even have been issued. Although we are not aware of any valid United States patents which are infringed by Vyleesi or our other product candidates, we cannot exclude the possibility that such patents might exist or arise in the future. We may be unable to avoid infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. Patent litigation is costly and time consuming. If such patents are valid and we do not obtain a license under any such patents, or we are found liable for infringement, we may be liable for significant monetary damages, may encounter significant delays in bringing products to market, or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents.
 
 
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Proprietary Information. We rely on proprietary information, such as trade secrets and know-how, which is not patented. We have taken steps to protect our unpatented trade secrets and know-how, in part with confidentiality and intellectual property agreements with our employees, consultants and certain contractors. If our employees, scientific consultants, collaborators or licensees develop inventions or processes independently that may be applicable to our product candidates, disputes may arise about the ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become our property but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.
 
If trade secrets are breached, our recourse will be solely against the person who caused the secrecy breach. This might not be an adequate remedy to us because third parties other than the person who causes the breach will be free to use the information without accountability to us. This is an inherent limitation of the law of trade secret protection.
 
U.S. Governmental Regulation of Pharmaceutical Products
 
General
 
Regulation by governmental authorities in the United States and other countries will continue to significantly impact our research, product development, manufacturing and marketing of any pharmaceutical products. The nature and the extent to which regulations apply to us will vary depending on the nature of any such products. Our potential pharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. The products we are developing are subject to federal regulation in the United States, principally by the FDA under the Federal Food, Drug, and Cosmetic Act (“FFDCA”), and by state and local governments, as well as ministries of health and other authorities in foreign governments. Such regulations govern or influence, among other things, the research, development, testing, manufacture, safety and efficacy requirements, labeling, storage, recordkeeping, licensing, advertising, promotion, distribution and export of products, manufacturing and the manufacturing process. In many foreign countries, such regulations also govern the prices charged for products under their respective national social security systems and availability to consumers.
 
All drugs intended for human use are subject to rigorous regulation by the FDA in the United States and similar regulatory bodies in other countries. The steps ordinarily required by the FDA before an innovative new drug product may be marketed in the United States are similar to steps required in most other countries and include, but are not limited to:
 
completion of preclinical laboratory tests, preclinical animal testing and formulation studies;
 
submission to the FDA of an IND, which must be in effect before clinical trials may commence;
 
clinical studies to evaluate safety and efficacy;
 
submission to the FDA of an NDA that includes preclinical data, clinical trial data and manufacturing information;
 
payment of substantial user fees for filing the NDA and other recurring user fees;
 
FDA review of the NDA;
 
satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities; and
 
FDA approval of the NDA, including approval of all product labeling.
 
For new drug products or for combination products deemed to have a “drug” primary mode of action, primary review of the product will be conducted by the appropriate division within the FDA’s Center for Drug Evaluation and Research (“CDER”). For combination products, CDER will consult with the Center for Devices and Radiological Health to ensure that the device components of the product meet all applicable device requirements.
 
The research, development and approval process requires substantial time, effort and financial resources, and approvals may not be granted on a timely or commercially viable basis, if at all.
 
Preclinical testing includes laboratory evaluations to characterize the product’s composition, impurities, stability, and mechanism of its pharmacologic effect, as well as animal studies to assess the potential safety and efficacy of each product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices and the U.S. Department of Agriculture’s Animal Welfare Act. Violations of these laws and regulations can, in some cases, lead to invalidation of the tests, requiring such tests to be repeated and delaying approval of the NDA. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to an IND by placing the study on clinical hold, the IND will go into effect 30 days following its receipt by the FDA. The FDA may authorize trials only on specified terms and may suspend ongoing clinical trials at any time on various grounds, including a finding that patients are being exposed to unacceptable health risks. If the FDA places a study on clinical hold, the sponsor must resolve all of the FDA’s concerns before the study may begin or continue. The IND application process may become extremely costly and substantially delay development of products. Similar restrictive requirements also apply in other countries. Additionally, positive results of preclinical tests will not necessarily indicate positive results in clinical trials.
 
 
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Clinical trials involve the administration of the investigational product to humans under the supervision of qualified principal investigators. Our clinical trials must be conducted in accordance with Good Clinical Practice regulations under protocols submitted to the FDA as part of an IND. In addition, each clinical trial is approved and conducted under the auspices of an institutional review board (“IRB”) and requires the patients’ informed consent. An IRB considers, among other things, ethical factors, the safety of human subjects, and the possibility of liability of the institutions conducting the trial. The IRB at each institution at which a clinical trial is being performed may suspend a clinical trial at any time for a variety of reasons, including a belief that the test subjects are being exposed to an unacceptable health risk. As the sponsor, we can also suspend or terminate a clinical trial at any time.
 
Clinical development is typically conducted in three sequential phases, Phases 1, 2, and 3, involving clinical trials with increasing numbers of human subjects. These phases may sometimes overlap or be combined. Phase 1 trials are performed in a small number of healthy human subjects or subjects with the targeted condition, and involve testing for safety, dosage tolerance, absorption, distribution, metabolism and excretion. Phase 2 studies, which may involve up to hundreds of subjects, seek to identify possible adverse effects and safety risks, preliminary information related to the efficacy of the product for specific targeted diseases, dosage tolerance, and optimal dosage. Finally, Phase 3 trials may involve up to thousands of individuals often at geographically dispersed clinical trial sites, and are intended to provide the data demonstrating the effectiveness and safety required for approval. Prior to commencing Phase 3 clinical trials many sponsors elect to meet with FDA officials to discuss the conduct and design of the proposed trial or trials.
 
In addition, federal law requires the listing, on a publicly available website, of detailed information on clinical trials for investigational drugs. Some states have similar or supplemental clinical trial reporting laws.
 
Success in early-stage animal studies and clinical trials does not necessarily assure success in later-stage clinical trials. Data obtained from animal studies and clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or even prevent regulatory approval.
 
All data obtained from the preclinical studies and clinical trials, in addition to detailed information on the manufacture and composition of the product, would be submitted in an NDA to the FDA for review and approval for the manufacture, marketing and commercial shipments of any of our products. FDA approval of the NDA is required before commercial marketing or non-investigational interstate shipment may begin in the United States. The FDA may also conduct an audit of the clinical trial data used to support the NDA.
 
The FDA may deny or delay approval of an NDA that does not meet applicable regulatory criteria. For example, the FDA may determine that the preclinical or clinical data or the manufacturing information does not adequately establish the safety and efficacy of the drug. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the data submitted in its NDA. The FDA can request additional information, seek clarification regarding information already provided in the submission or ask that new additional clinical trials be conducted, all of which can delay approval. Similar types of regulatory processes will be encountered as efforts are made to market any drug internationally. We will be required to assure product performance and manufacturing processes from one country to another.
 
Even if the FDA approves a product, it may limit the approved uses for the product as described in the product labeling, require that contraindications, warning statements or precautions be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval, impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a REMS, or otherwise limit the scope of any approval or limit labeling. Once it approves an NDA, the FDA may revoke or suspend the product approval if compliance with post-market regulatory commitments is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies to monitor the effect of approved products and may limit further marketing of the product based on the results of these post-market studies. The FDA and other government agencies have broad post-market regulatory and enforcement powers, including the ability to levy civil and criminal penalties, suspend or delay issuance of approvals, seize or recall products and revoke approvals.
 
Pharmaceutical manufacturers, distributors and their subcontractors are required to register their facilities with the FDA and state agencies. Manufacturers are required to list their marketed drugs with the FDA, are subject to periodic inspection by the FDA’s current GMP regulations, and the product specifications set forth in the approved NDA. The GMP requirements for pharmaceutical products are extensive and compliance with them requires considerable time, resources and ongoing investment. The regulations require manufacturers and suppliers of raw materials and components to establish validated systems and to employ and train qualified employees to ensure that products meet high standards of safety, efficacy, stability, sterility (where applicable), purity, and potency. The requirements apply to all stages of the manufacturing process, including the synthesis, processing, sterilization, packaging, labeling, storage and shipment of the drug product. For all drug products, the regulations require investigation and correction of any deviations from GMP requirements and impose documentation requirements upon us and any third-party manufacturers that we may decide to use. Manufacturing establishments are subject to mandatory user fees, and to periodic unannounced inspections by the FDA and state agencies for compliance with all GMP requirements. The FDA is authorized to inspect manufacturing facilities without a warrant at reasonable times and in a reasonable manner.
 
 
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We or our present or future suppliers may not be able to comply with GMP and other FDA regulatory requirements. Failure to comply with the statutory and regulatory requirements subjects the manufacturer and/or the NDA sponsor or distributor to possible legal or regulatory action, such as a delay or refusal to approve an NDA, suspension of manufacturing, seizure or recall of a product, or civil or criminal prosecution of the company or individual officers or employees.
 
Post-Marketing Regulation
 
Vyleesi and any other drug products manufactured or distributed by us pursuant to FDA approvals, as well as the materials and components used in our products, are subject to pervasive and continuing regulation by the FDA, including:
 
recordkeeping requirements;
 
periodic reporting requirements;
 
GMP requirements related to all stages of manufacturing, testing, storage, packaging, labeling and distribution of finished dosage forms of the product;
 
monitoring and reporting of adverse experiences with the product; and
 
advertising and promotional reporting requirements and restrictions.
 
Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or product removal. Product approvals may be revoked if compliance with regulatory requirements is not maintained or if problems concerning safety or effectiveness of the product occur following approval. The FDA is developing a national electronic drug safety tracking system known as SENTINEL that may impose additional safety monitoring burdens, and enhanced FDA enforcement authority, beyond the extensive requirements already in effect. As a condition of NDA approval, the FDA may require post-approval testing and surveillance to monitor a product’s safety or efficacy. The FDA also may impose other conditions, including labeling restrictions which can materially impact the potential market and profitability of a product.
 
With respect to post-market product advertising and promotion, the FDA and other government agencies including the Department of Health and Human Services and the Department of Justice, and individual States, impose a number of complex regulations on entities that advertise and promote pharmaceuticals, including, among others, standards and restrictions on direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. The FDA has very broad enforcement authority under the FFDCA, and failure to abide by these regulations can result in administrative and judicial enforcement actions, including the issuance of a Warning Letter directing correction of deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, False Claims Act prosecution based on alleged off-label marketing seeking monetary and other penalties, including potential exclusion of the drug and/or the company from participation in government health care programs, and state and federal civil and criminal investigations and prosecutions. Foreign regulatory bodies also strictly enforce these and other regulatory requirements and drug marketing may be prohibited in whole or in part in other countries.
 
We, our collaborators, licensees or third-party contract manufacturers may not be able to comply with the applicable regulations. After regulatory approvals are obtained, the subsequent discovery of previously unknown problems, or the failure to maintain compliance with existing or new regulatory requirements, may result in:
 
restrictions on the marketing or manufacturing of a product;
 
Warning Letters or Untitled Letters from the FDA asking us, our collaborators or third-party contractors to take or refrain from taking certain actions;
 
withdrawal of the product from the market;
 
the FDA’s refusal to approve pending applications or supplements to approved applications;
 
voluntary or mandatory product recall;
 
fines or disgorgement of profits or revenue;
 
suspension or withdrawal of regulatory approvals;
 
refusals to permit the import or export of products;
 
product seizure; and
 
injunctions or the imposition of civil or criminal penalties.
 
 
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We may also be subject to healthcare laws, regulations and enforcement and our failure to comply with any such laws, regulations or enforcement could adversely affect our business, operations and financial condition. Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We are subject to regulation by both the federal government and the states in which we or our partners conduct our business. The laws and regulations that may affect our ability to operate include:
 
the federal Anti-Kickback Statute, which prohibits, among other things, any person or entity from knowingly and willfully offering, soliciting, receiving or providing any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce either the referral of an individual or in return for the purchase, lease, or order of any good, facility item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as the Medicare and Medicaid programs;
 
federal civil and criminal false claims laws and civil monetary penalty laws, including, for example, the federal civil False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
 
the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;
 
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations, which impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
 
the federal physician sunshine requirements under the Patient Protection and Affordable Care Act (“Affordable Care Act”), which require manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of value provided to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and
 
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be provided to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
 
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided 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.
 
Achieving and sustaining compliance with these laws may prove costly. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, the exclusion from participation in federal and state healthcare programs, individual imprisonment or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
 
 
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Generic Competition
 
Orange Book Listing. In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, the applicant identifies all patents that claim the approved product’s active ingredient(s), the drug product’s approved formulation, or an approved method of use of the drug. Each of the identified patents are then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application (“ANDA”). An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing, unless such testing is waived by the FDA, as is the case with some injectable drug products, to be therapeutically equivalent to the listed drug. Other than bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, preclinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can usually be substituted by pharmacists under prescriptions written for the original listed drug.
 
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify either that: (1) the required patent information has not been filed (a Paragraph I Certification); (2) the listed patent has expired (a Paragraph II Certification); (3) the listed patent has not expired, but will expire on a particular date and the generic approval is being sought only after patent expiration (a Paragraph III Certification); or (4) the listed patent is invalid, unenforceable, or will not be infringed by the proposed generic product (a Paragraph IV Certification). In certain circumstances, the ANDA applicant may also elect to submit a “section (viii)” statement instead of a Paragraph IV Certification, certifying that its proposed ANDA label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the application contains only Paragraph I or Paragraph II Certifications, the ANDA may be approved as soon as FDA completes its review and concludes that all approval requirements have been met. If the ANDA contains one or more Paragraph III Certifications, the ANDA cannot not be approved until each listed patent for which a Paragraph III Certification was filed have expired.
 
If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA holder and patent owner once the ANDA has been accepted for filing by the FDA. The patent owner or NDA holder may then commence a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months (the “30-month stay”), expiration of the patent, settlement of the lawsuit in which the patent owner admits that the patent is invalid or not infringed by the ANDA product, or a decision in the infringement case that holds the patent to be invalid or not infringed, or an order by the court shortening the 30-month stay due to actions by the patent holder to delay the litigation. In most circumstances, the NDA holder is only eligible for one 30-month stay against an ANDA.
 
If a patent infringement action is filed against an ANDA applicant, any settlement of the litigation must be submitted to the Federal Trade Commission (“FTC”). If the FTC believes the terms or effects of the settlement are anticompetitive, the FTC may bring an antitrust enforcement action against the parties. Private parties may also bring antitrust lawsuits against drug companies based on such patent litigation settlements.
 
The ANDA also will not be approved until any applicable non-patent regulatory exclusivity listed in the Orange Book for the referenced product has expired.
 
Regulatory Exclusivity. Upon NDA approval of a new chemical entity (“NCE”), which is a drug that contains no active moiety that has been approved by the FDA in any other NDA, that drug receives five years of marketing exclusivity during which the FDA cannot receive for review any ANDA seeking approval of a generic version of that drug. An ANDA containing a Paragraph IV Certification may be received by the FDA 4 years after the NCE drug’s approval, but any 30-month stay that ensues would be extended so that it expires seven and one half years after the NCE approval date, subject to early termination by reason of a court decision or settlement as described above.
 
Certain changes to an NDA drug, such as the addition of a new indication to the package insert, for which new clinical trials, conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the change, can be eligible for a three-year period of exclusivity during which the FDA cannot approve an ANDA for a generic drug that includes the change. An ANDA that contains a section (viii) statement to a method of use patent may be approved with labeling that omits the patented use before the use patent expires. Generic drugs approved with such a labeling carve out may be substituted by pharmacists for the original branded drug before the method of use patent expires.
 
 
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Section 505(b)(2) NDAs. Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referred to as a 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s previous approval of a similar product, or published literature, in support of its application.
 
505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. A 505(b)(2) NDA may be used where at least some of the information required for approval comes from studies not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all, or some, of the label indications for which the referenced product has been approved, as well as for any new indication or conditions of use sought by the Section 505(b)(2) applicant.
 
To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of a 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the expiration of any 30-month stay, subject to early termination of the stay as described above.
 
