Attached files

file filename
EX-31.1 - EX-31.1 - XENOPORT INCd171465dex311.htm
EX-31.2 - EX-31.2 - XENOPORT INCd171465dex312.htm
EX-32.1 - EX-32.1 - XENOPORT INCd171465dex321.htm
EX-10.3 - EX-10.3 - XENOPORT INCd171465dex103.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2016

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 000-51329

 

 

XenoPort, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3330837

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification no.)

3410 Central Expressway,

Santa Clara, California

  95051
(Address of principal executive offices)   (Zip code)

(408) 616-7200

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Total number of shares of common stock outstanding as of April 15, 2016: 63,526,681.

 

 

 


Table of Contents

XENOPORT, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

          Page  
PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements      3   
   Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015      3   
   Statements of Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2016 and 2015      4   
   Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015      5   
   Notes to Financial Statements (unaudited)      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      24   

Item 4.

   Controls and Procedures      24   
PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      25   

Item 1A.

   Risk Factors      26   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      54   

Item 3.

   Defaults Upon Senior Securities      54   

Item 4.

   Mine Safety Disclosures      54   

Item 5.

   Other Information      55   

Item 6.

   Exhibits      56   

Signatures

     58   

HORIZANT, REGNITE, XENOPORT and the XenoPort logo are trademarks of XenoPort, Inc.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

XENOPORT, INC.

BALANCE SHEETS

(In thousands, except per share amounts)

 

     March 31,
2016
    December 31,
2015
 
     (Unaudited)        

Current assets:

    

Cash and cash equivalents

   $ 22,882      $ 61,317   

Short-term investments

     97,303        78,169   

Accounts receivable

     6,646        6,439   

Inventories

     2,259        2,068   

Prepaids and other current assets

     6,736        6,553   
  

 

 

   

 

 

 

Total current assets

     135,826        154,546   

Property and equipment, net

     1,681        1,792   

Long-term inventories

     12,680        7,581   

Other assets

     —          74   
  

 

 

   

 

 

 

Total assets

   $ 150,187      $ 163,993   
  

 

 

   

 

 

 

Current liabilities:

    

Accounts payable

   $ 3,013      $ 2,300   

Accrued compensation

     5,123        6,924   

Accrued preclinical and clinical costs

     1,316        1,316   

Other accrued liabilities

     7,338        7,610   

Deferred revenue

     1,134        1,134   
  

 

 

   

 

 

 

Total current liabilities

     17,924        19,284   

Convertible senior notes, net

     111,883        111,761   

Deferred revenue

     9,446        9,730   

Other noncurrent liability

     3,038        2,918   

Commitments and contingencies

    

Stockholders’ equity:

    

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

     —          —     

Common stock, $0.001 par value; 200,000 shares authorized; 63,523 and 63,390 shares issued and outstanding, at March 31, 2016 and December 31, 2015, respectively

     63        63   

Additional paid-in capital

     691,420        689,319   

Accumulated other comprehensive income

     106        47   

Accumulated deficit

     (683,693     (669,129
  

 

 

   

 

 

 

Total stockholders’ equity

     7,896        20,300   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 150,187      $ 163,993   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim financial statements.

 

3


Table of Contents

XENOPORT, INC.

STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2016     2015  

Revenues:

    

Product sales, net

   $ 13,678      $ 6,639   

Collaboration revenue

     284        284   

Royalty revenue

     161        144   
  

 

 

   

 

 

 

Total revenues

     14,123        7,067   
  

 

 

   

 

 

 

Operating expenses:

    

Cost of product sales

     620        454   

Research and development

     1,760        6,384   

Selling, general and administrative

     25,483        20,099   
  

 

 

   

 

 

 

Total operating expenses

     27,863        26,937   
  

 

 

   

 

 

 

Loss from operations

     (13,740     (19,870

Interest income

     175        116   

Interest expense

     (999     (655
  

 

 

   

 

 

 

Net loss

     (14,564     (20,409

Other comprehensive loss:

    

Unrealized gains on available-for-sale securities

     59        92   
  

 

 

   

 

 

 

Comprehensive loss

   $ (14,505   $ (20,317
  

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.23   $ (0.33
  

 

 

   

 

 

 

Shares used to compute basic and diluted net loss per share

     63,472        62,722   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim financial statements.

 

4


Table of Contents

XENOPORT, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2016     2015  
     (In thousands)  

Operating activities

    

Net loss

   $ (14,564   $ (20,409

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

    

Depreciation and amortization

     120        134   

Accretion of investment discounts and amortization of investment premiums, net

     —          311   

Amortization of discount and debt issuance costs on convertible senior notes

     122        73   

Gain on disposal of property and equipment

     (227     —     

Stock-based compensation expense

     2,388        2,671   

Changes in assets and liabilities:

    

Accounts receivable

     (207     8   

Prepaids and other current and noncurrent assets

     118        (785

Inventories

     (5,290     (196

Accounts payable

     713        107   

Accrued compensation

     (1,801     (2,807

Accrued preclinical and clinical costs

     —          218   

Other accrued liabilities, current and noncurrent

     (152     548   

Deferred revenue, current and noncurrent

     (284     (284
  

 

 

   

 

 

 

Net cash used in operating activities

     (19,064     (20,411
  

 

 

   

 

 

 

Investing activities

    

Purchases of investments

     (67,259     (111,524

Proceeds from maturities of investments

     48,184        26,668   

Purchases of property and equipment

     (9     (11
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,084     (84,867
  

 

 

   

 

 

 

Financing activities

    

Proceeds from issuance of convertible senior notes, net of discount and debt issuance costs

     —          111,345   

Net cash proceeds provided by (used in) issuance of common stock and exercise of stock options

     (287     (1,127
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (287     110,218   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (38,435     4,940   

Cash and cash equivalents at beginning of period

     61,317        11,958   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 22,882      $ 16,898   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim financial statements.

 

5


Table of Contents

XENOPORT, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Nature of Operations

XenoPort, Inc., or the Company, is a biopharmaceutical company focused on commercializing HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States. The Company is also collaborating with the National Institute on Alcohol Abuse and Alcoholism, or NIAAA, to develop HORIZANT as a potential treatment for patients with alcohol use disorder. In addition, the Company has developed a portfolio of internally discovered product candidates for the potential treatment of neurological and other disorders, including arbaclofen placarbil, or AP, XP23829 and XP21279. Effective June 2014, the Company granted to Indivior UK Ltd. exclusive, world-wide rights to develop and commercialize pharmaceutical products containing AP and other prodrugs of baclofen or R-baclofen, or collectively, the AP Products, for all indications, subject to the Company’s right of first negotiation with Indivior to collaborate to develop and commercialize AP Products for non-addiction indications. XP23829 is a novel fumaric acid ester product candidate that is a potential treatment for patients with psoriasis and/or relapsing forms of multiple sclerosis, or MS. In March 2016, the Company entered into a license agreement with Dr. Reddy’s Laboratories, S.A., or Dr. Reddy’s, pursuant to which the Company will grant to Dr. Reddy’s, subject to review by the U.S. Government under the Hart-Scott-Rodino Antitrust Improvements Act, as amended, or HSR Act, exclusive U.S. rights for the development and commercialization of XP23829 (see Note 11 for more information). The Company also intends to seek a development and commercialization partner for XP23829 outside the United States. XP21279 is a potential treatment for patients with advanced idiopathic Parkinson’s disease that has completed Phase 2 development. The Company intends to seek a development and commercialization partner for XP21279.