Changing Legal and Regulatory Landscape
 
Periodically, legislation is introduced in the U.S. Congress that could change the statutory and regulatory provisions governing the approval, manufacturing and marketing of our drugs. In addition, the FFDCA, FDA regulations and guidance are often revised or reinterpreted by the FDA or the courts in ways that may significantly affect our business and products. We cannot predict whether or when legislation or court decisions impacting our business will be enacted or issued, what FDA regulations, guidance or interpretations may change, or what the impact of such changes, if any, may be in the future.
 
Third-Party Reimbursements
 
Successful sales of our proposed products in the United States and other countries depend, in large part, on the availability of adequate reimbursement from third-party payers such as governmental entities, managed care organizations, health maintenance organizations (“HMOs”), and private insurance plans. Reimbursement by a third-party payer depends on a number of factors, including the payer’s determination that the product has been approved by the FDA for the indication for which the claim is being made, that it is neither experimental nor investigational, and that the use of the product is safe and efficacious, medically necessary, appropriate for the specific patient and cost effective.
 
Since reimbursement by one payer does not guarantee reimbursement by another, we or our licensees may be required to seek approval from each payer individually. Seeking such approvals is a time-consuming and costly process. Third-party payers routinely limit the products that they will cover and the amount of money that they will pay and, in many instances, are exerting significant pressure on medical suppliers to lower their prices.
 
Payers frequently employ a tiered system in reimbursing end users for pharmaceutical products, with tier designation affecting copay or deductible amounts. Vyleesi is classified as a Tier 3 drug by at least two insurers, and will likely be classified as a Tier 3 drug by additional insurers. Thus reimbursement will be limited for Vyleesi for treatment of premenopausal women with HSDD. Flibanserin, sold under the trade name Addyi, is similarly classified as a Tier 3 drug. Less than full reimbursement by governmental and other third-party payers may adversely affect the market acceptance of Vyleesi. Further, healthcare reimbursement systems vary from country to country, and third-party reimbursement might not be made available for Vyleesi for HSDD under other reimbursement systems.
 
Manufacturing and Marketing
 
To be successful, our proposed products will need to be manufactured in commercial quantities under GMP prescribed by the FDA and at acceptable costs. We do not have the facilities to manufacture any of our proposed products under GMP. We intend to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of our proposed products.
 
 
13
 
 
Vyleesi is manufactured using contract manufacturing companies. Pursuant to the termination of the license agreement with AMAG, we have assumed contracts relating to manufacturing, and intend to manufacture Vyleesi for sales in the United States and to our licensees throughout the world.
 
Our PL3994 product candidate is a peptide mimetic molecule, incorporating a proprietary amino acid mimetic structure and amino acids. We have had a contract manufacturer make the active pharmaceutical ingredient in quantities sufficient for Phase 1 and Phase 2.
 
Our MC1r and MCr agonist product candidates are synthetic peptides. We have had a contract manufacturer make both the PL8177 and PL9643 peptides in suitable scale for toxicity studies and under GMP for clinical trial use. The PL8177 drug product for uveitis has been manufactured for clinical trial use, and manufacturing process development is ongoing for an oral formulation of PL8177 preparatory to manufacturing oral PL8177 drug product for clinical trial use. While the production process for making peptide active pharmaceutical ingredient involves well-established technology, there are few manufacturers capable of scaling up to commercial quantities under GMP at acceptable costs. Additionally, scaling up to commercial quantities may involve production, purification, formulation and other problems not present in the scale of manufacturing done to date. Manufacturing drug product, such as the oral formulation of PL8177, similarly may involve production, formulation and other problems not present in manufacturing at laboratory scale.
 
The failure of any manufacturer or supplier to comply with FDA regulations, including GMP or medical device quality systems regulations (“QSR”), or to supply the device component or drug substance and services as agreed, would force us or our licensees to seek alternative sources of supply and could interfere with our and our licensees’ ability to deliver product on a timely and cost-effective basis or at all. Establishing relationships with new manufacturers or suppliers, any of whom must be FDA-approved, is a time-consuming and costly process.
 
Product Liability and Insurance
 
Our business may be affected by potential product liability risks that are inherent in the testing, manufacturing, marketing and use of our proposed products. We have liability insurance providing $10 million coverage in the aggregate as to certain product liability and commercialization risks and certain clinical trial risks.
 
Employees
 
As of September 24, 2020, we employed 20 people full time, of whom 14 are engaged in research and development activities and five are engaged in administration and management, and did not have any part-time employees. While we have been successful in attracting skilled and experienced scientific personnel, competition for personnel in our industry is intense. None of our employees are covered by a collective bargaining agreement. All of our employees have executed confidentiality and intellectual property agreements. We consider relations with our employees to be good.
 
We rely on contractors and scientific consultants to work on specific research and development programs. We also rely on independent organizations, advisors and consultants to provide services, including aspects of manufacturing, testing, preclinical evaluation, clinical management, regulatory strategy and market research. Our independent advisors, contractors and consultants sign agreements that provide for confidentiality of our proprietary information and that we have the rights to any intellectual property developed while working for us.
 
Corporate Information
 
We were incorporated under the laws of the State of Delaware on November 21, 1986 and commenced operations in the biopharmaceutical area in 1996. Our corporate offices are located at 4B Cedar Brook Drive, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We maintain an Internet site at www.palatin.com, where among other things, we make available free of charge on and through this website our Forms 3, 4 and 5, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) and Section 16 of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website and the information contained in it or connected to it are not incorporated into this Annual Report. The reference to our website is an inactive textual reference only.
 
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (www.sec.gov).
 
 
14
 
 
Item 1A. Risk Factors.
 
Risks Related to Our Financial Results and Need for Financing
 
We have a history of substantial net losses, including a net loss of $22.4 million for the year ended June 30, 2020, and while we had net income for the years ended June 30, 2019 and 2018, we expect to incur substantial net losses over the next few years, and we may never achieve or maintain profitability.
 
As of June 30, 2020, we had an accumulated deficit of $318.2 million. We had a net loss of $22.4 million for the year ended June 30, 2020, compared to $35.8 million of net income for the year ended June 30, 2019, and $24.7 million of net income for the year ended June 30, 2018. We may not sustain profitability in future years, depending on numerous factors, including profitability of Vyleesi, whether and when development and sales milestones are met, whether and when we enter into license agreements for any of our products under development, regulatory actions by the FDA and other regulatory bodies, the performance of our licensees, and market acceptance of our products.
 
We expect to incur significant expenses as we continue our development of MC1r, MCr and natriuretic peptide receptor products. These expenses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.
 
Until we commenced selling Vyleesi in July 2020 upon termination of our license agreement with AMAG, since 2005 we have not had any products available for commercial sale and have not received any revenues from the sale of our product candidates. Because of termination of the license agreement with AMAG relating to Vyleesi, we cannot accurately forecast sales of Vyleesi. However, we anticipate a net loss from Vyleesi sales for at least the year ending June 30, 2021. For the foreseeable future, we will have to fund our operations and capital expenditures from license, royalty and contract revenue under license agreements, existing cash balances and outside sources of financing, which may not be available on acceptable terms, if at all. We will not have product revenue from our products in development unless and until we receive approval from the FDA or other equivalent regulatory authorities outside the United States, and to date the only approved product is Vyleesi in the United States. We have devoted substantially all of our efforts to research and development, including preclinical and clinical trials. Because of the numerous risks associated with developing drugs, we are unable to predict the extent of future losses, whether or when any of our product candidates will become commercially available, or when we will become profitable, if at all.
 
We will need additional funding, including funding to complete clinical trials for our product candidates other than Vyleesi, which may not be available on acceptable terms, if at all.
 
We intend to focus future efforts on our MC1r product candidates and secondarily on our natriuretic peptide product candidates. As of June 30, 2020, we had cash and cash equivalents of $82.9 million, with current liabilities of $3.9 million. We believe we have sufficient existing capital resources to fund our planned operations through at least September 2021. We will need additional funding to complete development activities and required clinical trials for our MC1r product candidates and, if those clinical trials are successful (which we cannot predict), to complete submission of required regulatory applications to the FDA.
 
We cannot predict product sales for Vyleesi for HSDD in the United States, so we may not have significant recurring revenue and may need to depend on financing or partnering to sustain our operations. We may raise additional funds through public or private equity or debt financings, collaborative arrangements on our product candidates, or other sources. However, such financing arrangements may not be available on acceptable terms, or at all. To obtain additional funding, we may need to enter into arrangements that require us to develop only certain of our product candidates or relinquish rights to certain technologies, product candidates and/or potential markets.
 
If we are unable to raise sufficient additional funds when needed, we may be required to curtail operations significantly, cease clinical trials and decrease staffing levels. We may seek to license, sell or otherwise dispose of our product candidates, technologies and contractual rights on the best possible terms available. Even if we are able to license, sell or otherwise dispose of our product candidates, technologies and contractual rights, it is likely to be on unfavorable terms and for less value than if we had the financial resources to develop or otherwise advance our product candidates, technologies and contractual rights ourselves.
 
Our future capital requirements depend on many factors, including:
 
 ● 
our ability to develop and maintain manufacturing, marketing and distribution capability for sales of Vyleesi in the United States, including our ability to enter into agreements with one or more third parties to conduct activities relating to the commercialization of Vyleesi;
 
 ● 
our ability to enter into one or more licensing or similar agreements for Vyleesi outside of Korea and China;
 
● 
the timing of obtaining regulatory approvals for Vyleesi for HSDD in markets outside the United States;
 
● 
the expense and timing of obtaining regulatory approvals for our other product candidates;
 
● 
the number and characteristics of any additional product candidates we develop or acquire;
 
 
15
 
 
● 
the scope, progress, results and costs of researching and developing our future product candidates, and conducting preclinical and clinical trials;
 
● 
the cost of commercialization activities if any future product candidates are approved for sale, including marketing, sales and distribution costs;
 
● 
the cost of manufacturing any future product candidates and any products we successfully commercialize;
 
● 
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms and timing of such arrangements;
 
● 
the degree and rate of market acceptance of any future approved products;
 
● 
the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;
 
● 
any product liability or other lawsuits related to our products;
 
● 
the expenses needed to attract and retain skilled personnel;
 
● 
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and
 
● 
the timing, receipt and amount of sales of, or royalties on, future approved products, if any.
 
We have a limited operating history upon which to base an investment decision.
 
Our operations are primarily focused on acquiring, developing and securing our proprietary technology, conducting preclinical and clinical studies and formulating and manufacturing, through contract manufacturers, our principal product candidates on a small-scale basis. These operations provide a limited basis for stockholders to assess our ability to commercialize our product candidates.
 
While we have completed Phase 3 clinical trials on Vyleesi for HSDD in premenopausal women, filed an NDA on Vyleesi for HSDD with the FDA, and received approval on Vyleesi from the FDA, we have not yet demonstrated our ability to perform the functions necessary for the successful commercialization of any of our current product candidates. The successful commercialization of our product candidates will require us to perform a variety of functions, including:
 
● 
continuing to conduct preclinical development and clinical trials;
 
● 
participating in regulatory approval processes;
 
● 
formulating and manufacturing products, or having third parties formulate and manufacture products;
 
● 
post-approval monitoring and surveillance of our products;
 
● 
conducting sales and marketing activities, either alone or with a partner; and
 
● 
obtaining additional capital.
 
If we are unable to obtain regulatory approval of any of our product candidates, to successfully commercialize any products for which we receive regulatory approval or to obtain additional capital, we may not be able to recover our investment in our development efforts.
 
The clinical and commercial success of our product candidates will depend on a number of factors, including the following:
 
● 
the ability to raise additional capital on acceptable terms, or at all;
 
● 
timely completion of our clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;
 
● 
whether we are required by the FDA or similar foreign regulatory agencies to conduct additional clinical trials beyond those planned to support the approval and commercialization of our product candidates or any future product candidates;
 
● 
acceptance of our proposed indications and primary endpoint assessments relating to the proposed indications of our product candidates by the FDA and similar foreign regulatory authorities;
 
● 
our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities, the safety and efficacy of our product candidates or any future product candidates;
 
 
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● 
the prevalence, duration and severity of potential side effects experienced with our product candidates or future approved products, if any;
 
 ● 
the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;
 
● 
achieving and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to our product candidates or any future product candidates or approved products, if any;
 
● 
the ability of third parties with whom we contract to manufacture clinical trial and commercial supplies of our product candidates or any future product candidates, remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with the FDA’s current GMP regulations;
 
● 
a continued acceptable safety profile and efficacy during clinical development and following approval of our product candidates or any future product candidates;
 
● 
our ability to successfully commercialize our product candidates or any future product candidates in the United States and internationally, if approved for marketing, sale and distribution in such countries and territories, whether alone or in collaboration with others;
 
● 
acceptance by physicians and patients of the benefits, safety and efficacy of our product candidates or any future product candidates, if approved, including relative to alternative and competing treatments;
 
● 
our and our partners’ ability to establish and enforce intellectual property rights in and to our product candidates or any future product candidates;
 
● 
our and our partners’ ability to avoid third-party patent interference or intellectual property infringement claims; and
 
● 
our ability to develop, in-license or acquire additional product candidates or commercial-stage products that we believe can be successfully developed and commercialized.
 
If we do not achieve one or more of these factors, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to obtain regulatory approvals or commercialize our product candidates. Even if regulatory approvals are obtained, we may never be able to successfully commercialize any of our product candidates. Accordingly, we cannot assure you that we will be able to generate sufficient revenue through the sale of our product candidates or any future product candidates to continue our business.
 
Raising additional capital may cause dilution to existing shareholders, restrict our operations or require us to relinquish rights.
 
We may seek the additional capital necessary to fund our operations through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, existing shareholders’ ownership interests will be diluted and the terms may include liquidation or other preferences that adversely affect their rights as a shareholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.
 
Risks Related to Our Business, Strategy and Industry
 
We are substantially dependent on the commercial success of Vyleesi for HSDD, but we and our licensees may never successfully commercialize Vyleesi for HSDD or obtain approvals in countries other than the United States.
 
To date, we have invested most of our efforts and financial resources in the research and development of Vyleesi for HSDD, which was approved by the FDA in June 2019. Since July 24, 2020, the effective date of the termination of our license agreement with AMAG for Vyleesi, we have been responsible for manufacturing, marketing and distribution of Vyleesi in the United States. We licensed all rights to commercialize Vyleesi in China to Fosun and in Korea to Kwangdong. We have not yet received regulatory approval to commercialize Vyleesi in China or Korea, and regulatory approval in these countries cannot be assured.
 
 
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Our near-term prospects, including our ability to finance our company and generate revenue, will depend heavily on the successful commercialization of Vyleesi for HSDD, as well as any future product candidates. The clinical and commercial success of Vyleesi and our product candidates will depend on a number of factors, including the following:
 
 ● 
timely completion of, or need to conduct additional clinical trials and studies, for our product candidates, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the accurate and satisfactory performance of third-party contractors;
 
● 
the ability to demonstrate to the satisfaction of the FDA the safety and efficacy of future product candidates through clinical trials;
 
● 
whether we or our licensees are required by the FDA or other similar foreign regulatory agencies to conduct additional clinical trials to support the approval of Vyleesi and future product candidates;
 
● 
our ability to successful manufacture Vyleesi for worldwide markets;
 
● 
our success and the success of our licensees in educating physicians and patients about the benefits, administration and use of Vyleesi for HSDD;
 
● 
the prevalence and severity of adverse events experienced with Vyleesi for HSDD or any future product candidates or approved products;
 
● 
the adequacy and regulatory compliance of the autoinjector device, supplied by an unaffiliated third party, used as part of the Vyleesi combination product;
 
● 
the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;
 
● 
our ability to raise additional capital on acceptable terms to achieve our goals;
 
● 
achieving and maintaining compliance with all regulatory requirements applicable to Vyleesi for HSDD or any future product candidates or approved products;
 
● 
the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
 
● 
the effectiveness of our own or our future potential strategic collaborators’ marketing, sales and distribution strategy and operations;
 
● 
the ability to manufacture clinical trial supplies of any future product candidates and to develop, validate and maintain a commercially viable manufacturing process that is compliant with current GMP;
 
● 
our ability to successfully commercialize Vyleesi for HSDD in the United States;
 
● 
our ability to successfully commercialize any future product candidates, if approved for marketing and sale, whether alone or in collaboration with others;
 
● 
our ability to enforce our intellectual property rights in and to Vyleesi for HSDD or any future product candidates;
 
● 
our ability to avoid third-party patent interference or intellectual property infringement claims;
 
● 
acceptance of Vyleesi for HSDD or any future product candidates, if approved, as safe and effective by patients and the medical community; and
 
● 
a continued acceptable safety profile and efficacy of Vyleesi for HSDD or any future product candidates following approval.
 