HORIZANT and the Company’s product candidates are prodrugs that were created by modifying the chemical structure of currently marketed drugs, referred to as parent drugs, and are designed to correct limitations in the oral absorption, distribution and/or metabolism of the parent drug. HORIZANT and each of the Company’s product candidates are orally-available, patented molecules that address potential markets with unmet medical needs. The Company’s facilities are currently located in Santa Clara, California. The Company plans to relocate its facilities to Redwood City, California in May 2016 (see Note 11 for more information).

Basis of Preparation

The accompanying financial statements as of March 31, 2016, and for the three months ended March 31, 2016 and 2015, are unaudited. These unaudited financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2016 and comprehensive loss for the three months ended March 31, 2016 and 2015, and cash flows for the three months ended March 31, 2016 and 2015. The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, is the single source of authoritative U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016, or for any other interim period or any other future year. For more complete financial information, these financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under GAAP for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. ASU 2014-09 is required to be adopted by the Company on January 1, 2018; however the Company may adopt this standard as early as January 1, 2017. The Company will adopt this standard on January 1, 2018. However, the Company has not yet selected a transition method nor has it determined the potential effects that the adoption of ASU 2014-09 will have on its financial statements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). This update is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a

 

6


Table of Contents

going concern and to provide related footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments: (1) provide a definition of the term substantial doubt; (2) require an evaluation every reporting period including interim periods; (3) provide principles for considering the mitigating effect of management’s plans; (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans; (5) require an express statement and other disclosures when substantial doubt is not alleviated; and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 will be effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2014-15 will be effective for the Company beginning with its annual report for fiscal 2016 and interim periods thereafter. The Company is currently evaluating the impact that ASU 2014-15 will have on its financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). Prior to this update, entities were required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. This update is intended to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for the Company beginning with its annual report for fiscal 2018 and interim periods thereafter. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact that ASU 2015-17 will have on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases Topic 842 (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and the corresponding right-of-use assets on the balance sheet. The main difference between the previous GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous GAAP. ASU 2016-02 is effective for the Company beginning in the first quarter of fiscal 2018. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08). The amendments in this update do not change the core principles in the guidance in ASU 2016-08 but clarify the implementation guidance on principal versus agent considerations by providing additional illustrative examples and clarifying existing illustrative examples on how to apply the implementation guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact that ASU 2016-08 will have on its financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is part of the Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning in the first quarter of fiscal 2018. The Company is currently evaluating the impact that ASU 2016-09 will have on its financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing (ASU 2016-10). The amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and clarifying the licensing implementation guidance. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the impact that ASU 2016-10 will have on its financial statements.

2. License and Collaboration Arrangements

Astellas Pharma Inc.

Under a December 2005 license agreement with Astellas Pharma Inc., as amended in July 2012, Astellas is commercializing gabapentin enacarbil in Japan under the trade name of REGNITE® (gabapentin enacarbil) Extended-Release Tablets. In each of the three month periods ended March 31, 2016 and 2015, the Company recognized collaboration revenue of $284,000 representing amortization of the up-front license payment under this agreement. For the three months ended March 31, 2016 and 2015, the Company recognized $161,000 and $144,000, respectively, in royalty revenue. As of March 31, 2016, the Company had recognized an aggregate of $56,219,000 of revenue pursuant to this agreement. At March 31, 2016, $10,580,000 of revenue was deferred under this agreement and was being recognized on a straight-line basis over a period that the Company expects to remain obligated to provide services, of which $1,134,000 was classified within current liabilities and the remaining $9,446,000 was recorded as a noncurrent liability.

 

7


Table of Contents

3. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period without consideration for potential common shares. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period plus any dilutive potential common shares for the period determined using the treasury-stock method for restricted stock units and options to purchase stock and using the if-converted method for the convertible senior notes. For purposes of this calculation, restricted stock units, options to purchase stock and convertible senior notes are considered to be potential common shares and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

     Three Months Ended  
     March 31,  
     2016      2015  
     (In thousands, except  
     per share amounts)  

Numerator:

     

Net loss

   $ (14,564    $ (20,409
  

 

 

    

 

 

 

Denominator:

     

Weighted-average common shares outstanding

     63,472         62,722   
  

 

 

    

 

 

 

Basic and diluted net loss per share

   $ (0.23    $ (0.33
  

 

 

    

 

 

 

Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:

     

Restricted stock units and options to purchase common stock

     8,999         9,036   

Convertible senior notes

     10,729         10,729   
  

 

 

    

 

 

 
     19,728         19,765   
  

 

 

    

 

 

 

On February 3, 2015, the Company completed a private placement of $115,000,000 aggregate principal amount of 2.50% Convertible Senior Notes due 2022, or the 2022 Notes. The 2022 Notes are convertible at an initial conversion rate of 93.2945 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equal to an initial conversion price of approximately $10.72 per share of common stock. As of March 31, 2016, 10,728,867 shares of the Company’s common stock were issuable upon conversion of the 2022 Notes (see Note 8 for more information).

 

8


Table of Contents

4. Cash and Cash Equivalents, Short-Term Investments and Restricted Investments

The following are summaries of cash and cash equivalents, short-term investments and restricted investments (in thousands):

 

     Cost      Gross Unrealized
Gains
     Gross Unrealized
Losses
     Estimated Fair
Value
 

As of March 31, 2016:

           

Cash

   $ 5,433       $ —         $ —         $ 5,433   

Money market funds

     12,693         —           —           12,693   

Corporate debt securities

     101,953         109         (3      102,059   

Certificates of deposit

     1,725         —           —           1,725   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 121,804       $ 109       $ (3    $ 121,910   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as:

           

Cash and cash equivalents

            $ 22,882   

Short-term investments

              97,303   

Restricted investments (1)

              1,725   
           

 

 

 
            $ 121,910   
           

 

 

 

As of December 31, 2015:

           

Cash

   $ 5,311       $ —         $ —         $ 5,311   

Money market funds

     17,261         —           —           17,261   

U.S. government-sponsored agencies

     12,249         1         —           12,250   

Corporate debt securities

     104,618         63         (17      104,664   

Certificates of deposit

     1,725         —           —           1,725   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 141,164       $ 64       $ (17    $ 141,211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported as:

           

Cash and cash equivalents

            $ 61,317   

Short-term investments

              78,169   

Restricted investments (1)

              1,725   
           

 

 

 
            $ 141,211   
           

 

 

 

 

(1)  Included in “Prepaids and other current assets.”

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents, which primarily consist of money market funds, and management determines the appropriate classification of these securities at the time of purchase. All investments have been designated as available-for-sale. The Company classifies its available-for-sale investments as either current or noncurrent based on their maturities and the Company’s intent with regard to those investments. The Company currently views its available-for-sale investments that mature within one year as available for its current operations and classified as short-term investments, while available-for-sale investments that mature beyond one year are classified as long-term investments. All available-for-sale securities are carried at estimated fair value with unrealized gains and losses reported as a component of other comprehensive loss in the statements of comprehensive loss. No gross realized gains or losses were recognized and accordingly, there were no amounts reclassified out of accumulated other comprehensive income to earnings in the three months ended March 31, 2016, or in the same period in 2015.