If we fail to satisfy any one of these prerequisites to our commercial success, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates. Accordingly, we cannot assure you that we will be able to generate sufficient revenue through direct sales of Vyleesi for HSDD in the United States and the license agreements with Fosun and Kwangdong, or through the sale of any future product candidate, to continue our business. In addition to preventing us from executing our current business plan, any delays in our clinical trials, or inability to successfully commercialize our products could impair our reputation in the industry and the investment community and could hinder our ability to fulfill our existing contractual commitments. As a result, our share price would likely decline significantly, and we would have difficulty raising necessary capital for future projects.
 
 
18
 
 
Production and supply of Vyleesi depend on contract manufacturers over whom we do not have any control, and there may not be adequate supplies of Vyleesi.
 
We do not have the facilities to manufacture the Vyleesi active drug ingredient or the autoinjector pen component of the Vyleesi combination product, or to fill, assemble and package the Vyleesi combination product. We have contracts with third parties to make the Vyleesi combination product. The contract manufacturers must perform these manufacturing activities in a manner that complies with FDA regulations. Our ability to control third-party compliance with FDA requirements is limited to contractual remedies and rights of inspection. The manufacturers of approved products and their manufacturing facilities will be subject to ongoing review and periodic inspections by the FDA and other authorities where applicable, and must comply with regulatory requirements, including FDA regulations concerning GMP. Failure of third-party manufacturers to comply with GMP, medical device quality system regulations, or other FDA requirements may result in enforcement action by the FDA. Failure to conduct their activities in compliance with FDA regulations could delay or negatively impact our ability to market Vyleesi. Establishing relationships with new suppliers, who must be FDA-approved, is a time-consuming and costly process. If we are not able to obtain adequate supplies of Vyleesi, it will be difficult for us to market and commercialize Vyleesi and compete effectively.
 
The effect of COVID-19 and other possible pandemics and outbreaks could result in material adverse effects on our clinical trials, business, financial condition and results of operations.
 
We have active and planned clinical trial sites in the United States and planned clinical trial sites in Europe, and our licensees have planned clinical trial sites in Asia-Pacific countries. As the COVID-19 pandemic continues to spread around the globe, we will likely experience disruptions that could severely impact our planned clinical trials, including potential Phase 3 clinical trials with PL9643 in the United States for dry eye disease, a planned Phase 2 clinical trial with PL8177 for ulcerative colitis, a planned Phase 2 clinical trial with PL3994, an NPR-A agonist, in heart failure patients in collaboration with two major academic medical centers, and clinical trials planned to be conducted in the People’s Republic of China and the Republic of Korea by our licensees for Vyleesi, Fosun and Kwangdong.
 
It is possible that the COVID-19 pandemic may delay enrollment in our clinical trials due to prioritization of medical and hospital resources toward the outbreak, and some patients may be unwilling to enroll in our trials or be unable to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services, which would delay our ability to conduct clinical trials or release clinical trial results.
 
The spread of COVID-19 may also result in the inability of our suppliers to deliver clinical drug supplies on a timely basis or at all. In addition, medical centers and hospitals may reduce staffing and reduce or postpone certain treatments in response to the spread of an infectious disease. Such events may result in a period of business disruption, and in reduced operations, or doctors and medical providers may be unwilling to participate in our clinical trials.
 
The COVID-19 pandemic and measures to prevent the spread of COVID-19 subject us to various risks and uncertainties that could materially adversely affect our clinical trials, business, financial condition and results of operation, including the following:
 
● 
our ability to recruit subjects for clinical trials and studies for our product candidates and to timely complete clinical trials and other studies;
 
● 
our ability to successfully market Vyleesi, given significant limitations in person-to-person marketing and contacts, including limitations in educating physicians and other health care professionals about the benefits, administration and use of Vyleesi for HSDD;
 
● 
adverse impacts on our ability to manufacture and distribute Vyleesi, including due to the negative impact of COVID-19 on air travel, as well as temporary disruptions, restrictions or closures of facilities of our suppliers and contract manufacturers in the Vyleesi manufacturing chain;
 
● 
adverse impacts of COVID-19 on our ability to successful manufacture product candidates for clinical trials and to successfully manufacture Vyleesi for the United States market and clinical trials elsewhere in the world;
 
● 
adverse impacts on our operations resulting from remote working arrangements;
 
● 
limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families, delays or difficulties in conducting site visits and other required travel, and the desire of employees to avoid contact with large groups of people;
 
● 
the inability of global suppliers of raw materials or components used in the manufacture of our products, or contract manufacturers of our products, to supply and/or transport those raw materials, components and products to us in a timely and cost effective manner due to shutdowns, interruptions or delays, limiting and precluding the production of our finished products, impacting our ability to supply customers, reducing our sales, increasing our costs of goods sold, and reducing our absorption of overhead;
 
 
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● 
the illiquidity or insolvency of our suppliers, vendors and customers, or their inability to pay our invoices in full or in a timely manner, due to the reduction in their revenues caused by the cancellation or delay of procedures and other factors, which could potentially reduce our cash flow and our liquidity;
 
● 
delays in our ability, and the ability of our development partners, to conduct, enroll and complete clinical development programs;
 
● 
the instability to worldwide economies, financial markets, social institutions, labor markets and the healthcare systems as a result of the COVID-19 pandemic, which could result in an economic downturn that could adversely impact our business, results of operations and financial condition, as well as that of our investors, suppliers, customers or other business partners;
 
● 
changes in customer behavior and preferences for Vyleesi, as customers may experience financial difficulties or may delay or reduce their spending in light of COVID-19; and
 
● 
a recurrence of the COVID-19 pandemic after social distancing and other similar measures have been relaxed.
 
Most of our employees have transitioned to remote working arrangements, and we have not determined how long these arrangements will last. While remote working has not had a significant adverse impact on our financial results or our operations to date, there can be no assurance that these arrangements will not ultimately result in lower work efficiency and productivity, which in turn may adversely affect our business. Certain employees, such as laboratory personnel, cannot work remotely, and COVID-19 may adversely affect our ability to conduct research and preclinical studies, and undertake other activities related to development of potential products. In addition, COVID-19 has resulted in industry events and business travel being suspended, cancelled or significantly curtailed, which may negatively impact our ability to identify and form relationships with potential development and marketing partners.
 
The extent to which the global COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions to contain or treat its impact, among others. The COVID-19 pandemic has adversely affected economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations, including our ability to obtain additional funding, if needed.
 
Our product candidates other than Vyleesi, including PL9643 for dry eye disease and PL8177 for the treatment of COVID-19, are still in the early stages of development and remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our product candidates, we will not be successful.
 
Our product candidates, including PL9643 for dry eye disease and PL8177 for the treatment of COVID-19, are at various stages of research and development, will require regulatory approval, and may never be successfully developed or commercialized. Our product candidates will require significant further research, development and testing before we can seek regulatory approval to market and sell them. We must demonstrate that our product candidates are safe and effective for use in patients in order to receive regulatory approval for commercial sale. Preclinical studies in animals, using various doses and formulations, must be performed before we can begin human clinical trials. Even if we obtain favorable results in the preclinical studies, the results in humans may be different. Numerous small-scale human clinical trials may be necessary to obtain initial data on a product candidate’s safety and efficacy in humans before advancing to large scale human clinical trials. We face the risk that the results of our trials in later phases of clinical trials may be inconsistent with those obtained in earlier phases. Adverse or inconclusive results could delay the progress of our development programs and may prevent us from filing for regulatory approval of our product candidates. Additional factors that could inhibit the successful development of our product candidates include:
 
● 
lack of effectiveness of any product candidate during clinical trials or the failure of our product candidates to meet specified endpoints;
 
● 
failure to design appropriate clinical trial protocols;
 
● 
uncertainty regarding proper dosing;
 
● 
for injectable products, inability to develop or obtain a supplier for a suitable autoinjector device that meets the FDA’s medical device requirements;
 
● 
insufficient data to support regulatory approval;
 
● 
inability or unwillingness of medical investigators to follow our clinical protocols;
 
● 
inability to add a sufficient number of clinical trial sites; or
 
● 
the availability of sufficient capital to sustain operations and clinical trials.
 
 
20
 
 
You should evaluate us in light of these uncertainties, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, as well as unanticipated problems and additional costs relating to:
 
● 
product approval or clearance;
 
● 
regulatory compliance;
 
● 
good manufacturing practices;
 
● 
intellectual property rights;
 
● 
product introduction; and
 
● 
marketing and competition.
 
If clinical trials for our product candidates are prolonged or delayed, we may be unable to commercialize our product candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any revenue from potential product sales.
 
We may be unable to commercialize our product candidates on a timely basis due to unexpected delays in our human clinical trials. Potential delaying events include:
 
● 
discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues;
 
● 
slower than expected rates of subject recruitment and enrollment rates in clinical trials resulting from numerous factors, including the prevalence of other companies’ clinical trials for their product candidates for the same indication, or clinical trials for indications for which patients do not as commonly seek treatment;
 
● 
difficulty in retaining subjects who have initiated a clinical trial but may withdraw at any time due to adverse side effects from the therapy, insufficient efficacy, fatigue with the clinical trial process or for any other reason;
 
● 
difficulty in obtaining IRB approval for studies to be conducted at each site;
 
● 
delays in manufacturing or obtaining, or inability to manufacture or obtain, sufficient quantities of materials for use in clinical trials;
 
● 
inadequacy of or changes in our manufacturing process or the product formulation or method of delivery;
 
● 
changes in applicable laws, regulations and regulatory policies;
 
● 
delays or failure in reaching agreement on acceptable terms in clinical trial contracts or protocols with prospective contract research organizations (“CROs”), clinical trial sites and other third-party contractors;
 
● 
failure of our CROs or other third-party contractors to comply with contractual and regulatory requirements or to perform their services in a timely or acceptable manner;
 
● 
failure by us, our employees, our CROs or their employees or any partner with which we may collaborate or their employees to comply with applicable FDA or other regulatory requirements relating to the conduct of clinical trials or the handling, storage, security and recordkeeping for drug, medical device and biologic products;
 
● 
delays in the scheduling and performance by the FDA of required inspections of us, our CROs, our suppliers, or our clinical trial sites, and violations of law or regulations discovered in the course of FDA inspections;
 
● 
scheduling conflicts with participating clinicians and clinical institutions; or
 
● 
difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data.
 
Any of these events or other delaying events, individually or in the aggregate, could delay the commercialization of our product candidates and have a material adverse effect on our business, results of operations and financial condition.
 
In light of the COVID-19 pandemic, it is possible that one or more government entities may take actions that directly or indirectly have the effect of abrogating some of our rights or opportunities. If we were to develop a treatment for COVID-19, the economic value of such a therapeutic treatment to us could be limited.
 
Various government entities, including the U.S. government, are offering incentives, grants and contracts to encourage additional investment by commercial organizations into preventative and therapeutic agents against coronavirus, which may have the effect of increasing the number of competitors and/or providing advantages to known competitors. Accordingly, there can be no assurance that we will be able to successfully establish a competitive market share for our COVID-19 therapeutic treatment, if any.
 
 
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We may not be able to secure and maintain relationships with research institutions and other organizations to conduct our clinical trials.
 
We rely on research institutions and other organizations to conduct our clinical trials, and we therefore have limited control over the timing and cost of clinical trials and our ability to recruit subjects. If we are unable to reach agreements with suitable research institutions or organizations on acceptable terms, or if any such agreement is terminated, we may be unable to quickly replace the research institution or organization with another qualified institution or organization on acceptable terms. We may not be able to secure and maintain suitable research institutions or organizations to conduct our clinical trials.
 
Even if our product candidates receive regulatory approval, they may never achieve market acceptance, in which case our business, financial condition and results of operation will be materially adversely affected.
 
Regulatory approval for the marketing and sale of any of our product candidates does not assure the product’s commercial success. Any approved product will compete with other products manufactured and marketed by major pharmaceutical and other biotechnology companies. If any of our product candidates are approved by the FDA and do not achieve adequate market acceptance, our business, financial condition and results of operations will be materially adversely affected. The degree of market acceptance of any such product will depend on a number of factors, including:
 
● 
perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of any such product;
 
 ● 
cost-effectiveness relative to competing products and technologies;
 
 ● 
availability of reimbursement for our products from third-party payers such as health insurers, HMOs and government programs such as Medicare and Medicaid; and
 
 ● 
advantages over alternative treatment methods.
 
There is one other FDA approved product for treatment of HSDD, flibanserin, which is sold under the trade name Addyi®, and started marketing in October 2015. Because flibanserin was not consistently marketed since October 2015, and ownership of the product has changed, the actual market size and market dynamics for HSDD are unknown. While we believe that an on-demand drug for HSDD has competitive advantages compared to chronic or daily use drugs, we may not be able to realize this perceived advantage in the market. Vyleesi is administered by subcutaneous injection. While the single-use, disposable autoinjector pen format is designed to maximize market acceptability, Vyleesi as a subcutaneous injectable drug for HSDD may never achieve significant market acceptance. In addition, we believe reimbursement of Vyleesi from third-party payers such as health insurers, HMOs or other third-party payers of healthcare costs will be similar to reimbursement for flibanserin and erectile dysfunction (“ED”) drugs, and that the ultimate user may pay a substantial part of the cost of Vyleesi for HSDD. If the market opportunity for Vyleesi is smaller than we anticipate, it may also be difficult for us to find marketing partners and, as a result, we may be unable to generate revenue and business from Vyleesi. If Vyleesi for HSDD does not achieve adequate market acceptance at an acceptable price point, our business, financial condition and results of operations will be materially adversely affected.
 
Even if our product candidates receive regulatory approval in the United States, we may never receive approval or commercialize our products outside of the United States.
 
In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setbacks in obtaining such approval would impair our ability to develop foreign markets for our product candidates and may have a material adverse effect on our results of operations and financial condition.
 
 
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If side effects emerge that can be linked to Vyleesi or any of our product candidates (either while they are in development or after they are approved and on the market), we may be required to perform lengthy additional clinical trials, change the labeling of any such products, or withdraw such products from the market, any of which would hinder or preclude our ability to generate revenues.
 
If we identify side effects or other problems occur in future clinical trials, we may be required to terminate or delay clinical development of the product candidate. Furthermore, even if any of our product candidates receive marketing approval, as greater numbers of patients use a drug following its approval, if the incidence of side effects increases or if other problems are observed after approval that were not seen or anticipated during pre-approval clinical trials, or if the incidence of side effects increase or other problems are observed with Vyleesi, a number of potentially significant negative consequences could result, including:
 
regulatory authorities may withdraw their approval of the product;
 
we may be required to reformulate such products or change the way the product is manufactured;
 
we may become the target of lawsuits, including class action suits; and
 
our reputation in the marketplace may suffer resulting in a significant drop in the sales of such products.
 
Any of these events could substantially increase the costs and expenses of developing, commercializing and marketing any such product candidates or could harm or prevent sales of any approved products.
 
We may not be able to keep up with the rapid technological change in the biotechnology and pharmaceutical industries, which could make any future approved products obsolete and reduce our revenue.
 
Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies. In addition, any future products that we develop, including our clinical product candidates, may become obsolete before we recover expenses incurred in developing those products, which may require that we raise additional funds to continue our operations.
 
Competing products and technologies may make our proposed products noncompetitive.
 