 

9


Table of Contents

The Company’s available-for-sale investments, which include cash equivalents and short-term investments, are measured at fair value on a recurring basis and are classified at the following fair value hierarchy (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   Total As of
March 31, 2016
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Money market funds

   $ 12,693       $ 12,693       $ —         $ —     

Corporate debt securities

     102,059         —           102,059         —     

Certificates of deposit

     1,725         —           1,725         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 116,477       $ 12,693       $ 103,784       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value Measurements at Reporting Date Using  

Description

   Total As of
December 31, 2015
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Money market funds

   $ 17,261       $ 17,261       $ —         $ —     

U.S. government-sponsored agencies

     12,250         —           12,250         —     

Corporate debt securities

     104,664         —           104,664         —     

Certificates of deposit

     1,725         —           1,725         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 135,900       $ 17,261       $ 118,639       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2016, the Company had no transfers between levels of the fair value hierarchy of its assets or liabilities measured at fair value.

5. Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out, or FIFO, basis. Inventories include raw materials, active pharmaceutical ingredient, or API, contract manufacturing costs and overhead allocations. The Company regularly evaluates the Company’s inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales compared to quantities on hand and the remaining shelf life of HORIZANT. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories. Inventories that are not expected to be consumed within 12 months following the balance sheet date are classified as long-term inventories.

Inventories as of March 31, 2016 and December 31, 2015 were as follows (in thousands):

 

     March 31,
2016
     December 31,
2015
 

Raw materials

   $ 12,124       $ 7,396   

Work in progress

     835         134   

Finished goods

     1,980         2,119   
  

 

 

    

 

 

 

Total inventory

     14,939         9,649   

Less: Long-term inventories

     12,680         7,581   
  

 

 

    

 

 

 

Total inventory classified as current

   $ 2,259       $ 2,068   
  

 

 

    

 

 

 

Long-term inventories primarily consisted of raw materials and gabapentin enacarbil API used for production of HORIZANT. The Company evaluates demand for HORIZANT and expected consumption of the API based on long-term projected sales of HORIZANT.

 

10


Table of Contents

6. Other Accrued Liabilities

Other accrued liabilities as of March 31, 2016 and December 31, 2015 were as follows (in thousands):

 

     March 31,
2015
     December 31,
2015
 

Accrued product costs

   $ 1,389       $ 446   

Accrued selling and marketing expenses

     1,555         1,931   

Accrued general and administrative expenses

     718         643   

Accrued rebates, allowances and returns

     1,861         1,878   

Interest payable – convertible senior notes

     463         1,182   

GSK liability – current portion

     960         923   

Other liabilities

     392         607   
  

 

 

    

 

 

 

Total other accrued liabilities

   $ 7,338       $ 7,610   
  

 

 

    

 

 

 

In connection with the Company’s acquisition of the HORIZANT business on May 1, 2013, Glaxo Group Limited, or GSK, provided it with inventory of gabapentin enacarbil in GSK’s possession that was not required for use by GSK in the manufacture of HORIZANT and related manufacturing property and equipment. In exchange for such inventory, the Company agreed to make annual payments to GSK of $1,000,000 for six years beginning in 2016, which was recorded at its present value and is being accreted to its contractual value over the repayment period. At March 31, 2016, the GSK liability comprised of a $960,000 current portion included in “Other accrued liabilities” and a $3,038,000 non-current portion included in “Other noncurrent liability.” At December 31, 2015, the GSK liability comprised of a $923,000 current portion included in “Other accrued liabilities” and a $2,918,000 non-current portion included in “Other noncurrent liability.”

7. Restructuring and Severance

On September 29, 2015, the Company implemented a restructuring plan in connection with its strategic shift to focus on the commercialization of HORIZANT and its decision to discontinue internal development of XP23829. This restructuring plan resulted in a reduction in force of approximately 25 employees and the recording of $1,715,000 in restructuring charges in the year ended December 31, 2015, of which $690,000 was recorded as research and development expense and $1,025,000 was recorded as selling, general and administrative expense. The restructuring charges related to severance benefits that were based upon existing severance agreements, including the 2012 Severance Plan. The Company paid $811,000 in 2015, with the remaining $904,000 included within accrued compensation on its balance sheet as of December 31, 2015. The Company paid $724,000 in the three months ended March 31, 2016, with the remaining $180,000 included within accrued compensation on its balance sheet as of March 31, 2016 and estimated to be paid by the second half of 2016.

In connection with the strategic shift, Ronald W. Barrett, Ph.D., retired as Chief Executive Officer and as a Director of the Company, effective on September 29, 2015. Dr. Barrett’s retirement resulted in the recording of $1,225,000 in severance benefits in 2015, all of which was recorded as selling, general and administrative expense and were based upon his existing Severance Rights Agreement. The Company paid $147,000 in 2015, with the remaining $1,078,000 included within accrued compensation on its balance sheet as of December 31, 2015. The Company paid $530,000 in the three months ended March 31, 2016, with the remaining $548,000 included within accrued compensation on its balance sheet as of March 31, 2016 and estimated to be substantially paid by the first quarter of 2017.

8. Convertible Senior Notes

On February 3, 2015, the Company completed a private placement of $115,000,000 aggregate principal amount of the 2022 Notes. The net proceeds from the offering of the 2022 Notes were $111,327,000, after deducting the initial purchaser’s discount and debt issuance costs payable by the Company. Beginning on August 1, 2015, interest on the 2022 Notes is payable semi-annually in cash in arrears on February 1 and August 1 of each year, at a rate of 2.50% per year. The 2022 Notes mature on February 1, 2022, unless earlier converted or repurchased. The 2022 Notes are not redeemable prior to the maturity date.

 

11


Table of Contents

Holders may convert all or any portion of their 2022 Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. The 2022 Notes are convertible at an initial conversion rate of 93.2945 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, subject to adjustment, which is equal to an initial conversion price of approximately $10.72 per share of common stock. Upon conversion, the 2022 Notes may be settled in shares of the Company’s common stock, together with a cash payment in lieu of delivering any fractional share. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that may occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its 2022 Notes in connection with such a corporate event in certain circumstances. If the Company undergoes a fundamental change, which would include specified change of control transactions, or liquidation or dissolution or the Company’s common stock ceasing to be listed or quoted on specified national securities exchanges, and the fundamental change occurs prior to the maturity date of the 2022 Notes, holders of the 2022 Notes may require the Company to repurchase all or part of their 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. As of March 31, 2016, the outstanding principal balance on the 2022 Notes was $115,000,000 and 10,728,867 shares of the Company’s common stock were issuable upon conversion of the 2022 Notes.

The 2022 Notes are accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, the Company evaluated the features embedded in the 2022 Notes and concluded that the 2022 Notes are not required to be bifurcated and accounted for separately from the host debt instrument.

The Company incurred $568,000 in debt issuance costs in connection with the issuance of the 2022 Notes, which are being amortized through the maturity date through the application of the interest method and reported as interest expense. In accordance with ASU No. 2015-03, the Company has presented debt issuance costs as a direct deduction from the carrying value of the 2022 Notes.

As of March 31, 2016, the 2022 Notes were reported at their current carrying value of $111,900,000 and which had a fair value of approximately $82,400,000 based on Level 2 available market information.

9. Stock-Based Compensation

The Company’s non-cash stock-based compensation expense was as follows (in thousands):

 

     Three Months Ended  
     March 31,  
     2016      2015  
     (In thousands)  

Research and development

   $ 96       $ 382   

Selling, general and administrative

     2,292         2,289   
  

 

 

    

 

 

 
   $ 2,388       $ 2,671   
  

 

 

    

 

 

 

 

12


Table of Contents

10. Income Taxes

Future utilization of the Company’s net operating loss, or NOL, and research credit carryforwards to offset its future taxable income may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code Section 382. Such annual limitation could result in the expiration of the NOL and research credit carryforwards before utilization. A Section 382 analysis on owner shifts that may have occurred in the first quarter of 2016 has not been performed as of the date of this disclosure due to limited information available on stock ownership. Until this analysis is performed, the Company is unable to determine if a change in ownership has occurred and if any NOL or research credit amount is estimated to expire before utilization.

11. Subsequent Events

On March 26, 2016, the Company entered into a license, development and commercialization agreement with Dr. Reddy’s, pursuant to which the Company will grant to Dr. Reddy’s exclusive U.S. rights for the development and commercialization of XP23829, or XP23829 Products, for all indications. The agreement is subject to and will become effective upon clearance under the HSR Act. In exchange for these rights, the Company will, upon effectiveness of the agreement, be entitled to receive an upfront, non-refundable cash payment of $47,500,000 and an additional $2,500,000 after delivery of certain clinical trial materials. The Company will also be eligible to receive aggregate cash payments of up to $440,000,000 upon the achievement of certain predefined milestones of which $190,000,000 are regulatory-based milestones and $250,000,000 are commercialization-based milestones. In addition, the Company will be entitled to receive tiered double-digit royalty payments of up to the mid-teens on a percentage basis on potential future net sales of the XP23829 Products in the United States.

On April 8, 2016, the Company entered into a Lease, or (the “Lease”) with Informatica LLC (the “Landlord”) for approximately 34,329 square feet of office space located at 2000 Seaport Boulevard, Redwood City, California (the “Leased Premises”). The Company intends to use the Leased Premises as its new principal executive offices. The term of the Lease runs for approximately 38 months commencing on the date the Landlord delivers to the Company certain interim premises (which will be used by the Company pending delivery to the Company of the Leased Premises), which date is May 1, 2016 (the “Commencement Date”), and terminating on June 30, 2019 (the “Initial Term”), unless the Lease is terminated sooner as provided in the Lease. The approximate aggregate rent due over the Initial Term will be approximately $5,000,000. The Company also has a conditional option to extend the Lease for one additional term of two years.

 

13


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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

XenoPort, Inc. is a biopharmaceutical company focused on commercializing HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States. HORIZANT is approved by the U.S. Food and Drug Administration, or FDA, for two indications: the treatment of moderate-to-severe primary restless legs syndrome, or RLS, in adults; and management of postherpetic neuralgia, or PHN, in adults. HORIZANT is also being evaluated by the National Institute on Alcohol Abuse and Alcoholism, or the NIAAA, under a clinical trial agreement whereby they are conducting a study of HORIZANT as a potential treatment for alcohol use disorder, or AUD. REGNITE® (gabapentin enacarbil) Extended-Release Tablets is being marketed in Japan by Astellas Pharma Inc. for the treatment of moderate-to-severe primary RLS. We have granted exclusive world-wide rights for the development and commercialization of our clinical-stage oral product candidate, arbaclofen placarbil, or AP, to Indivior UK Ltd., or Indivior, for all indications.

We announced our strategic shift to focus on the commercialization of HORIZANT in October 2015 and also indicated that we would discontinue development-stage activities for our product candidates and seek potential partners for these assets. Our development-stage product candidates include XP23829, a novel fumaric acid ester prodrug that is a potential treatment for patients with moderate-to-severe chronic plaque-type psoriasis and potentially for patients with relapsing forms of multiple sclerosis and XP21279, a prodrug of levodopa that is a potential treatment for patients with idiopathic Parkinson’s disease. On March 26, 2016, we entered into a license, development and commercialization agreement, or the DRL Agreement, with Dr. Reddy’s Laboratories, S.A., or Dr. Reddy’s, pursuant to which we will grant to Dr. Reddy’s exclusive U.S. rights for the development and commercialization of XP23829, or XP23829 Products, for all indications. The agreement is subject to and will become effective upon clearance under the Hart-Scott-Rodino Antitrust Improvements Act, as amended, or HSR Act. In exchange for these rights, we will, upon effectiveness of the agreement, be entitled to receive an upfront, non-refundable cash payment of $47.5 million and an additional $2.5 million after delivery of certain clinical trial materials. We will also be eligible to receive aggregate cash payments of up to $440.0 million upon the achievement of certain predefined milestones of which $190.0 million are regulatory-based milestones and $250.0 million are commercialization-based milestones. In addition, we will be entitled to receive tiered double-digit royalty payments of up to the mid-teens on a percentage basis on potential future net sales of the X23829 Products in the United States.

We have focused our promotional and sales efforts on specialty doctors in specific geographic territories. We initiated our commercialization efforts in approximately 40 territories and, in the third quarter of 2014, expanded our sales force into approximately 70 territories in the United States. In the first quarter of 2015, we announced an additional expansion of our sales force and by the beginning of the third quarter of 2015, our sales force covered approximately 120 territories in the United States. Our sales force has continued to expand and is now up to approximately 135 territories in the United States. In January 2016, we converted all of our contract sales representatives into XenoPort-employed sales representatives, and our sales force now consists solely of XenoPort-employed sales representatives dedicated to HORIZANT education and promotion. However, we rely on, and expect to continue to rely on, our contract sales organization to provide back-office logistical support for the XenoPort-employed sales representatives.

Our future product sales of HORIZANT will be dependent upon the success of our strategies for commercialization, promotion and distribution, as well as our ability to successfully execute on these activities and to comply with applicable laws, regulations and regulatory requirements. Our commercialization efforts may ultimately not be successful. In this regard, we rely on third parties to perform a variety of functions related to the sale and distribution of HORIZANT, key aspects of which are out of our direct control. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties to us, or if HORIZANT encounters physical or natural damage at their facilities, our ability to deliver HORIZANT to meet commercial demand would be significantly impaired.