Flibanserin, a daily-use oral drug sold under the trade name Addyi®, has been approved by the FDA for HSDD in premenopausal women. There are other products reported as being developed for HSDD and other FSD indications, including oral combination drugs, some of which incorporate testosterone, antidepressants or PDE-5 inhibitors. There is competition to develop drugs for treatment of HSDD and FSD in both premenopausal and postmenopausal patients. Our Vyleesi drug product is administered by subcutaneous injection, and an on-demand drug product for the same indication which utilizes another route of administration, such as a conventional oral drug product, may make subcutaneous Vyleesi noncompetitive.
 
There are a number of products approved for use in treating inflammatory diseases and indications, and other products are being developed, including products in clinical trials. The dry eye disease and ocular inflammatory disease markets are highly competitive, with a number of marketed products and products reported to be in late stage clinical trials. Similarly, the inflammatory bowel disease and ulcerative colitis markets are highly competitive, with a number of marketed products and products reported to be in late stage clinical trials.
 
There are several products approved for use in treatment of obesity and related indications, and a number of other products being developed for treatment of obesity, including products in clinical trials. There is intense competition to develop drugs for treatment of obesity and related indications.
 
In general, the biopharmaceutical industry is highly competitive. We are likely to encounter significant competition with respect to Vyleesi, MC1r product candidates, MCr product candidates and NPR product candidates. Most of our competitors have substantially greater financial and technological resources than we do. Many of them also have significantly greater experience in research and development, marketing, distribution and sales than we do. Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than we can. These competitive products or technologies may be more effective and useful or less costly than Vyleesi or our MC1r product candidates, MCr product candidates and NPR product candidates. In addition, academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and may develop competing products or technologies on their own or through strategic alliances or collaborative arrangements.
 
 
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We rely on third parties over whom we have no control to conduct preclinical studies, clinical trials and other research for our product candidates and their failure to timely perform their obligations could significantly harm our product development.
 
We have limited research and development staff. We rely on third parties and independent contractors, such as researchers at CROs and universities, in certain areas that are particularly relevant to our research and product development plans. We engage such researchers to conduct our preclinical studies, clinical trials and associated tests. These outside contractors are not our employees and may terminate their engagements with us at any time. In addition, we have limited control over the resources that these contractors devote to our programs, and they may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. There is also competition for these relationships, and we may not be able to maintain our relationships with our contractors on acceptable terms. If our third-party contractors do not carry out their duties under their agreements with us, fail to meet expected deadlines or fail to comply with appropriate standards for preclinical or clinical research, our ability to develop our product candidates and obtain regulatory approval on a timely basis, if at all, may be materially adversely affected.
 
Production and supply of our product candidates depend on contract manufacturers over whom we have no control, with the risk that we may not have adequate supplies of our product candidates or products.
 
We do not have the facilities to manufacture our early stage potential products such as PL8177, PL9643, PL3994 and other natriuretic peptide and melanocortin receptor agonist compounds for use in preclinical studies and clinical trials. Contract manufacturers must perform these manufacturing activities in a manner that complies with FDA regulations. Our ability to control third-party compliance with FDA requirements is limited to contractual remedies and rights of inspection. The manufacturers of our potential products and their manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other authorities where applicable, and must comply with ongoing regulatory requirements, including FDA regulations concerning GMP. Failure of third-party manufacturers to comply with GMP, medical device QSR, or other FDA requirements may result in enforcement action by the FDA. Failure to conduct their activities in compliance with FDA regulations could delay our development programs or negatively impact our ability to receive FDA approval of our potential products. Establishing relationships with new suppliers, who must be FDA-approved, is a time-consuming and costly process.
 
If we are unable to establish sales and marketing capabilities within our organization or enter into and maintain agreements with third parties to market and sell Vyleesi and our product candidates, we may be unable to generate product revenue.
 
We do not currently have any experience in sales, marketing and distribution of pharmaceutical products. We are currently working to establish sales and marketing capabilities for Vyleesi in the United States, including through establishing agreements with third parties to market and sell Vyleesi. We may not be able to enter into suitable agreements on acceptable terms, if at all, with third parties to market and sell Vyleesi. Engaging a third party to perform these services could impede sales of Vyleesi. If we are unable to establish adequate sales, marketing and distribution capabilities for Vyleesi, whether independently or with third parties, we may not be able to generate sufficient product revenue to support Vyleesi-associated costs and expenses, and our business would suffer. In addition, if we enter into arrangements with third parties to perform sales, marketing and distribution services, we will be dependent on the performance of third parties over whom we have limited control.
 
If any of our products candidates are approved by the FDA or other regulatory authorities, we must enter into agreements with third parties to market these product candidates or develop marketing, distribution and selling capacity and expertise, which will be costly and time consuming, or enter into agreements with other companies to provide these capabilities. We may not be able to enter into suitable agreements on acceptable terms, if at all. Engaging a third party to perform these services could delay the commercialization of any of our product candidates, if approved for commercial sale. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and our business would suffer. In addition, if we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues are likely to be lower than if we could market and sell any products that we develop ourselves.
 
We need to hire additional employees in order to commercialize Vyleesi and our product candidates in the future. Any inability to manage future growth could harm our ability to commercialize Vyleesi and ultimately our product candidates, increase our costs and adversely impact our ability to compete effectively.
 
In order to commercialize Vyleesi and ultimately our product candidates, we will need to hire experienced sales and marketing personnel to sell and market those product candidates we decide to commercialize, and we will need to expand the number of our managerial, operational, financial and other employees to support commercialization. Competition exists for qualified personnel in the biopharmaceutical field.
 
 
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Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively.
 
Our ability to achieve revenues from the sale of our products will depend, in part, on our ability to obtain adequate reimbursement from Medicare, Medicaid, private insurers and other healthcare payers.
 
Our ability to successfully commercialize our products, including Vyleesi and our products in development, will depend, in significant part, on the extent to which we or our marketing partners can obtain reimbursement for our products and also reimbursement at appropriate levels for the cost of our products. Obtaining reimbursement from governmental payers, insurance companies, HMOs and other third-party payers of healthcare costs is a time-consuming and expensive process. There is no guarantee that our products will ultimately be reimbursed. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product incorporating new technology and third-party reimbursement might not be available for our proposed products once approved, or if obtained, might not be adequate.
 
There is significant uncertainty concerning the extent and scope of third-party reimbursement for products treating HSDD and other forms of FSD. We believe that Vyleesi for HSDD will be classified as a Tier 3 drug, as was flibanserin, so that reimbursement will be limited for Vyleesi for treatment of premenopausal women with HSDD. Third-party payers are increasingly challenging the prices charged for diagnostic and therapeutic products and related services. Reimbursement from governmental payers is subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and other policy changes, all of which could materially decrease the range of products for which we are reimbursed or the rates of reimbursement by government payers. In addition, recent legislation reforming the healthcare system may result in lower prices or the actual inability of prospective customers to purchase our products. The cost containment measures that healthcare payers and providers are instituting and the effect of any healthcare reform could materially and adversely affect our ability to operate profitably. Furthermore, even if reimbursement is available, it may not be available at the volume and price levels sufficient for us to realize a positive return on our investment, which would have a material adverse effect on our business, financial condition and results of operations.
 
Even if we receive regulatory approval for our products in Europe, we may not be able to secure adequate pricing and reimbursement in Europe for us or any strategic partner to achieve profitability.
 
Even if one or more of our products are approved in Europe, we may be unable to obtain appropriate pricing and reimbursement for such products. In most European markets, demand levels for healthcare in general and for pharmaceuticals in particular are principally regulated by national governments. Therefore, pricing and reimbursement for our products will have to be negotiated on a “Member State by Member State” basis according to national rules, as there does not exist a centralized European process. As each Member State has its own national rules governing pricing control and reimbursement policy for pharmaceuticals, there are likely to be uncertainties attaching to the review process, and the level of reimbursement that national governments are prepared to accept. In the current economic environment, governments and private payers or insurers are increasingly looking to contain healthcare costs, including costs on drug therapies. If we are unable to obtain adequate pricing and reimbursement for our products in Europe, we or a potential strategic partner or collaborator may not be able to cover the costs necessary to manufacture, market and sell the product, limiting or preventing our ability to achieve profitability.
 
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
 
The testing and marketing of medical products entails an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products or cease clinical trials. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with corporate collaborators. We currently carry $10 million liability insurance in the aggregate as to certain product liability and commercialization risks and certain clinical trial risks. We, or any corporate collaborators, may not in the future be able to obtain insurance at a reasonable cost or in sufficient amounts, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
 
 
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Our internal computer systems, or those of our third-party contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
 
In the ordinary course of our business, we collect, store and transmit confidential information. Despite the implementation of security measures, our internal computer systems and those of our third-party contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. We rely on industry accepted measures and technology to secure confidential and proprietary information maintained on our computer systems. However, these measures and technology may not adequately prevent security breaches. While we do not believe that we have experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a loss of clinical trial data for our product candidates that could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Cyberattacks are increasing in their frequency, sophistication and intensity. Cyberattacks could include the deployment of harmful malware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. Significant disruptions of our information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology, intellectual property, research and development or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.
 
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
 
We may in the future employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
 
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
 
If we begin commercializing any of our products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
 
the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal health care program such as the Medicare and Medicaid programs;
 
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
 
HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
 
HIPAA, as amended by the Health Information Technology and Clinical Health Act, and its implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of individually identifiable health information;
 
 
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The federal physician sunshine requirements under the Affordable Care Act, which require manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and
 
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
 
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
 
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
 
We are highly dependent on our management team, senior staff professionals and third-party contractors and consultants, and the loss of their services could materially adversely affect our business.
 
We rely on our relatively small management team and staff as well as various contractors and consultants to provide critical services. Our ability to execute our clinical programs for Vyleesi, PL8177, PL9643, PL3994 and our other preclinical programs for MC1r and MC4r peptide or small molecule drug candidates and natriuretic peptide drug candidates depends on our continued retention and motivation of our management and senior staff professionals, including executive officers and senior members of product development and management, including commercialization, who possess significant technical expertise and experience and oversee our development and commercialization programs. If we lose the services of existing key personnel, our development programs could be adversely affected if suitable replacement personnel are not recruited quickly. Our success also depends on our ability to develop and maintain relationships with contractors, consultants and scientific advisors.
 
There is competition for qualified personnel, contractors and consultants in the pharmaceutical industry, which makes it difficult to attract and retain the qualified personnel, contractors and consultants necessary for the development and growth of our business. Our failure to attract and retain such personnel, contractors and consultants could have a material adverse effect on our business, results of operations and financial condition.
 
Existing coverage for Vyleesi for the treatment of HSDD is classified as a Tier 3 drug by third-party payers, so that demand for Vyleesi will be tied to discretionary spending levels of our targeted patient population and particularly affected by unfavorable economic conditions.
 
The market for HSDD may be particularly vulnerable to unfavorable economic conditions. We expect Vyleesi for the treatment of HSDD to have significant copay or deductible requirements and to be only partially reimbursed by third-party payers and, as a result, demand for this product may be tied to discretionary spending levels of our targeted patient population. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for Vyleesi for HSDD or any future product candidates, if approved, and our ability to raise additional capital when needed on acceptable terms, if at all. This is particularly true in Europe, which is undergoing a continued severe economic crisis. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which future economic climates and financial market conditions could adversely impact our business.
 
 
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Risks Related to Government Regulation
 
Both before and after marketing approval, our product candidates are subject to ongoing regulatory requirements and, if we fail to comply with these continuing requirements, we could be subject to a variety of sanctions and the sale of any approved commercial products could be suspended.
 
Both before and after regulatory approval to market a particular product candidate, the manufacturing, labeling, packaging, adverse event reporting, storage, advertising and promotion and record keeping related to the product candidates are subject to extensive regulatory requirements. If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities, we could be subject to administrative or judicially imposed sanctions, including:
 
restrictions on the products or manufacturing process;
 
warning letters;
 
civil or criminal penalties;
 
fines;
 
injunctions;
 
imposition of a Corporate Integrity Agreement requiring heightened monitoring of our compliance functions, overseen by outside monitors, and enhanced reporting requirements to, and oversight by, the FDA and other government agencies;
 
product seizures or detentions and related publicity requirements;
 
suspension or withdrawal of regulatory approvals;
 
regulators or IRBs may not authorize us or any potential future collaborators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
 
total or partial suspension of production; and
 
refusal to approve pending applications for marketing approval of new product candidates.
 
Changes in the regulatory approval policy during the development period, changes in or the enactment of additional regulations or statutes, or changes in the regulatory review for each submitted product application may cause delays in the approval or rejection of an application. Even if the FDA approves a product candidate, the approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials. The approval may also impose REMS on a product if the FDA believes there is a reason to monitor the safety of the drug in the marketplace. REMS may include requirements for additional training for health care professionals, safety communication efforts and limits on channels of distribution, among other things. The sponsor would be required to evaluate and monitor the various REMS activities and adjust them if need be. The FDA also may impose various civil or criminal sanctions for failure to comply with regulatory requirements, including withdrawal of product approval.
 
Furthermore, the approval procedure and the time required to obtain approval varies among countries and can involve additional testing beyond that required by the FDA. Approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies.
 
In addition, varying interpretations of the data obtained for preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Even if we submit an application to the FDA for marketing approval of a product candidate, it may not result in marketing approval from the FDA.
 
We do not expect to receive regulatory approval for the commercial sale of any of our product candidates that are in development in the near future, if at all. The inability to obtain FDA approval or approval from comparable authorities in other countries for our product candidates would prevent us or any potential future collaborators from commercializing these product candidates in the United States or other countries.
 
 
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The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the approvals that we require.
 
Government authorities in the United States and other countries extensively regulate the advertising, labeling, storage, record-keeping, safety, efficacy, research, development, testing, manufacture, promotion, marketing and distribution of drug products. Drugs are subject to rigorous regulation in the United States by the FDA and similar regulatory bodies in other countries. The steps ordinarily required by the FDA before a new drug may be marketed in the United States include:
 
completion of non-clinical tests including preclinical laboratory and formulation studies and animal testing and toxicology;
 
submission to the FDA of an IND application, which must become effective before clinical trials may begin, and which may be placed on “clinical hold” by the FDA, meaning the trial may not commence, or must be suspended or terminated prior to completion;
 
performance of adequate and well-controlled Phase 1, 2 and 3 human clinical trials to establish the safety and efficacy of the drug for each proposed indication, and potentially post-approval or Phase 4 studies to further define the drug’s efficacy and safety, generally or in specific patient populations;
 
submission to the FDA of an NDA that must be accompanied by a substantial “user fee” payment;
 
FDA review and approval of the NDA before any commercial marketing or sale; and
 
compliance with post-approval commitments and requirements.
 
Satisfaction of FDA pre-market approval requirements for new drugs typically takes a number of years and the actual time required for approval may vary substantially based upon the type, complexity and novelty of the product or disease to be treated by the drug. The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. The NDA also must contain extensive manufacturing information, demonstrating compliance with applicable GMP requirements. Once the submission has been accepted for filing, the FDA generally has twelve months to review the application and respond to the applicant. Such response may be an approval, or may be a “complete response letter” outlining additional data or steps that must be completed prior to further FDA review of the NDA. The review process is often significantly extended by FDA requests for additional information or clarification. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical trials is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of the advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the drug. Therefore, our proposed products could take a significantly longer time than we expect or may never gain approval. If regulatory approval is delayed or never obtained, our business, financial condition and results of operations would be materially adversely affected.
 