 

14


Table of Contents

Under the terms of an exclusive license agreement with Indivior, which became effective on June 19, 2014, we granted Indivior exclusive, world-wide rights to develop and commercialize pharmaceutical products containing AP and other prodrugs of baclofen or R-baclofen, or AP Products, for all indications, subject to our right of first negotiation to collaborate to develop and commercialize AP Products for non-addiction indications. In exchange for these rights, we received an upfront, non-refundable cash payment of $20.0 million in June 2014 and received an additional $5.0 million payment in July 2014 after our delivery of specified materials, both of which were recognized in the third quarter of 2014. We are also eligible to receive aggregate cash payments of up to $120.0 million upon the achievement by Indivior of certain contingent event-based milestones, of which $70.0 million are regulatory and development-based and $50.0 million are commercialization-based. In addition, we are entitled to receive tiered double-digit royalty payments of up to the mid-teens on a percentage basis on potential future net sales of AP Products in the United States, and high single-digit royalty payments on potential future net sales of AP Products outside the United States.

We currently depend, and may in the future depend, on collaboration, partnership, licensing and other strategic arrangements with third-party business partners. The potential for gabapentin enacarbil, XP23829 and/or XP21279 could be enhanced through partnerships that would further develop and/or enhance commercialization efforts of these assets. As such, we plan to enter into partnerships with pharmaceutical companies in order to: (1) gain access to a primary care and/or an expanded sales force to maximize the commercial potential of gabapentin enacarbil; (2) develop and commercialize gabapentin enacarbil, XP23829 and/or XP21279 outside the United States; or (3) to develop and commercialize XP21279 in the United States.

Historically, revenues recognized through May 1, 2013 were primarily comprised of upfront, milestone and contingent event-based payments from our collaboration and partnership arrangements. While a significant portion of our revenues in 2014 consisted of revenues from the recognition of cash payments we received under our license agreement with Indivior, we may in the future recognize revenues from contingent-event based payments from Dr. Reddy’s and/or Indivior, we expect the future composition of our revenues, with exception of $50.0 million in potential collaboration revenue related to upfront cash payments from Dr. Reddy’s, to consist primarily of revenues from HORIZANT drug product sales. Although we are recognizing revenue from HORIZANT drug product sales in the United States, our relative lack of commercialization experience as an organization with respect to HORIZANT drug product sales will make future operating results difficult to predict. In this regard, our product sales revenue may vary significantly from period to period as our commercialization efforts progress, and we may be unable to meaningfully increase HORIZANT drug product sales or otherwise successfully commercialize HORIZANT in a timely manner or at all. We also expect that the expenses of increasing and maintaining our sales and marketing capabilities, including with respect to the internal and external costs of supporting and maintaining an increased number of sales representatives, and maintaining and expanding a distribution and supply chain infrastructure will continue to be substantial, and these costs may exceed the revenues that we are able to generate from HORIZANT drug product sales. We recorded $13.7 million in net sales from HORIZANT in the three months ended March 31, 2016.

Gabapentin enacarbil is licensed to Astellas in Japan. We are entitled to receive percentage-based high-teen royalties on net sales of REGNITE in Japan, and the royalties are recognized as revenue when royalty payments are received. In the three months ended March 31, 2016, the royalty revenue from net sales of REGNITE in Japan was $0.2 million. We expect royalty revenues from our partnership with Astellas to fluctuate based on the results of their commercialization, marketing and distribution efforts for REGNITE in Japan and, to a lesser extent, foreign currency fluctuations; however, we do not expect that royalty revenues from our partnership with Astellas will be meaningful for the foreseeable future.

As a result of our strategic shift to focus on commercializing HORIZANT, and our decision to discontinue the internal development of XP23829 and to seek potential partners for further development and potential commercialization of XP23829 and XP21279, we expect our research and development expenses going forward will decline, in particular after the completion of activities related to our Phase 2 clinical trial and ongoing non-clinical studies of XP23829, which we expect will be completed by the first half of 2018. In this regard, we expect that our research and development expenses in 2016 will be significantly lower than 2015 levels, and will consist primarily of headcount and other overhead expenses, as well as expenses related to our ongoing non-clinical studies of XP23829. In 2016, we expect our selling, general and administrative expenses to be higher compared to 2015 levels primarily due to continued internal and external expenses of supporting and maintaining an increased number of sales representatives, as well as from maintaining and expanding marketing, distribution and other commercial capabilities for HORIZANT, largely through third-party service providers.

In connection with our strategic shift, on September 29, 2015 we implemented a restructuring entailing a reduction in force to eliminate approximately 25 positions, including positions related to XP23829. In connection with this restructuring, we recorded severance-related restructuring charges of $1.7 million in 2015. In addition, on September 29, 2015, Ronald W. Barrett, Ph.D., retired as Chief Executive Officer and as a member of our board of directors. Dr. Barrett’s retirement resulted in the recording of $1.2 million in severance benefits in 2015.

On February 3, 2015, we completed a private placement of $115.0 million aggregate principal amount of 2.50% Convertible Senior Notes due 2022, or the 2022 Notes. The net proceeds from the offering of the 2022 Notes were $111.3 million, after deducting the initial purchaser’s discount and offering expenses payable by us. For more information on the 2022 Notes, see “Liquidity and Capital Resources – 2022 Notes” below.

 

15


Table of Contents

We believe that our existing capital resources, together with anticipated product revenue, and the anticipated receipt of the cash payments from Dr. Reddy’s under the DRL agreement will be sufficient to meet our projected operating requirements for at least the next twelve months. We have based our cash sufficiency estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for commercialization sooner than planned. We have no credit facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our partnerships with Astellas, Indivior and Dr. Reddy’s. With the exception of the clinical trial in patients with AUD that the NIAAA initiated in June 2015, we are solely responsible for all HORIZANT commercialization and development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate, or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional capital. In addition, we do not believe that revenues generated from HORIZANT and REGNITE sales and other revenues generated from our partnerships with Astellas, Indivior and Dr. Reddy’s will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. Additional funds may not be available to us on terms that are acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other things, reduce the amount of resources devoted to advertising, promotion, sales or medical affairs of HORIZANT, or conduct additional workforce or other expense reductions, any of which could have a material adverse effect on our business and prospects. In addition, we may face substantial financial costs in order to comply with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and our inability to carry out and fund such efforts to comply with these requirements could have material adverse consequences to us, including the loss of marketing approval for HORIZANT.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, inventories, stock-based compensation, fair value measurements and accrued expenses. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and significant judgments and estimates are detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under U.S. generally accepted accounting principles, or GAAP, for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. We may adopt ASU 2014-09 either by way of a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. ASU 2014-09 is required to be adopted by us on January 1, 2018; however we may adopt this standard as early as January 1, 2017. We will adopt this standard on January 1, 2018. However, we have not yet selected a transition method nor have we determined the potential effects that the adoption of ASU 2014-09 will have on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). This update is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments: (1) provide a definition of the term substantial doubt; (2) require an evaluation every reporting period including interim periods; (3) provide principles for considering the mitigating effect of management’s plans; (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans; (5) require an express statement and other disclosures when substantial doubt is not alleviated; and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 will be effective for annual periods ending after

 

16


Table of Contents

December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2014-15 will be effective for us beginning with our annual report for fiscal 2016 and interim periods thereafter. We are currently evaluating the impact that ASU 2014-15 will have on our financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). Prior to this update, entities were required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. This update is intended to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for us beginning with our annual report for fiscal 2018 and interim periods thereafter. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact that ASU 2015-17 will have on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases Topic 842 (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and the corresponding right-of-use assets on the balance sheet. The main difference between the previous GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous GAAP. ASU 2016-02 is effective for us beginning in the first quarter of fiscal 2018. We are currently evaluating the impact that ASU 2016-02 will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08). The amendments in this update do not change the core principles in the guidance in Topic 606 but clarify the implementation guidance on principal versus agent considerations by providing additional illustrative examples and clarifying existing illustrative examples on how to apply the implementation guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09. We are currently evaluating the impact that ASU 2016-08 will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is part of the Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for us beginning in the first quarter of fiscal 2018. We are currently evaluating the impact that ASU 2016-09 will have on our financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing (ASU 2016-10). The amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and clarifying the licensing implementation guidance. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09. We are currently evaluating the impact that ASU 2016-10 will have on our financial statements.

 

17


Table of Contents

Results of Operations

Three Months Ended March 31, 2016 and 2015

Revenues

Our net product sales revenue consisted of sales of HORIZANT. Our collaboration revenue consisted of the recognition of revenues from the upfront payments from our partnership with Astellas. Our royalty revenue was from Astellas and was based on Astellas’ net sales of REGNITE in Japan.

 

     Three Months Ended
March 31,
     Change  
     2016      2015      $      %  
     (In thousands, except percentages)  

Product sales, net

   $ 13,678       $ 6,639       $ 7,039         106

Collaboration revenue

     284         284         —           0

Royalty revenue

     161         144         17         12
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 14,123       $ 7,067       $ 7,056         100
  

 

 

    

 

 

    

 

 

    

The increase in total revenues for the three months ended March 31, 2016, compared to the same period in 2015, was primarily from increased HORIZANT net product sales, primarily resulting from an increase in average net selling prices due to price increases, and, to a lesser extent, from an increase in sales volume. The increase in sales volume was due to enhanced promotional efforts, particularly as we expanded our sales force into additional territories beginning in the third quarter of 2014 and again in the third quarter of 2015.

We expect the future composition of our revenues, with exception of $50.0 million in potential collaboration revenue related to upfront cash payments from Dr. Reddy’s, to consist primarily of revenues from HORIZANT net product sales. We expect our HORIZANT net product sales to increase in 2016 compared to 2015 levels. Such an increase will be dependent upon the success of our strategies for commercialization, promotion and distribution, as well as our ability to successfully execute these strategies. We expect royalty revenue from our partnership with Astellas to fluctuate based on the results of its commercialization, marketing and distribution efforts for REGNITE in Japan and, to a lesser extent, foreign currency fluctuations; however, we do not expect that royalty revenues from our partnership with Astellas will be meaningful for the foreseeable future. While we anticipate the DRL Agreement becoming effective and receiving the $50.0 million of payments from Dr. Reddy’s, we expect that collaboration revenue to fluctuate based on Dr. Reddy’s timing and achievement of contingent-event based milestones with respect to XP23829 in the United States, Indivior’s timing and achievement of contingent-event based milestones with respect to AP Products, and to the extent we enter into new partnerships for our marketed product or any of our product candidates.

Cost of Product Sales

Cost of product sales consisted of the direct and indirect costs to manufacture product sold, including tableting, packaging, storage, shipping and handling costs related to our product sales of HORIZANT. Cost of product sales also included raw materials, specifically gabapentin enacarbil, acquired from GSK as part of the acquisition of the HORIZANT business and recorded at fair value. The fair value of the inventory acquired from GSK represents a lower cost than if new raw materials were purchased at current third-party costs.

 

     Three Months Ended
March 31,
     Change  
     2016      2015      $      %  
     (In thousands, except percentages)  

Cost of product sales

   $ 620       $ 454       $ 166         37

The increase in cost of product sales for the three months ended March 31, 2016, compared to the same period in 2015, was from an increase in volume of HORIZANT product sales.

We expect cost of product sales for HORIZANT to remain relatively constant as a percentage of net product sales for the remainder of the year.

 

18


Table of Contents

Research and Development Expenses

Research and development expenses consisted of costs associated with conducting preclinical studies and clinical trials, manufacturing development efforts for clinical trials and activities related to development-related regulatory filings.

 

     Three Months Ended
March 31,
     Change  
     2016      2015      $      %  
     (In thousands, except percentages)  

Research and development

   $ 1,760       $ 6,384       $ (4,624      -72

The decrease in research and development expenses in the three months ended March 31, 2016, compared to the same period in 2015, primarily resulted from our decision to discontinue internal development of XP23829 at the end of third quarter of 2015, which caused net costs for XP23829 to decline by $2.5 million, primarily due to decreased clinical, manufacturing and toxicology costs, and caused personnel costs to decline by $1.6 million, primarily due to decreased headcount and corresponding decreased non-cash stock-based compensation.

As a result of our strategic shift to focus on HORIZANT and our decision to discontinue the internal development of XP23829 and seek partners for further development and potential commercialization of XP23829 and XP21279, we expect that our research and development expenses going forward will continue to decline, particularly after we wind down activities related to our Phase 2 clinical trial of XP23829 and complete our ongoing non-clinical studies of XP23829, which we expect will be completed by the first half of 2018. We expect that our research and development expenses in 2016 will be significantly lower than 2015 levels, and will consist primarily of headcount and other overhead expenses, as well as expenses related to our ongoing non-clinical studies of XP23829.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted primarily of compensation for executive, sales, marketing, finance, legal, compliance and administrative personnel. Other sales, general and administrative expenses included facility costs not otherwise included in research and development expenses, the cost of market research activities, legal and accounting services, other professional services and consulting fees.

 

     Three Months Ended
March 31,
     Change  
     2016      2015      $      %  
     (In thousands, except percentages)  

Selling, general and administrative

   $ 25,483       $ 20,099       $ 5,384         27

The increase in selling, general and administrative expenses in the three months ended March 31, 2016, compared to the same period in 2015, was principally due to costs related to the continued and expanded commercialization of, and promotional activities for, HORIZANT.

We expect continued increases in selling, general and administrative expenses in 2016 compared to 2015 levels primarily due to internal and external expenses of supporting and maintaining an increased number of sales representatives, as well as expenses from maintaining and expanding marketing, distribution and other commercial capabilities for HORIZANT, largely through third-party service providers.

 

19


Table of Contents

Interest Income/Expense

Interest income consisted primarily of interest earned on our cash equivalents and short-term investments, and interest expense consisted primarily of the interest expense associated with the 2022 Notes and accretion of our GSK liability.

 

     Three Months Ended
March 31,
     Change  
     2016      2015      $      %  
     (In thousands, except percentages)  

Interest income

   $ 175       $ 116       $ 59         51

Interest expense

   $ 999       $ 655       $ 344         53

The increase in interest income for the three months ended March 31, 2016, compared to the same period in 2015, was due to higher cash balances primarily from the receipt of $111.3 million in net proceeds from the 2022 Notes offering in February 2015. For more information on the 2022 Notes, see “Liquidity and Capital Resources – 2022 Notes” below.

The increase in interest expense for the three months ended March 31, 2016, compared to the same period in 2015, was principally due to interest expense associated with the 2022 Notes that we issued in February 2015. We expect interest expense to remain relatively constant in 2016 compared to 2015 due to interest expense associated with the 2022 Notes.