Some of our products or product candidates may be used in combination with a drug delivery device, such as an injector or other delivery system. Vyleesi is considered a drug-device combination product because of its injection delivery device. Medical products containing a combination of new drugs, biological products or medical devices are regulated as “combination products” in the United States. A combination product generally is defined as a product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a new drug, biologic or device. In order to facilitate pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the pre-market review and regulation of the overall product based upon a determination by the FDA of the primary mode of action of the combination product. The determination whether a product is a combination product or two separate products is made by the FDA on a case-by-case basis. Our product candidates intended for use with such devices, or expanded indications that we may seek for our products used with such devices, may not be approved or may be substantially delayed in receiving approval if the devices do not gain and/or maintain their own regulatory approvals or clearances. Where approval of the drug product and device is sought under a single application, the increased complexity of the review process may delay approval. In addition, because these drug delivery devices are provided by single source unaffiliated third-party companies, we are dependent on the sustained cooperation and effort of those third-party companies both to supply the devices, maintain their own regulatory compliance, and, in some cases, to conduct the studies required for approval or other regulatory clearance of the devices. We are also dependent on those third-party companies continuing to maintain such approvals or clearances once they have been received. Failure of third-party companies to supply the devices, to successfully complete studies on the devices in a timely manner, or to obtain or maintain required approvals or clearances of the devices, and maintain compliance with all regulatory requirements, could result in increased development costs, delays in or failure to obtain regulatory approval and delays in product candidates reaching the market or in gaining approval or clearance for expanded labels for new indications.
 
 
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Upon approval, a product candidate may be marketed only in those dosage forms and for those indications approved by the FDA. Once approved, the FDA may withdraw the product approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the approved products in a specific subset of patients or a larger number of patients than were required for product approval and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to seek injunctions, levy fines and civil penalties, criminal prosecution, withdraw approvals and seize products or request recalls.
 
If regulatory approval of any of our product candidates is granted, it will be limited to certain disease states or conditions, patient populations, duration or frequency of use, and will be subject to other conditions as set forth in the FDA-approved labeling. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restriction through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
 
Outside the United States, our ability to market our product candidates will also depend on receiving marketing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process generally includes all of the risks associated with FDA approval described above. The requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community (“EC”), registration procedures are available to companies wishing to market a product to more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficiency has been presented, a marketing authorization will be granted. If we do not obtain, or experience difficulties in obtaining, such marketing authorizations, our business, financial condition and results of operations may be materially adversely affected.
 
The FDA has required that two postmarketing studies and a clinical trial be conducted on Vyleesi.
 
In its approval of Vyleesi, under the FFDCA the FDA imposed certain postmarketing requirements, consisting of two studies, one a prospective, registry-base, observational cohort study that compares obstetrical, maternal, fetal/neonatal, and infant outcomes in women exposed to Vyleesi during pregnancy to an internal, unexposed cohort of pregnant women, and the other a retrospective cohort study using electronic claims data that compares maternal, fetal/neonatal, and infant outcomes in women exposed to Vyleesi during pregnancy to an internal, unexposed cohort of pregnant women, and one clinical trial in lactating women who have received Vyleesi to assess potential adverse effects in the breastfed infant and measure bremelanotide concentrations in breast milk using a validated assay. We are evaluating requirements, timelines and costs for these studies and the clinical trial. We do not know the outcomes of the studies or the clinical trials, and do not know whether the outcomes would adversely affect approvals of Vyleesi.
 
Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of any future product candidates and to produce, market and distribute our products after clearance or approval is obtained.
 
From time to time, legislation is drafted and introduced in Congress, and court decisions are issued, that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of Vyleesi for HSDD or any future product candidates. We cannot determine what effect changes in regulations, statutes, court decisions, legal interpretation or policies, when and if promulgated, enacted, issued or adopted may have on our business in the future. Such changes could, among other things:
 
require changes to manufacturing methods;
 
require recall, replacement or discontinuance of one or more of our products;
 
require additional recordkeeping;
 
limit or restrict our ability to engage in certain types of marketing or promotional activities;
 
alter or eliminate the scope or terms of any currently available regulatory exclusivities; and
 
restrict or eliminate our ability to settle any patent litigation we may bring against potential generic competitors.
 
 
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Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition and results of operations.
 
Changes in healthcare policy could adversely affect our business.
 
U.S. and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”), expanded Medicare coverage for drugs purchased by Medicare beneficiaries and introduced new reimbursement methodologies. In addition, this law provided authority for limiting the number of drugs that will be covered in any therapeutic class. Until our products are approved and drug plan formulary listing decisions are made, we do not know what impact the MMA and similar laws will have on the availability of coverage for and the price that we receive for any approved products. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare policies in setting their own reimbursement policies, and any reduction in reimbursement that results from the MMA may result in similar reductions by private payers.
 
The Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (together the “ACA”), was adopted in 2010. This law has resulted in an increase in the number of people who are covered by both public and private insurance and has changed the way health care is financed by both government health program and private insurers, with significant impacts on the pharmaceutical industry. The ACA contains a number of provisions that may impact our business and operations in ways that may negatively affect our potential revenues in the future. For example, the ACA imposes a non-deductible excise tax on pharmaceutical manufacturers or importers that sell branded prescription drugs to U.S. government programs that we believe will increase the cost of any products that we develop. In addition, as part of the ACA’s provisions closing a funding gap that currently exists in the Medicare Part D prescription drug program (commonly known as the “donut hole”), we will be required to provide a 50% discount on any branded prescription drugs that we develop sold to beneficiaries who fall within the donut hole. We cannot predict all of the specific effects the ACA or any future healthcare reform legislation will have on our business, but they could have a material adverse effect on our business and financial condition.
 
Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Congress may consider other legislation to repeal or replace elements of the ACA. Because of the continued uncertainty about the implementation of the ACA, including the potential for further legal challenges or repeal of the ACA, we cannot quantify or predict with any certainty the likely impact of the ACA or its repeal on our business, prospects, financial condition or results of operations.
 
The availability of government reimbursement for prescription drugs will be impacted by the Budget Control Act of 2011, which was signed into law on August 2, 2011. This law is expected to result in federal spending cuts totaling between $1.2 trillion and $1.5 trillion over the next decade, over half of which will include cuts in Medicare and other health-related spending.
 
Risks Related to Our Intellectual Property
 
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
 
Our success, competitive position and future revenues will depend in part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. We cannot predict:
 
the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents;
 
if and when patents will be issued;
 
whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; and
 
whether we will need to initiate litigation or administrative proceedings, which may be costly whether we win or lose.
 
 
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If our products, methods, processes and other technologies infringe the proprietary rights of other parties we could incur substantial costs and we may have to:
 
obtain licenses, which may not be available on commercially reasonable terms, if at all;
 
redesign our products or processes to avoid infringement;
 
stop using the subject matter claimed in the patents held by others;
 
pay damages; or
 
defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources.
 
We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time consuming.
 
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop third-party infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology or that the factors necessary to grant an injunction against an infringer are not satisfied.
 
An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
 
Interference, derivation or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or collaborators. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management. We may not be able, alone or with our licensors or collaborators, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.
 
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.
 
If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be harmed.
 
Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other parties. There may also be patent applications that have been filed but not published that, when issued as patents, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
 
As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms, if at all.
 
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation or post-grant proceedings declared or granted by the USPTO and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or future products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
 
 
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Our patent applications and the enforcement or defense of our issued patents may be impacted by the application of or changes in U.S. and foreign standards.
 
The standards that the USPTO and foreign patent offices use to grant patents are not always applied predictably or uniformly and can change. Consequently, our pending patent applications may not be allowed and, if allowed, may not contain the type and extent of patent claims that will be adequate to conduct our business as planned. Additionally, any issued patents we currently own or obtain in the future may have a shorter patent term than expected or may not contain claims that will permit us to stop competitors from using our technology or similar technology or from copying our product candidates. Similarly, the standards that courts use to interpret patents are not always applied predictably or uniformly and may evolve, particularly as new technologies develop. In addition, changes to patent laws in the United States or other countries may be applied retroactively to affect the validation enforceability, or term of our patent. For example, the U.S. Supreme Court has recently modified some legal standards applied by the USPTO in examination of U.S. patent applications, which may decrease the likelihood that we will be able to obtain patents and may increase the likelihood of challenges to patents we obtain or license. In addition, changes to the U.S. patent system have come into force under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, which was signed into law in September 2011. The Leahy-Smith Act included significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. Under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, and may become involved in opposition, derivation, reexamination, inter partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position.
 
While we cannot predict with certainty the impact the Leahy-Smith Act or any potential future changes to the U.S. or foreign patent systems will have on the operation of our business, the Leahy-Smith Act and such future changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, results of operations, financial condition and cash flows and future prospects.
 
We may not be able to protect our intellectual property rights throughout the world.
 
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States and in some cases may even force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
 
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
 
In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property laws.
 
 
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If we are unable to keep our trade secrets confidential, our technologies and other proprietary information may be used by others to compete against us.
 
In addition to our reliance on patents, we attempt to protect our proprietary technologies and processes by relying on trade secret laws and agreements with our employees and other persons who have access to our proprietary information. These agreements and arrangements may not provide meaningful protection for our proprietary technologies and processes in the event of unauthorized use or disclosure of such information, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, our competitors may independently develop substantially equivalent technologies and processes or gain access to our trade secrets or technology, either of which could materially and adversely affect our competitive position.
 
Risks Related to the Ownership of Our Common Stock
 
Our stock price is volatile and may fluctuate in a way that is disproportionate to our operating performance and we expect it to remain volatile, which could limit investors’ ability to sell stock at a profit.
 
The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:
 
publicity regarding actual or potential clinical results relating to products under development by our competitors or us;
 
delay or failure in initiating, completing or analyzing preclinical or clinical trials or unsatisfactory designs or results of these trials;
 
interim decisions by regulatory agencies, including the FDA, as to clinical trial designs, acceptable safety profiles and the benefit/risk ratio of products under development;
 
achievement or rejection of regulatory approvals by our competitors or by us;
 
announcements of technological innovations or new commercial products by our competitors or by us;
 
developments concerning proprietary rights, including patents;
 
developments concerning our collaborations;
 
regulatory developments in the United States and foreign countries;
 
economic or other crises and other external factors;
 
period-to-period fluctuations in our revenue and other results of operations;
 
changes in the structure of healthcare payment systems or other actions that affect the effective reimbursement rates for treatment regimens containing our products;
 
changes in financial estimates and recommendations by securities analysts following our business or our industry;
 
sales of our common stock, or the perception that such sales could occur; and
 
the other factors described in this “Risk Factors” section.
 
We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance. If our revenues, if any, in any particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our operating results to suffer further. If our operating results in any future period fall below the expectations of securities analysts or investors, our stock price may fall by a significant amount.
 
For the 12-month period ended June 30, 2020, the price of our stock has been volatile, ranging from a high of $1.21 per share to a low of $0.36 per share. In addition, the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
 
As a public company in the United States, we are subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). We can provide no assurance that we will, at all times, in the future be able to report that our internal controls over financial reporting are effective.
 
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of Sarbanes-Oxley. Section 404 requires management to establish and maintain a system of internal control over financial reporting, and annual reports on Form 10-K filed under the Exchange Act must contain a report on the effectiveness of our internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could cause the trading price of our common stock to fall dramatically.
 
 
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If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
 
As a smaller company, it may be difficult for us to attract or retain the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of our common stock. We do not have any control of the equity research analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of us, or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
 
Holders of our preferred stock may have interests different from our common stockholders.
 
We are permitted under our certificate of incorporation to issue up to 10,000,000 shares of preferred stock. We can issue shares of our preferred stock in one or more series and can set the terms of the preferred stock without seeking any further approval from our common stockholders. 4,030 shares of our Series A Preferred Stock remain outstanding as of September 24, 2020. Each share of Series A Preferred Stock is convertible at any time, at the option of the holder, and such conversion could dilute the value of our common stock to current stockholders and could adversely affect the market price of our common stock. The conversion price decreases if we sell common stock (or equivalents) for a price per share less than the conversion price or less than the market price of the common stock and is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which results in an increase or decrease in the number of shares of common stock outstanding. Upon (i) liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (ii) sale or other disposition of all or substantially all of the assets of the Company, or (iii) any consolidation, merger, combination, reorganization or other transaction in which the Company is not the surviving entity or in which the shares of common stock constituting in excess of 50% of the voting power of the Company are exchanged for or changed into other stock or securities, cash and/or any other property, after payment or provision for payment of the debts and other liabilities of the Company, the holders of Series A Preferred Stock will be entitled to receive, pro rata and in preference to the holders of any other capital stock, an amount per share equal to $100 plus accrued but unpaid dividends, if any. Any preferred stock that we issue may rank ahead of our common stock in terms of dividend priority or liquidation premiums and may have greater voting rights than our common stock.
 
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.
 
We do not anticipate paying any cash dividends in the foreseeable future and intend to retain future earnings, if any, for the development and expansion of our business. Our outstanding Series A Preferred Stock, consisting of 4,030 shares on September 24, 2020, provides that we may not pay a dividend or make any distribution to holders of any class of stock unless we first pay a special dividend or distribution of $100 per share to the holders of the Series A Preferred Stock. In addition, the terms of existing or future agreements may limit our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
 
Anti-takeover provisions of Delaware law and our charter documents may make potential acquisitions more difficult and could result in the entrenchment of management.
 
We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter documents may make a change in control or efforts to remove management more difficult. Also, under Delaware law, our board of directors may adopt additional anti-takeover measures. Under Section 203 of the Delaware General Corporation Law, a corporation may not engage in a business combination with an “interested stockholder” for a period of three years after the date of the transaction in which the person first becomes an “interested stockholder,” unless the business combination is approved in a prescribed manner.
 
We are authorized to issue up to 300,000,000 shares of common stock. To the extent that we sell or otherwise issue authorized but currently unissued shares, this could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.
 
Our charter authorizes us to issue up to 10,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders. If we exercise this right, it could be more difficult for a third party to acquire a majority of our outstanding voting stock.
 
In addition, our equity incentive plans generally permit us to accelerate the vesting of options and other stock rights granted under these plans in the event of a change of control. If we accelerate the vesting of options or other stock rights, this action could make an acquisition more costly.
 
The application of these provisions could have the effect of delaying or preventing a change of control, which could adversely affect the market price of our common stock.
 
 
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We are a smaller reporting company and the reduced disclosure requirements applicable to smaller reporting companies may make our common stock less attractive to investors.
 
We are currently a “smaller reporting company” as defined in the Exchange Act. Smaller reporting companies are able to provide simplified executive compensation disclosures in their filings, and have certain other decreased disclosure obligations in their SEC filings. We cannot predict whether investors will find our common stock less attractive because of our reliance on the smaller reporting company exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
As of September 24, 2020, there were 44,970,962 shares of common stock underlying outstanding convertible preferred stock, options, restricted stock units and warrants. Stockholders may experience dilution from the conversion of preferred stock, exercise of outstanding options and warrants and vesting and delivery of restricted stock units.
 
As of September 24, 2020, holders of our outstanding dilutive securities had the right to acquire the following amounts of underlying common stock:
 
66,059 shares issuable on the conversion of our immediately convertible Series A Convertible Preferred Stock, subject to adjustment, for no further consideration;
 
20,042,950 shares issuable upon the exercise of stock options at a weighted-average exercise price of $0.79 per share;
 
5,778,105 shares issuable under restricted stock units which vest on dates between December 12, 2020 and June 16, 2024, subject to the fulfillment of service or performance conditions;
 
6,444,353 shares of common stock which have vested under restricted stock unit agreements, but are subject to provisions to delay delivery; and
 
12,639,495 shares issuable upon the exercise of warrants at a weighted-average exercise price of $0.74 per share.
 
If the holders convert, exercise or receive these securities, or similar dilutive securities we may issue in the future, stockholders may experience dilution in the net book value of their common stock. In addition, the sale or availability for sale of the underlying shares in the marketplace could depress our stock price. We have registered or agreed to register for resale substantially all of the underlying shares listed above. Holders of registered underlying shares could resell the shares immediately upon issuance, which could result in significant downward pressure on our stock price.
 
Our failure to meet the continued listing requirements of the NYSE American could result in a de-listing of our common stock.
 
Our common shares are listed on the NYSE American, a national securities exchange, under the symbol “PTN”. Although we currently meet the NYSE American’s listing standards, which generally mandate that we meet certain requirements relating to stockholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that we will be able to continue to meet the NYSE American’s listing requirements. If we fail to satisfy the continued listing requirements of the NYSE American, such as the corporate governance requirements or the minimum closing bid price requirement, the NYSE American may take steps to de-list our common stock. If the NYSE American delists our securities for trading on its exchange, we could face significant material adverse consequences, including:
 
a limited availability of market quotations for our securities;
reduced liquidity with respect to our securities;
a determination that our shares of common stock are “penny stock” which will require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
 
Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we may take actions to restore our compliance with the NYSE American’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the NYSE American minimum bid price requirement or prevent future non-compliance with the NYSE American’s listing requirements.
 
 
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The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Our common shares are considered to be covered securities because they are listed on the NYSE American. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on the NYSE American, our common stock would not be covered securities and we would be subject to regulation in each state in which we offer our securities.
 
Item 1B. Unresolved Staff Comments
 
None.
 
Item 2. Properties
 
Our corporate offices are located at 4B Cedar Brook Drive, Cedar Brook Corporate Center, Cranbury, NJ 08512, where we lease approximately 10,000 square feet of office space under a lease that expires in June 2025. We also lease approximately 1,700 square feet of laboratory space in the Township of South Brunswick, NJ, and have signed an amendment to expand the lease to approximately 3,600 square feet of laboratory space in the fourth quarter of calendar year 2020 and extend the lease until October 2023. We believe our present facilities are adequate for our current needs. We do not own any real property.
 
Item 3. Legal Proceedings
 
We are involved, from time to time, in various claims and legal proceedings arising in the ordinary course of our business. We are not currently a party to any claim or legal proceeding.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
 
 
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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock has been listed on NYSE American under the symbol “PTN” since December 21, 1999. It previously traded on The Nasdaq SmallCap Market under the symbol “PLTN.”
 
On September 23, 2020 we had approximately 106 record holders of common stock and the closing sales price of our common stock as reported on the NYSE American was $0.49 per share. The aggregate market value of the common and non-voting common equity held by non-affiliates on such date, computed by reference to the closing sales price of our common stock on that date, was $111,043,160.
 
Issuer purchases of equity securities. In certain instances we provide our employees with the option to withhold shares to satisfy tax withholding amounts due from the employees upon the vesting of restricted stock units and stock options in connection with our 2011 Stock Incentive Plan. The following 6,696 shares were withheld during the quarter ended June 30, 2020 at the direction of the employees as permitted under the 2011 Stock Incentive Plan in order to pay the minimum amount of tax liability owed by the employee from the vesting of those units and options:
 
Fiscal Month Period
 
Total Number of Shares Purchased (1)
 
 
Weighted Average Price per Share
 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Maximum Number of Shares that May Yet be Purchased Under Announced Plans or Programs
 
April 1, 2020 through April 30, 2020
  6,696 
 $0.44 
  - 
  - 
May 1, 2020 through May 31, 2020
  - 
  - 
  - 
  - 
June 1, 2020 through June 30, 2020
  - 
  - 
  - 
  - 
Total
  6,696 
 $0.44 
  - 
  - 
 
 (1) Consists solely of 6,696 shares that were withheld to satisfy tax withholding amounts due from employees upon the vesting of previously issued restricted stock units and options.
 
Dividends and dividend policy. We have never declared or paid any dividends. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future.
 
Dividend restrictions. Our outstanding Series A Preferred Stock, consisting of 4,030 shares on September 23, 2020, provides that we may not pay a dividend or make any distribution to holders of any class of stock unless we first pay a special dividend or distribution of $100 per share to the holders of the Series A Preferred Stock.
 
Equity compensation plan information. Reference is made to the information contained in the Equity Compensation Plan table contained in Item 11 of this Annual Report.
 
Item 6. Selected Financial Data.
 
Not Applicable.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements filed as part of this Annual Report.
 
 
38
 
 
Forward-Looking Statements
 
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws. You are urged to carefully review our description and examples of forward-looking statements included earlier in this Annual Report immediately prior to Part I, under the heading “Forward-Looking Statements.” Forward-looking statements are subject to risk that could cause actual results to differ materially from those expressed in the forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in Part I, Item 1A of this Annual Report, and any of those made in our other reports filed with the SEC. You are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date of this document. We do not intend, and undertake no obligation, to publish revised forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
 
Critical Accounting Policies and Estimates
 
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this Annual Report. We believe that our accounting policies and estimates relating to revenue recognition, accrued expenses and stock-based compensation are the most critical.
 
Revenue Recognition
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), which, along with amendments from 2015 and 2016 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC Topic 606 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective.
 
On July 1, 2018, we adopted ASC Topic 606 using the modified retrospective approach, a practical expedient permitted under ASC Topic 606, and applied this approach only to contracts that were not completed as of July 1, 2018. We calculated a one-time cumulative transition adjustment of $500,000, which was recorded on July 1, 2018 to the opening balance of accumulated deficit related to our license agreement with Kwangdong (the “Kwangdong License Agreement”) because we determined a significant revenue reversal would not occur in a future period. The one-time adjustment consisted of the recognition of $500,000 of deferred revenue.
 
Revenue Recognition for Periods Prior to July 1, 2018
 
We have generated revenue solely through license and collaboration agreements. Prior to July 1, 2018, we recognized revenue in accordance with FASB Accounting Standards Codification (“ASC”) Topic 605-25, Revenue Recognition for Arrangements with Multiple Elements, which addressed the determination of whether an arrangement involving multiple deliverables contained more than one unit of accounting. A delivered item within an arrangement was considered a separate unit of accounting only if both of the following criteria were met:
 
the delivered item had value to the customer on a stand-alone basis; and
if the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered item was considered probable and substantially in control of the vendor.
 
Under FASB ASC Topic 605-25, if both of the criteria above were not met, then separate accounting for the individual deliverables was not appropriate.
 
We determined that it was appropriate to recognize such revenue specifically related to the up-front payment the Company received using the input-based proportional method during the period of Palatin’s development obligations as defined in the license agreement with AMAG (the “AMAG License Agreement”). Refer to Note 4 of the accompanying consolidated financial statements for additional information.
 
Under the license agreement with Fosun for exclusive rights to commercialize Vyleesi in the China (the “Fosun License Agreement”), as discussed in Note 5 of the accompanying consolidated financial statements, we received consideration in the form of an upfront license fee payment and determined that it was appropriate to recognize such consideration as revenue in the first quarter of the fiscal year ended June 30, 2018 (“fiscal 2018”), which was the quarter in which the license was granted, since the license had stand-alone value and the upfront payment we received was non-refundable.
 
Under the Kwangdong License Agreement, as discussed in Note 6 of the accompanying consolidated financial statements, we received consideration in the form of an upfront license fee payment in fiscal 2018 and determined that it was appropriate to record such consideration as deferred revenue because the upfront payment we received is subject to certain refund provisions.
 
 
39
 
 
Revenue resulting from the achievement of development milestones was recorded in accordance with the accounting guidance for the milestone method of revenue recognition. Amounts received prior to satisfying the revenue recognition criteria were recorded as deferred revenue on our consolidated balance sheet.
 
Revenue Recognition for Periods Commencing July 1, 2018
 
For licenses of intellectual property, we assess, at contract inception, whether the intellectual property is distinct from other performance obligations identified in the arrangement. If the licensing of intellectual property is determined to be distinct, revenue is recognized for nonrefundable, upfront license fees when the license is transferred to the customer and the customer can use and benefit from the license. If the licensing of intellectual property is determined not to be distinct, then the license will be bundled with other promises in the arrangement into one performance obligation. We need to determine if the bundled performance obligation is satisfied over time or at a point in time. If we conclude that the nonrefundable, upfront license fees will be recognized over time, we will need to assess the appropriate method of measuring proportional performance.
 
Regulatory milestone payments are excluded from the transaction price due to the inability to estimate the probability of reversal. Revenue relating to achievement of these milestones is recognized in the period in which the milestone is achieved.
 
Sales-based royalty and milestone payments resulting from customer contracts solely or predominately for the license of intellectual property will only be recognized upon occurrence of the underlying sale or achievement of the sales milestone in the future and such sales-based royalties and milestone payments will be recognized in the same period earned.
 
We recognize revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. We record these reimbursements as revenue and not as a reduction of research and development expenses as we are the principal in the research and development activities based upon our control of such activities, which is considered part of our ordinary activities.
 
Development milestone payments are generally due 30 business days after the milestone is achieved. Sales milestone payments are generally due 45 business days after the calendar year in which the sales milestone is achieved. Royalty payments are generally due on a quarterly basis 20 business days after being invoiced.
 
Accrued Expenses
 
Third parties perform a significant portion of the Company’s development activities. The Company reviews the activities performed under all contracts each quarter and accrues expenses and the amount of any reimbursement to be received from its collaborators based upon the estimated amount of work completed. Estimating the value or stage of completion of certain services requires judgment based on available information. If the Company does not identify services performed for it but not billed by the service-provider, or if it underestimates or overestimates the value of services performed as of a given date, reported expenses will be understated or overstated.
 
Stock-Based Compensation
 
We expense the fair value of stock options and other equity awards granted. Compensation costs for stock-based awards with time-based vesting are determined using the quoted market price of our common stock on the date of grant or for stock options, the value determined utilizing the Black-Scholes option pricing model, and are recognized on a straight-line basis, while awards containing a market condition are valued using multifactor Monte Carlo simulations. Compensation costs for awards containing a performance condition are determined using the quoted price of our common stock on the date of grant or for stock options, the value is determined utilizing the Black Scholes option pricing model, and are recognized based on the probability of achievement of the performance condition over the service period. The Black-Scholes option pricing model requires us to make estimates of expected volatility and interest rates, which we estimate based on prior experience and public sources of information. The expected term of the option used is based upon the simplified method, which represents the average of the vesting and contractual term. Compensation expense is not adjusted for subsequent changes in the estimates used to calculate fair value or for actual experience. Forfeitures are recognized as they occur. As the amount and timing of compensation expense to be recorded in future periods may be affected by the achievement of performance conditions and employee terminations, stock-based compensation may vary significantly period to period.
 
See Note 3 to the consolidated financial statements included in this Annual Report for a description of recent accounting pronouncements that affect us.
 
 
40
 
 
Results of Operations
 
Year Ended June 30, 2020 Compared to the Year Ended June 30, 2019:
 
Revenue – For the fiscal year ended June 30, 2020 (“fiscal 2020”), we recognized $117,989 in revenue pursuant to our license agreement with AMAG compared to $60,300,476 in revenue for the fiscal year ended June 30, 2019 (“fiscal 2019”).
 
On January 8, 2017, we entered into the AMAG License Agreement which provided for $60,000,000 as a one-time initial payment. Pursuant to the terms of and subject to the conditions in the AMAG License Agreement, AMAG reimbursed us $25,000,000, less certain expenses directly paid by AMAG for direct out-of-pocket expenses we incurred following the effective date of the AMAG License Agreement in connection with development and regulatory activities necessary to file an NDA for Vyleesi for HSDD in the United States, less certain other expenses directly paid or to be paid by AMAG. We recognized $117,989 and $300,476 for fiscal 2020 and fiscal 2019, respectively, as license and contract revenue which included additional billings for AMAG-related Vyleesi costs.
 
In addition, pursuant to the terms of and subject to the conditions in the AMAG License Agreement, we were eligible to receive up to $80,000,000 from AMAG in specified regulatory milestone payments upon achievement of certain regulatory milestones. On June 21, 2019, the FDA granted approval of Vyleesi for use in the United States, which triggered a $60,000,000 milestone payment to Palatin. As a result, we recognized $60,000,000 in revenue related to regulatory milestones in fiscal 2019.
 
Due to the early commercial stage of Vyleesi and the sales and marketing strategy of AMAG, including no charge for the first Vyleesi prescription, AMAG has not generated positive net sales through June 30, 2020, which resulted in no royalties to Palatin during this period. On January 9, 2020, AMAG announced plans to divest Vyleesi.
 
On July 27, 2020, Palatin and AMAG announced that they had mutually terminated the license agreement for Vyleesi effective July 24, 2020. Under the terms of the termination agreement, the Company regained all North American development and commercialization rights for Vyleesi. AMAG made a $12.0 million payment to the Company at closing and will make a $4.3 million payment to the Company on March 31, 2021. The Company assumed all Vyleesi manufacturing agreements, and AMAG will transfer information, data, and assets related exclusively to Vyleesi, including, but not limited to, existing inventory. AMAG is providing certain transitional services to the Company for a period of time to ensure continued patient access to Vyleesi during the transition back to the Company. The Company will reimburse AMAG for the costs of the transition services.
 
Research and Development – Total research and development expenses, including general research and development spending, were $13,959,379 for fiscal 2020 compared to $14,857,059 for fiscal 2019. The decrease is a result of lower compensation cost in fiscal 2020 along with lower spending on our Vyleesi program offset by an increase in spending on our other melanocortin receptor programs.
 
Research and development expenses related to our Vyleesi, PL3994, PL8177, MC1r, MC4r and other preclinical projects were $10,187,786 and $10,129,640 in fiscal 2020 and fiscal 2019, respectively. The increase in spending for fiscal 2020 as compared to fiscal 2019 is a result of increased spending primarily on our melanocortin receptor programs offset by a decrease in spending on our Vyleesi program. The amount of such spending and the nature of future development activities are dependent on a number of factors, including primarily the availability of funds to support future development activities, success of our clinical trials and preclinical and discovery programs, and our ability to progress compounds in addition to Vyleesi, PL8177 and PL3994 into human clinical trials.
 
The amounts of project spending above exclude general research and development spending, which was $3,771,611 and $4,727,455 in fiscal 2020 and fiscal 2019, respectively. The decrease in general research and development spending is primarily attributable to lower compensation cost in fiscal 2020.
 
Cumulative spending from inception to June 30, 2020 was approximately $311,400,000 on our Vyleesi program and approximately $154,700,000 on all our other programs (which include PL8177, PL9643, other melanocortin receptor agonists, NPR programs and terminated programs). Due to various risk factors described herein under “Risk Factors,” including the difficulty in currently estimating the costs and timing of future Phase 1 clinical trials and larger-scale Phase 2 and Phase 3 clinical trials for any product under development, we cannot predict with reasonable certainty when, if ever, a program will advance to the next stage of development or be successfully completed, or when, if ever, related net cash inflows will be generated.
 
General and Administrative – General and administrative expenses, which consist mainly of compensation and related costs, were $9,765,372 for fiscal 2020 compared to $9,699,061 for fiscal 2019. The increase in general and administrative expenses is primarily attributable the final payment made in connection with the Greenhill agreement and professional fees related to the Vyleesi divestiture offset by a decrease in compensation costs.
 
 
41
 
 
Other Income (Expense) – Total other income (expense), net was $1,180,757 and $28,707 for fiscal 2020 and fiscal 2019, respectively. For fiscal 2020, we recognized $1,200,898 of investment income offset by $20,141 of interest expense. For fiscal 2019, we recognized $446,268 of investment income offset by $417,561 of interest expense primarily related to our venture debt. The increase in investment income is a result of Company’s increased cash position. The decrease in interest expense relates to our paying down of the venture debt.
 
Income Taxes – For fiscal 2020 and fiscal 2019, the Company recorded no income tax benefit or expense as a result of the generation of and utilization of net operating losses that were subject to a full valuation allowance.
 
Year Ended June 30, 2019 Compared to the Year Ended June 30, 2018:
 
Revenue – For fiscal 2019, we recognized $60,300,476 in revenue pursuant to our license agreement with AMAG compared to $67,134,758 in revenue for fiscal 2018 pursuant to our license agreements with AMAG and Fosun.
 
On January 8, 2017, we entered into the AMAG License Agreement which provided for $60,000,000 as a one-time initial payment. Pursuant to the terms of and subject to the conditions in the AMAG License Agreement, AMAG reimbursed us $25,000,000, less certain expenses directly paid by AMAG for direct out-of-pocket expenses we incurred following the effective date of the AMAG License Agreement in connection with development and regulatory activities necessary to file an NDA for Vyleesi for HSDD in the United States, less certain other expenses directly paid or to be paid by AMAG. We recognized $300,476 and $42,134,758 for fiscal 2019 and fiscal 2018, respectively, as license and contract revenue which included additional billings for AMAG-related Vyleesi costs of $300,476 and $1,151,243 in fiscal 2019 and fiscal 2018, respectively.
 