 

20


Table of Contents

Liquidity and Capital Resources

 

     As of
March 31,
2016
     As of
December 31,
2015
 

Cash and cash equivalents and short-term investments

   $ 120,185       $ 139,486   

Working capital

     117,902         135,262   

Restricted investments (1)

     1,725         1,725   

 

(1) Included in “Prepaids and other current assets.”

 

     Three Months Ended
March 31,
 
     2016      2015  
     (In thousands)  

Cash provided by (used in):

     

Operating activities

   $ (19,064    $ (20,411

Investing activities

     (19,084      (84,867

Financing activities

     (287      110,218   

Due to our significant research and development and, more recently, sales and marketing expenditures, we have generated cumulative operating losses since we incorporated in 1999. As such, we have funded our operations primarily through sales of our equity and debt securities, non-equity payments from collaboration, partnership, licensing and other similar forms of revenue-generating transactions with third-party business partners, and interest earned on investments. At March 31, 2016, we had available cash and cash equivalents and short-term investments of $120.2 million. Our cash and investment balances are held in a variety of interest-bearing instruments, including corporate debt securities and money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

Net cash used in operating activities was $19.1 million and $20.4 million in the three months ended March 31, 2016 and 2015, respectively. Our main uses of operating cash flows during these periods were primarily due to funding our net loss, offset in part by non-cash stock-based compensation expense.

Net cash used in investing activities primarily reflected the timing of purchases of investments and proceeds from maturities of our investments.

Net cash used in financing activities in the three months ended March 31, 2016 was from the issuance of common stock. Net cash provided by financing activities in the three months ended March 31, 2015 was primarily from the issuance of the 2022 Notes on February 3, 2015, which resulted in $111.3 million in net proceeds to us, after deducting the initial purchaser’s discount and offering expenses payable by us.

We believe that our existing capital resources, together with anticipated product revenue and the anticipated receipt of the upfront cash payments from Dr. Reddy’s under the DRL Agreement, will be sufficient to meet our projected operating requirements for at least the next twelve months. We have based our cash sufficiency estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for commercialization sooner than planned. We have no credit facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our partnerships with Astellas, Indivior and Dr. Reddy’s. With the exception of the clinical trial in patients with AUD that the NIAAA initiated in June 2015, we are solely responsible for all HORIZANT commercialization and development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate, or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional capital. In addition, we do not believe

 

21


Table of Contents

that revenues generated from HORIZANT and REGNITE sales and other revenues generated from our partnerships with Astellas, Indivior and Dr. Reddy’s will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” Because of the numerous risks and uncertainties associated with the drug development and commercialization, and with our ability to enter into additional partnerships with third parties to participate in the development and commercialization of HORIZANT and our development-stage product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our operations. Our future funding requirements will depend on many factors, including:

 

    the timing, receipt and amount of sales or royalties from HORIZANT and REGNITE;

 

    the costs of our sales and marketing, supply chain, distribution, pharmacovigilance, compliance and safety infrastructure to promote and distribute HORIZANT, including the internal and external expenses of supporting and maintaining our sales representatives and any potential future expansions to our dedicated sales team;

 

    the costs of manufacturing and commercial supplies of HORIZANT;

 

    the timing and costs of complying with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and any future additional commitments or requirements imposed on us by the FDA;

 

    the number and characteristics of any additional potential indications for HORIZANT we pursue, such as the treatment of patients with AUD;

 

    the costs, timing and outcomes of regulatory approvals, if any;

 

    the timing of any contingent-event based and royalty payments under our licensing arrangements with Indivior and Dr. Reddy’s;

 

    the terms and timing of any partnerships that we may establish or modify;

 

    the costs associated with any potential litigation;

 

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

 

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

In addition, we are required to make periodic interest payments to the holders of the 2022 Notes and to make payments of principal upon maturity. In this regard, if holders of the 2022 Notes do not convert their 2022 Notes prior to the maturity date, we will be required to repay the principal amount of all then outstanding 2022 Notes plus any accrued and unpaid interest. We may also be required to repurchase the 2022 Notes for cash upon the occurrence of a change of control or certain other fundamental changes involving us. If our capital resources are insufficient to satisfy our debt service obligations, we will be required to seek to sell additional equity or debt securities or to obtain debt financing.

Until we can generate a sufficient amount of product revenues, if ever, we expect to finance future cash needs through public or private equity or equity-linked offerings, debt financings or collaboration, partnership, licensing and other strategic arrangements with third-party business partners. If we raise additional funds by issuing our common stock, or securities convertible into, exchangeable or exercisable for common stock, our stockholders will experience dilution. Any debt financing or additional equity that we raise may contain terms that are not favorable to our stockholders or us. To the extent that we raise additional capital through partnerships, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates. Our ability to raise additional funds and the terms upon which we are able to raise such funds may be adversely impacted by the uncertainty regarding our financial condition, the commercial prospects of HORIZANT and REGNITE based on their respective sales to date and our relative lack of experience in commercializing products, and/or current economic conditions, including the effects of disruptions to, and volatility in, the credit and financial markets in the United States, Asia, the European Union and other regions of the world.

Additional funds may not be available to us on terms that are acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other things, reduce the amount of resources devoted to advertising, promotion, sales or medical affairs of HORIZANT, or conduct additional workforce or other expense

 

22


Table of Contents

reductions, any of which could have a material adverse effect on our business and prospects. In addition, we may face substantial financial costs in order to comply with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and our inability to carry out and fund such efforts to comply with these requirements could have material adverse consequences to us, including the loss of marketing approval for HORIZANT.

2022 Notes

In February 2015, we completed a private placement of $115.0 million principal amount of 2022 Notes. Interest on the 2022 Notes is payable semi-annually in cash in arrears on February 1 and August 1 of each year, which commenced on August 1, 2015, at a rate of 2.50% per year. The 2022 Notes mature on February 1, 2022, unless earlier converted or repurchased. The 2022 Notes are not redeemable prior to the maturity date.

The 2022 Notes are convertible at an initial conversion rate of 93.2945 shares of our common stock per $1,000 principal amount of the 2022 Notes, subject to adjustment, which is equal to an initial conversion price of approximately $10.72 per share of common stock. Upon conversion, the 2022 Notes may be settled in shares of our common stock, together with a cash payment in lieu of delivering any fractional share. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2022 Notes in connection with such a corporate event in certain circumstances.

If we undergo a fundamental change, which would include specified change of control transactions, or liquidation or dissolution or our common stock ceasing to be listed or quoted on specified national securities exchanges, and the fundamental change occurs prior to the maturity date of the 2022 Notes, holders of the 2022 Notes may require us to repurchase all or part of their 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4)(ii).