In addition, pursuant to the terms of and subject to the conditions in the AMAG License Agreement, we were eligible to receive up to $80,000,000 from AMAG in specified regulatory milestone payments upon achievement of certain regulatory milestones. On June 4, 2018, the FDA accepted the Vyleesi NDA for filing, which triggered a $20,000,000 milestone payment to Palatin from AMAG, that was recognized in revenue in fiscal 2018. On June 21, 2019, the FDA granted approval of Vyleesi for use in the United States, which triggered a $60,000,000 milestone payment to Palatin. As a result, we recognized $60,000,000 in revenue related to regulatory milestones in fiscal 2019.
 
On September 6, 2017, we entered into the Fosun License Agreement, which provided for $5,000,000 as a one-time non-refundable upfront payment, which was recorded as revenue during the year ended June 30, 2018. Pursuant to the Fosun License Agreement, $500,000 was withheld in accordance with tax withholding requirements in the Chinese Territories and was recorded as an expense during the year ended June 30, 2018.
 
Research and Development – Total research and development expenses, including general research and development spending, were $14,857,095 for fiscal 2019 compared to $32,566,217 for fiscal 2018. Fiscal 2019 costs primarily relate to our MC4r and other preclinical programs along with an additional Phase 1 study for Vyleesi. Fiscal 2018 costs primarily relate to our Vyleesi Phase 3 clinical trial program and ancillary studies necessary to file an NDA for Vyleesi for HSDD.
 
Research and development expenses related to our Vyleesi, PL3994, PL8177, MC1r, MC4r and other preclinical projects were $10,129,640 and $27,449,494 in fiscal 2019 and fiscal 2018, respectively. Spending to date was primarily related to our Vyleesi for the treatment of HSDD program. The decrease in research and development expenses is mainly attributable to the conclusion of Phase 3 clinical trial and development of Vyleesi for HSDD. The amount of such spending and the nature of future development activities are dependent on a number of factors, including primarily the availability of funds to support future development activities, success of our clinical trials and preclinical and discovery programs, and our ability to progress compounds in addition to Vyleesi, PL8177 and PL3994 into human clinical trials.
 
The amounts of project spending above exclude general research and development spending, which was $4,727,455 and $5,116,723 in fiscal 2019 and fiscal 2018, respectively. The decrease in general research and development spending is primarily attributable to lower stock-based compensation in fiscal 2019.
 
Cumulative spending from inception to June 30, 2019 was approximately $310,200,000 on our Vyleesi program and approximately $142,000,000 on all our other programs (which include PL8177, PL9643, other melanocortin receptor agonists, NPR programs and terminated programs). Due to various risk factors described herein under “Risk Factors,” including the difficulty in currently estimating the costs and timing of future Phase 1 clinical trials and larger-scale Phase 2 and Phase 3 clinical trials for any product under development, we cannot predict with reasonable certainty when, if ever, a program will advance to the next stage of development or be successfully completed, or when, if ever, related net cash inflows will be generated.
 
 
42
 
 
General and Administrative – General and administrative expenses, which consist mainly of compensation and related costs, were $9,699,061 for fiscal 2019 compared to $8,641,976 for fiscal 2018. The increase in general and administrative expenses is primarily attributable to an increase in compensation expense.
 
Other Income (Expense) – Total other income, net was $28,707 for fiscal 2019 and total other expenses, net was $1,141,351 for fiscal 2018. For fiscal 2019, we recognized $446,268 of investment income offset by $417,561 of interest expense primarily related to our venture debt. For fiscal 2018, we recognized $1,452,014 of interest expense primarily related to our venture debt, offset by $310,663 of investment income. The decrease in interest expense relates to our paying down of the venture debt.
 
Income Taxes – For fiscal 2019, the Company recorded no income tax expense as a result of the utilization of net operating losses that were subject to a full valuation allowance.
 
Effects of Inflation
 
We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.
 
Liquidity and Capital Resources
 
Since inception, we have generally incurred net operating losses, primarily related to spending on our research and development programs. We have financed our net operating losses primarily through debt and equity financings and amounts received under collaborative agreements.
 
Our product candidates are at various stages of development and will require significant further research, development and testing and some may never be successfully developed or commercialized. We may experience uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:
 
the development and testing of products in animals and humans;
 
product approval or clearance;
 
regulatory compliance;
 
GMP compliance;
 
intellectual property rights;
 
product introduction;
 
marketing, sales and competition; and
 
obtaining sufficient capital.
 
Failure to enter into or successfully perform under collaboration agreements and obtain timely regulatory approval for our product candidates and indications would impact our ability to generate revenues and could make it more difficult to attract investment capital for funding our operations. Any of these possibilities could materially and adversely affect our operations and require us to curtail or cease certain programs.
 
In addition, the COVID-19 pandemic may negatively impact our operations, including possible effects on our financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce. We will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2021 and beyond.
 
During fiscal 2020, net cash provided by operating activities was $41,326,415 compared to net cash used in operating activities of $21,782,841 in fiscal 2019 and net cash provided by operating activities of $1,703,103 in fiscal 2018. The difference in cash provided by operations in fiscal 2020 compared with cash used in operations in fiscal 2019 and compared with cash provided by operating activities in fiscal 2018 was primarily related to the timing of the receipt of payments related to revenue recorded for the AMAG License Agreement, including for the FDA’s approval of Vyleesi.
 
During fiscal 2020, net cash used in investing activities consisted of $62,880 compared to $36,139 during fiscal 2019, which consisted of the acquisition of equipment. During fiscal 2018, net cash provided by investing activities was $227,549, which consisted of $250,000 of proceeds from maturity of investments offset by $22,451 used for the acquisition of equipment.
 
During fiscal 2020 net cash used in financing activities was $1,921,687 which consisted of payment on notes payable obligations of $832,851, repurchase and cancellation of outstanding warrants of $2,547,466 and payment of withholding taxes related to restricted stock units of $122,868 offset by net proceeds from the sale of common stock of $1,581,498 in our “at-the-market” offering program. During fiscal 2019, net cash provided by financing activities was $27,329,231 which consisted of proceeds from the sale of common stock of $33,136,060 and proceeds from the exercise of common stock warrants of $808,934 offset by payment of withholding taxes related to restricted stock units and stock options of $115,763 and payment of debt obligations of $6,500,000. During fiscal 2018, net cash used in financing activities was $4,130,805, which consisted of payments of capital lease obligations of $14,324, payment of withholding taxes related to restricted stock units of $45,165, and payment of debt obligations of $8,000,000, offset by proceeds from the exercise of stock options, and common stock warrants of $2,670,910 and sale of common stock of $1,257,774.
 
 
43
 
 
We have incurred cumulative negative cash flows from operations since our inception, and have expended, and expect to continue to expend in the future, substantial funds to develop the capability to market and distribute Vyleesi in the United States and to complete our planned product development efforts. Continued operations are dependent upon our ability to generate future income from sales of Vyleesi in the United States and from existing licenses, including royalties and milestones, to complete equity or debt financing activities and enter into additional licensing or collaboration arrangements. As of June 30, 2020, our cash and cash equivalents were $82,852,270 with current liabilities of $3,927,553.
 
We intend to utilize existing capital resources for general corporate purposes and working capital, including establishing marketing and distribution capabilities for Vyleesi in the United States and preclinical and clinical development of our MC1r and MC4r peptide programs and natriuretic peptide program, and development of other portfolio products.
 
We believe that our cash and cash equivalents as of June 30, 2020 will be sufficient to fund our current operating plans through at least September 2021. We will need additional funding to complete required clinical trials for our other product candidates and development programs and, if those clinical trials are successful (which we cannot predict), to complete submission of required regulatory applications to the FDA.
 
We had a net loss for fiscal 2020 of $22,426,023. We may not attain profitability in future years, which is dependent on numerous factors, including whether and when development and sales milestones are met, regulatory actions by the FDA and other regulatory bodies, the performance of our licensees, and market acceptance of our products.
 
We expect to incur significant expenses as we continue to develop marketing and distribution capability for Vyleesi in the United States and continue to develop our MC1r and natriuretic peptide product candidates. These expenses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets, and working capital.
 
Off-Balance Sheet Arrangements
 
None.
 
Contractual Obligations
 
We have entered into various contractual obligations and commercial commitments. The following table summarizes our most significant contractual obligations as of June 30, 2020:
 
 
 
Payments due by Period
 
 
 
Total
 
 
Less than 1 Year
 
 
1 - 3 Years
 
 
3 - 5 Years
 
 
More than 5 Years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating leases
 $1,434,330 
 $355,164 
 $556,818 
 $522,348 
 $- 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Not applicable.
 
 
44
 
 
Item 8. Financial Statements and Supplementary Data.
 
Table of Contents
 
Consolidated Financial Statements
 
The following consolidated financial statements are filed as part of this Annual Report:
 
 
Page
 
 
Report of Independent Registered Public Accounting Firm
46
 
 
Consolidated Balance Sheets
47
 
 
Consolidated Statements of Operations
48
 
 
Consolidated Statements of Comprehensive (Loss) Income
49
 
 
Consolidated Statements of Stockholders’ Equity (Deficiency)
50
 
 
Consolidated Statements of Cash Flows
51
 
 
Notes to Consolidated Financial Statements
52
 
 
 
 
45
 
 
Report of Independent Registered Public Accounting Firm
 
To the Stockholders and Board of Directors
 
Palatin Technologies, Inc.:
 
Opinion on the Consolidated Financial Statements
 
We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. and subsidiary (the Company) as of June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity (deficiency), and cash flows for each of the years in the three-year period ended June 30, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2020, in conformity with U.S. generally accepted accounting principles.
 
Changes in Accounting Principle
 
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue as of July 1, 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.
 
Also as discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of July 1, 2019 due to the adoption of ASU No. 2016-02, Leases.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ KPMG LLP
 
We have served as the Company’s auditor since 2002.
 
Philadelphia, Pennsylvania
 
September 25, 2020
 
 
46
 
 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Balance Sheets
 
 
 
June 30,
2020
 
 
June 30,
2019
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $82,852,270 
 $43,510,422 
Accounts receivable
  - 
  60,265,970 
Prepaid expenses and other current assets
  738,216 
  637,289 
Total current assets
  83,590,486 
  104,413,681 
 
    
    
Property and equipment, net
  140,216 
  141,539 
Right-of-use assets
  1,266,132 
  - 
Other assets
  56,916 
  179,916 
Total assets
 $85,053,750 
 $104,735,136 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $715,672 
 $504,787 
Accrued expenses
  2,899,097 
  2,848,692 
Notes payable, net of discount
  - 
  332,896 
Short-term operating lease liabilities
  312,784 
  - 
Other current liabilities
  - 
  499,517 
Total current liabilities
  3,927,553 
  4,185,892 
 
    
    
Long-term operating lease liabilities
  953,348 
  - 
Total liabilities
  4,880,901 
  4,185,892 
 
    
    
Commitments and contingencies (Note 13)
    
    
 
    
    
Stockholders’ equity:
    
    
Preferred stock of $0.01 par value – authorized 10,000,000 shares; shares issued and outstanding designated as follows:
    
    
Series A Convertible: authorized 264,000 shares: issued and outstanding 4,030 shares as of June 30, 2020 and June 30, 2019
  40 
  40 
Common stock of $0.01 par value – authorized 300,000,000 shares:
    
    
issued and outstanding 229,258,400 shares as of June 30, 2020 and 226,815,363 shares as of June 30, 2019
  2,292,584 
  2,268,154 
Additional paid-in capital
  396,079,127 
  394,053,929 
Accumulated deficit
  (318,198,902)
  (295,772,879)
Total stockholders’ equity
  80,172,849 
  100,549,244 
Total liabilities and stockholders’ equity
 $85,053,750 
 $104,735,136 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
47
 
  
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Operations
 
 
 
Year Ended June 30,
 
 
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
REVENUES
 
 
 
 
 
 
 
 
 
License and contract
 $117,989 
 $60,300,476 
 $67,134,758 
 
    
    
    
OPERATING EXPENSES
    
    
    
Research and development
  13,959,397 
  14,857,095 
  32,566,217 
General and administrative
  9,765,372 
  9,699,061 
  8,641,976 
Total operating expenses
  23,724,769 
  24,556,156 
  41,208,193 
 
    
    
    
(Loss) income from operations
  (23,606,780)
  35,744,320 
  25,926,565 
 
    
    
    
OTHER INCOME (EXPENSE)
    
    
    
Investment income
  1,200,898 
  446,268 
  310,663 
Interest expense
  (20,141)
  (417,561)
  (1,452,014)
Total other income (expense), net
  1,180,757 
  28,707 
  (1,141,351)
 
    
    
    
(Loss) income before income taxes
  (22,426,023)
  35,773,027 
  24,785,214 
Income tax expense
  - 
  - 
  (82,500)
NET LOSS (INCOME)
 $(22,426,023)
 $35,773,027 
 $24,702,714 
 
    
    
    
 
    
    
    
Basic net (loss) income per common share
 $(0.10)
 $0.17 
 $0.12 
 
    
    
    
Diluted net (loss) income per common share
 $(0.10)
 $0.16 
 $0.12 
 
    
    
    
Weighted average number of common shares outstanding used in computing basic net (loss) income per common share
  234,684,776 
  207,670,607 
  198,101,060 
 
    
    
    
Weighted average number of common shares outstanding used in computing diluted net (loss) income per common share
  234,684,776 
  217,133,374 
  207,007,558 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
48
 
 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Comprehensive (Loss) Income
 
 
 
Year Ended June 30,
 
 
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 $(22,426,023)
 $35,773,027 
 $24,702,714 
 
    
    
    
Other comprehensive income:
    
    
    
Unrealized gain on available-for-sale investments
  - 
  - 
  590 
 
    
    
    
Total comprehensive (loss) income
 $(22,426,023)
 $35,773,027 
 $24,703,304 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
49
 
 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Stockholders’ Equity (Deficiency)
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Additional Paid-in
 
 
Accumulated Other Comprehensive (Loss)
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Total
 
Balance, June 30, 2017
  4,030 
 $40 
  160,515,361 
 $1,605,153 
 $349,974,538 
 $(590)
 $(356,743,785)
 $(5,164,644)
Cumulative effect of accounting change
  - 
  - 
  - 
  - 
  4,835 
  - 
  (4,835)
  - 
Stock-based compensation
  - 
  - 
  795,041 
  7,951 
  3,510,400 
  - 
  - 
  3,518,351 
Sale of common stock , net of costs
  - 
  - 
  1,283,754 
  12,838 
  1,244,936 
  - 
  - 
  1,257,774 
Withholding taxes related to restricted stock units
  - 
  - 
  (27,465)
  (275)
  (20,511)
  - 
  - 
  (20,786)
Warrant exercises
  - 
  - 
  37,778,614 
  377,786 
  2,133,243 
  - 
  - 
  2,511,029 
Option exercises
  - 
  - 
  208,900 
  2,089 
  157,792 
  - 
  - 
  159,881 
Unrealized gains on investments
  - 
  - 
  - 
  - 
  - 
  590 
  - 
  590 
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  24,702,714 
  24,702,714 
Balance, June 30, 2018
  4,030 
  40 
  200,554,205 
  2,005,542 
  357,005,233 
  - 
  (332,045,906)
  26,964,909 
Cumulative effect of accounting change
  - 
  - 
  - 
  - 
  - 
  - 
  500,000 
  500,000 
Stock-based compensation
  - 
  - 
  327,692 
  3,277 
  3,478,800 
  - 
  - 
  3,482,077 
Sale of common stock , net of costs
  - 
  - 
  24,785,814 
  247,858 
  32,888,202 
  - 
  - 
  33,136,060 
Withholding taxes related to restricted stock units
  - 
  - 
  (67,038)
  (670)
  (65,322)
  - 
  - 
  (65,992)
Withholding taxes related to stock options
  - 
  - 
  (37,994)
  (380)
  (49,391)
  - 
  - 
  (49,771)
Warrant exercises
  - 
  - 
  1,115,333 
  11,153 
  797,781 
  - 
  - 
  808,934 
Option exercises
  - 
  - 
  137,351 
  1,374 
  (1,374)
  - 
  - 
  - 
Net income
  - 
  - 
  - 
  - 
  - 
  - 
  35,773,027 
  35,773,027 
Balance, June 30, 2019
  4,030 
  40 
  226,815,363 
  2,268,154 
  394,053,929 
  - 
  (295,772,879)
  100,549,244 
Stock-based compensation
  - 
  - 
  614,117 
  6,141 
  3,132,323 
  - 
  - 
  3,138,464 
Sale of common stock , net of costs
  - 
  - 
  1,895,934 
  18,959 
  1,562,539 
  - 
  - 
  1,581,498 
Withholding taxes related to restricted stock units
  - 
  - 
  (93,875)
  (939)
  (121,929)
  - 
  - 
  (122,868)
Warrant repurchases
  - 
  - 
  - 
  - 
  (2,547,466)
  - 
  - 
  (2,547,466)
Warrant Exercises
  - 
  - 
  26,861 
  269 
  (269)
  - 
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (22,426,023)
  (22,426,023)
Balance June 30, 2020
  4,030 
 $40 
  229,258,400 
 $2,292,584 
 $396,079,127 
 $- 
 $(318,198,902)
 $80,172,849 
 
The accompanying notes are an integral part of these consolidated financial statements
 

 
50
 
 
PALATIN TECHNOLOGIES, INC.
and Subsidiary
Consolidated Statements of Cash Flows
 
 
 
Year Ended June 30,
 
 
 
2020
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
  Net (loss) Income
 $(22,426,023)
 $35,773,027 
 $24,702,714 
  Adjustments to reconcile net (loss) income to net cash
    
    
    
  provided by (used in) operating activities:
    
    
    
Depreciation and amortization
  64,203 
  58,635 
  56,569 
Non-cash interest expense
  438 
  51,234 
  175,493 
Decrease in right-of-use asset
  298,558 
  - 
  - 
Stock-based compensation
  3,138,464 
  3,482,077 
  3,518,351 
Deferred income tax benefit
  - 
  - 
  (500,000)
Changes in operating assets and liabilities:
    
    
    
Accounts receivable
  60,265,970 
  (60,265,970)
  15,116,822 
Prepaid expenses and other assets
  22,073 
  35,399 
  715,533 
Accounts payable
  210,885 
  (1,718,906)
  672,326 
Accrued expenses
  50,405 
  745,671 
  (8,393,698)
Deferred revenue
  - 
  - 
  (34,550,572)
Operating lease liabilities
  (298,558)
  - 
  - 
Other liabilities
  - 
  55,992 
  189,565 
Net cash provided by (used in) operating activities
  41,326,415 
  (21,782,841)
  1,703,103 
 
    
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
    
Proceeds from matured investments
  - 
  - 
  250,000 
Purchases of property and equipment
  (62,880)
  (36,139)
  (22,451)
Net cash (used in) provided by investing activities
  (62,880)
  (36,139)
  227,549 
 
    
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
    
Payment on capital lease obligations
  - 
  - 
  (14,324)
Payment of withholding taxes related to restricted
    
    
    
stock units
  (122,868)
  (115,763)
  (45,165)
Payment on notes payable obligations
  (832,851)
  (6,500,000)
  (8,000,000)
Proceeds from the exercise of stock options
  - 
  - 
  159,881 
Proceeds from exercise of common stock warrants
  - 
  808,934 
  2,511,029 
Warrant repurchases
  (2,547,466)
  - 
  - 
Proceeds from the sale of common stock,
    
    
    
net of costs
  1,581,498 
  33,136,060 
  1,257,774 
Net cash (used in) provided by financing activities
  (1,921,687)
  27,329,231 
  (4,130,805)
 
    
    
    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  39,341,848 
  5,510,251 
  (2,200,153)
 
    
    
    
CASH AND CASH EQUIVALENTS, beginning of year
  43,510,422 
  38,000,171 
  40,200,324 
 
    
    
    
CASH AND CASH EQUIVALENTS, end of year
 $82,852,270 
 $43,510,422 
 $38,000,171 
 
    
    
    
SUPPLEMENTAL CASH FLOW INFORMATION:
    
    
    
Cash paid for interest
 $19,222 
 $354,456 
 $1,084,158 
Cash paid for income taxes
  - 
  - 
  500,000 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
51
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
(1)            
ORGANIZATION
 
Nature of Business - Palatin Technologies, Inc. (“Palatin” or the “Company”) is a specialized biopharmaceutical company developing first-in-class medicines based on molecules that modulate the activity of the melanocortin and natriuretic peptide receptor systems. The Company’s product candidates are targeted, receptor-specific therapeutics for the treatment of diseases with significant unmet medical need and commercial potential.
 
Melanocortin Receptor System. The melanocortin receptor (“MCr”) system is hormone driven, with effects on food intake, metabolism, sexual function, inflammation and immune system responses. There are five melanocortin receptors, MC1r through MC5r. Modulation of these receptors, through use of receptor-specific agonists, which activate receptor function, or receptor-specific antagonists, which block receptor function, can have significant pharmacological effects.
 
The Company’s lead product, Vyleesi®, was approved by the U.S. Food and Drug Administration (“FDA”) in June 2019 and was being marketed in North America by AMAG Pharmaceuticals, Inc. (“AMAG”) for the treatment of hypoactive sexual desire disorder (“HSDD”) in premenopausal women pursuant to a license agreement between them for Vyleesi for North America, which was entered into on January 8, 2017 (the “AMAG License Agreement”). As disclosed in Note 4, AMAG announced its plan in January 2020 to divest Vyleesi and another product. As disclosed in Note 17, subsequent to fiscal year end AMAG and the Company entered into an agreement to terminate the AMAG License Agreement.
 
The Company’s new product development activities focus primarily on MC1r agonists, with potential to treat inflammatory and autoimmune diseases such as dry eye disease, which is also known as keratoconjunctivitis sicca, uveitis, diabetic retinopathy and inflammatory bowel disease. The Company believes that the MC1r agonist peptides in development have broad anti-inflammatory effects and appear to utilize mechanisms engaged by the endogenous melanocortin system in regulation of the immune system and resolution of inflammatory responses. The Company is also developing peptides that are active at more than one melanocortin receptor, and MC4r peptide and small molecule agonists with potential utility in obesity and metabolic-related disorders, including rare disease and orphan indications.
 
Natriuretic Peptide Receptor System. The natriuretic peptide receptor (“NPR”) system regulates cardiovascular functions, and therapeutic agents modulating this system have potential to treat cardiovascular and fibrotic diseases. The Company has designed and is developing potential NPR candidate drugs selective for one or more different natriuretic peptide receptors, including natriuretic peptide receptor-A (“NPR-A”), natriuretic peptide receptor B (“NPR-B”), and natriuretic peptide receptor C (“NPR-C”).
 
Business Risks and Liquidity – Since inception, the Company has incurred negative cash flows from operations, and has expended, and expects to continue to expend, substantial funds to develop the capability to market and distribute Vyleesi in the United States and complete its planned product development efforts. As shown in the accompanying consolidated financial statements, the Company had an accumulated deficit as of June 30, 2020 of $318,198,902 and a net loss for the year ended June 30, 2020 of $22,426,023, and the Company anticipates incurring significant expenses in the future as a result of spending on developing marketing and distribution capabilities for Vyleesi in the United States and spending on its development programs and will require substantial additional financing or revenues to continue to fund its planned developmental activities. To achieve sustained profitability, if ever, the Company, alone or with others, must successfully develop and commercialize its technologies and proposed products, conduct successful preclinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach sustained profitability is highly uncertain, and the Company may never be able to achieve profitability on a sustained basis, if at all.
 
As of June 30, 2020, the Company’s cash and cash equivalents were $82,852,270 and current liabilities were $3,927,553. Management intends to utilize existing capital resources for general corporate purposes and working capital, including establishing marketing and distribution capabilities for Vyleesi in the United States and preclinical and clinical development of the Company’s MC1r and MC4r peptide programs and natriuretic peptide program, and development of other portfolio products.
 
 
52
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
 
Management believes that the Company's cash and cash equivalents as of June 30, 2020 will be sufficient to fund our current operating plans through at least September 2021. The Company will need additional funding to complete required clinical trials for its other product candidates and, assuming those clinical trials are successful, as to which there can be no assurance, to complete submission of required applications to the FDA. If the Company is unable to obtain approval or otherwise advance in the FDA approval process, the Company’s ability to sustain its operations could be materially adversely affected.
 
The Company may seek the additional capital necessary to fund its operations through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements. Additional capital that is required by the Company may not be available on reasonable terms, or at all.
 
In March 2020, the World Health Organization declared COVID-19, a disease caused by a novel strain of coronavirus, a pandemic. The Company has taken steps to ensure the safety and well-being of its employees and clinical trial patients to comply with guidance from federal, state and local authorities, while working to ensure the sustainability of its business operations as this unprecedented situation continues to evolve. In mid-March, the Company transitioned to a company-wide work from home policy. Business-critical activities continue to be subject to heightened precautions to ensure safety of employees. The Company continues to assess its policies, business continuity plans and employee support.
 
 The Company continues to evaluate the impact of COVID-19 on the healthcare system and work with contract research organizations supporting its clinical, research, and development programs to mitigate risk to patients and its business and community partners, taking into account regulatory, institutional, and government guidance and policies.
 
The Company receives a royalty on sales of Vyleesi by our licensees. We have licensed third parties to sell Vyleesi in China and Korea. The COVID-19 coronavirus could adversely impact the time required to obtain regulatory approvals to sell Vyleesi in China and Korea, which would delay when the Company receives royalty income from sales in those countries.
 
The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business and it has the potential to materially adversely affect its business, financial condition and results of operations and cashflows during fiscal 2021 and beyond.
 
Concentrations – Concentrations in the Company’s assets and operations subject it to certain related risks. Financial instruments that subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents. The Company’s cash and cash equivalents are primarily invested in one money market account sponsored by a large financial institution. For the year ended June 30, 2020, the Company reported $117,989 in revenue, solely related to the AMAG License Agreement (Note 4). For the years ended June 30, 2019 and 2018, the Company reported $60,300,476, and $62,134,758, respectively, in license and contract revenue related to the AMAG License Agreement. In addition, for the year ended June 30, 2018, the Company reported $5,000,000 in license revenue related to a license agreement with Fosun.
 
(2)            
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned inactive subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 
53
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
 
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a purchased maturity of less than three months. Cash equivalents consist of $82,406,697 and $43,381,556 in a money market account at June 30, 2020 and 2019, respectively.
 
Fair Value of Financial Instruments – The Company’s financial instruments consist primarily of cash equivalents, accounts receivable and accounts payable. Management believes that the carrying values of cash equivalents, accounts receivable and accounts payable are representative of their respective fair values based on the short-term nature of these instruments.
 
Credit Risk – Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. Total cash and cash equivalent balances have exceeded balances insured by the Federal Depository Insurance Company (“FDIC”).
 
Property and Equipment – Property and equipment consists of office and laboratory equipment, office furniture and leasehold improvements and includes assets acquired under capital leases. Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the related assets, generally five years for laboratory and computer equipment, seven years for office furniture and equipment and the lesser of the term of the lease or the useful life for leasehold improvements. Amortization of assets acquired under capital leases is included in depreciation expense. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized.
 
Impairment of Long-Lived Assets – The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions.
 
Revenue RecognitionIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”), which, along with amendments from 2015 and 2016 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC Topic 606 replaced most existing revenue recognition guidance in U.S. GAAP when it became effective.
 
On July 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective approach, a practical expedient permitted under ASC Topic 606, and applied this approach only to contracts that were not completed as of July 1, 2018. The Company calculated a one-time cumulative transition adjustment of $500,000 which was recorded on July 1, 2018 to the opening balance of accumulated deficit related to the license agreement with Kwangdong Pharmaceutical Co., Ltd. (“Kwangdong”) to market Vyleesi in the Republic of Korea (the “Kwangdong License Agreement”), as the Company determined a significant revenue reversal would not occur in a future period. The one-time adjustment consisted of the recognition of $500,000 of deferred revenue.
 
Revenue Recognition for Periods Prior to July 1, 2018
 
The Company has generated revenue solely through license and collaboration agreements. Prior to July 1, 2018, the Company recognized revenue in accordance with FASB Accounting Standards Codifications (“ASC”) Topic 605-25, Revenue Recognition for Arrangements with Multiple Elements, which addressed the determination of whether an arrangement involving multiple deliverables contained more than one unit of accounting. A delivered item within an arrangement was considered a separate unit of accounting only if both of the following criteria were met:
 
the delivered item had value to the customer on a stand-alone basis; and
if the arrangement included a general right of return relative to the delivered item, delivery or performance of the undelivered item was considered probable and substantially in control of the vendor.
 
 
54
PALATIN TECHNOLOGIES, INC.
and Subsidiary
 
Notes to Consolidated Financial Statements
 
Under FASB ASC Topic 605-25, if both of the criteria above were not met, then separate accounting for the individual deliverables was not appropriate.
 
The Company determined that it was appropriate to recognize such revenue using the input-based proportional method during the period of the Company’s development obligations as defined in the AMAG License Agreement. Refer to Note 4 for additional information.
 
Under the Fosun License Agreement (Note 5), the Company received consideration in the form of an upfront license fee payment and determined that it was appropriate to recognize such consideration as revenue in the first quarter of fiscal 2018, which was the quarter in which the license was granted, since the license had stand-alone value and the upfront payment received by the Company was non-refundable.
 
Under the Kwangdong License Agreement (Note 6), the Company received consideration in the form of an upfront license fee payment and determined that it was appropriate to record such consideration as deferred revenue because the upfront payment received by the Company is subject to certain refund provisions.
 
Revenue resulting from the achievement of development milestones was recorded in accordance with the accounting guidance for the milestone method of revenue recognition. Amounts received prior to satisfying the revenue recognition criteria were recorded as deferred revenue on the Company’s consolidated balance sheet.
 
Revenue Recognition for Periods Commencing July 1, 2018
 
For licenses of intellectual property, the Company assesses, at contract inception, whether the intellectual property is distinct from other performance obligations identified in the arrangement. If the licensing of intellectual property is determined to be distinct, revenue is recognized for nonrefundable, upfront license fees when the license is transferred to the customer and the customer can use and benefit from the license. If the licensing of intellectual property is determined not to be distinct, then the license will be bundled with other promises in the arrangement into one performance obligation. The Company needs to determine if the bundled performance obligation is satisfied over time or at a point in time. If the Company concludes that the nonrefundable, upfront license fees will be recognized over time, the Company will need to assess the appropriate method of measuring proportional performance.
 
Regulatory milestone payments are excluded from the transaction price due to the inability to estimate the probability of reversal. Revenue relating to achievement of these milestones is recognized in the period in which the milestone is achieved.
 
Sales-based royalty and milestone payments resulting from customer contracts solely or predominately for the license of intellectual property will only be recognized upon occurrence of the underlying sale or achievement of the sales milestone in the future and such sales-based royalties and milestone payments will be recognized in the same period earned.
 
The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses as the Company is the principal in the research and development activities based upon its control of such activities, which is considered part of its ordinary activities.
 
Development milestone payments are generally due 30 business days after the milestone is achieved. Sales milestone payments are generally due 45 business days after the calendar year in which the sales milestone is achieved. Royalty payments are generally due on a quarterly basis 20 business days after being invoiced.
 
The cumulative effect of applying ASC Topic 606 to the Company’s consolidated balance sheet was as follows:
 
 
 
Balance at
June 30,
2018
 
 
Net Adjustment
 
 
Balance at
July 1,
2018
 
Deferred revenue
 $500,000 
 $(500,000)
 $- 
Accumulated deficit
  (332,045,906)
  500,000 
  (331,545,906)
  
 
55
PALATIN TECHNOLOGIES, INC.
and Subsidiary