 

23


Table of Contents

Contractual Obligations

Our future contractual obligations at March 31, 2016 were as follows (in thousands):

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1 – 3
Years
     3 – 5
Years
     Greater
Than 5
Years
 

Purchase commitments (1)

   $ 11,301       $ 9,733       $ 1,568       $ —         $ —     

GSK payable (2)

     6,000         1,000         2,000         2,000         1,000   

Operating lease obligations (3)

     638         636         2         —           —     

Principal on 2022 Notes due 2022 (4)

     115,000         —           —           —           115,000   

Interest on 2022 Notes (5)

     17,250         2,875         5,750         5,750         2,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 150,189       $ 14,244       $ 9,320       $ 7,750       $ 118,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  At March 31, 2016, we had non-cancelable purchase orders and minimum purchase obligations of approximately $1.6 million under our commercial supply agreement with Patheon Pharmaceuticals Inc. all due within one year and approximately $7.2 million under our commercial supply agreement with Lonza Ltd. also all due within one year. At March 31, 2016, we had other non-cancelable purchase commitments of approximately $0.9 million due within one year and approximately $1.6 million due within the one to three year period.
(2)  On November 8, 2012, we executed a termination and transition agreement with GSK that terminated our development and commercialization agreement with respect to HORIZANT. GSK provided us inventory of gabapentin enacarbil in GSK’s possession that was not required for use by GSK in the manufacture of HORIZANT. In exchange for such inventory, we will make annual payments to GSK of $1.0 million for six years beginning in 2016.
(3)  In the fourth quarter of 2014, we entered into an amendment to the lease with respect to our current office space at 3410 Central Expressway, Santa Clara, California, which extended the term of the lease for an additional nine months so that the lease will expire on May 31, 2016. In April 2016, we entered into a lease, or the New Facility Lease, for our new principal executive office to be located at 2000 Seaport Boulevard, Redwood City, California. Future obligations under the New Facility Lease are not included since this agreement was executed after March 31, 2016 (See Note 11 for more information). The amount also includes vehicle operating leases obligations of $0.4 million all due within one year. Operating lease obligations do not assume the exercise by us of any termination or extension options.
(4)  In February 2015, we completed a private placement of $115.0 million principal amount of 2022 Notes. The 2022 Notes mature on February 1, 2022, unless earlier converted or repurchased. We may not redeem the 2022 Notes prior to their maturity date.
(5)  Beginning on August 1, 2015, interest on the 2022 Notes is payable semi-annually in cash in arrears on February 1 and August 1 of each year, at a rate of 2.50% per year. We used the fixed interest rate of 2.50% to estimate interest owed on the 2022 Notes from March 31, 2016 until the final maturity date of February 1, 2022.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes during the three months ended March 31, 2016 to our market risk exposure as disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on February 26, 2016.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Based on their evaluation as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as amended, as of March 31, 2016, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) were effective.

Changes in Internal Control over Financial Reporting.

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

24


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not a party to any material legal proceedings at this time. From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business.

 

25


Table of Contents
Item 1A. Risk Factors.

The following risks and uncertainties may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 26, 2016.

Risks Related to our Business and Industry

We have incurred cumulative operating losses since inception, we expect to continue to incur losses for the foreseeable future and we may never achieve or sustain profitability on an annual basis.*

We have incurred cumulative losses of $683.7 million since our inception in May 1999 through March 31, 2016. We have made, and expect to continue to make, substantial expenditures in connection with our commercialization of HORIZANT. We continue to expect substantial costs and expenses associated with maintaining and expanding sales, marketing and commercial capabilities. In addition, we do not believe that collaboration revenues and revenues generated from sales of HORIZANT and REGNITE will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. Annual losses have had, and will continue to have, an adverse effect on our stockholders’ equity.

Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to predict the timing or amount of revenues or expenses or when, or if, we will be able to achieve or sustain profitability. HORIZANT is approved by the U.S. Food and Drug Administration, or FDA, for two indications: the treatment of moderate-to-severe primary restless legs syndrome, or RLS, in adults; and management of postherpetic neuralgia, or PHN, in adults. With the exception of the clinical trial in patients with alcohol use disorder, or AUD, initiated by the National Institute on Alcohol Abuse and Alcoholism, or NIAAA, in June 2015, we are solely responsible for all HORIZANT commercialization and development activities, including all post-marketing requirements and commitments. REGNITE has been approved by the Japanese Ministry of Health, Labour and Welfare, or MHLW, as a treatment for patients with moderate-to-severe RLS, and Astellas Pharma Inc. is responsible for promoting REGNITE in Japan.

To date, we have not generated revenue from sales of HORIZANT or REGNITE that is sufficient to fund our operations. We have financed our operations primarily through the sale of equity and debt securities, non-equity payments from collaboration, partnership, licensing and other similar forms of revenue-generating transactions with third-party business partners, and interest earned on investments. Prior to 2013, we devoted substantially all of our efforts to research and development, including clinical trials. Since the beginning of 2013, we have devoted substantial efforts to the initiation, maintenance and growth of our HORIZANT commercial operations, and we expect our selling, general and administrative expenses to continue to increase year over year primarily due to internal and external expenses of supporting and maintaining an increased number of sales representatives, as well as expenses from maintaining and growing marketing, distribution and other commercial capabilities for HORIZANT, largely through third-party service providers. If sales-related revenue from HORIZANT or REGNITE is insufficient, if we are unable to enter into new collaboration, partnership, licensing and other similar forms of revenue-generating transactions with third-party business partners for our product candidates or if our current and potential future business partners are unable to develop and commercialize our product candidates, we may never become profitable on an annual basis. Even if we do become profitable on an annual basis, we may not be able to sustain or increase our profitability.

Our success depends substantially on the success of HORIZANT. If we do not successfully market and sell HORIZANT, or if Astellas does not effectively market and sell REGNITE in Japan, we may be unable to generate significant product revenue and may be unable to achieve sustained profitability. *

As a result of our strategic shift in late 2015 to focus on commercializing HORIZANT, to discontinue the internal development of XP23829 and to seek collaboration, partnership, licensing and other strategic arrangements with third-party business partners for the further development of XP23829 and XP21279, our success depends substantially on the success of HORIZANT. In this regard, HORIZANT is our only product approved for marketing and our ability to generate revenue from product sales and achieve profitability is substantially dependent on our ability to effectively commercialize HORIZANT. For the three months ended March 31, 2016, we recorded net sales in the United States of HORIZANT of only $13.7 million. To achieve sustained profitability, we will need to generate substantially more product revenue from HORIZANT and REGNITE.

Our ability to generate significant revenue from HORIZANT depends on our ability to achieve market acceptance of, and to otherwise effectively market, HORIZANT for the treatment of moderate-to-severe primary RLS and for the management of PHN in adults. We may not be able to devote sufficient resources to the advertising, promotion and sales efforts for HORIZANT. We also

 

26


Table of Contents

need to continue to expend time and resources to train our sales team to be credible, persuasive and compliant in discussing HORIZANT with physicians. We also need to continue to train and monitor our sales team to ensure that a consistent and appropriate message about HORIZANT is being delivered. If we are unable to effectively train sales representatives and equip them with effective materials, including medical and sales literature to help inform and educate potential customers about the benefits and risks of HORIZANT and its proper administration, our efforts to successfully commercialize HORIZANT could be put in jeopardy. Moreover, if we are unable to effectively educate physicians and potential customers about the benefits and risks of HORIZANT, we could face significant pressure from branded and/or unbranded (generic) competition, as well as a lack of physician awareness, third-party reimbursement and differentiation from currently approved treatments.

Due to our limited resources, we have made decisions on how best to allocate our resources to efficiently promote HORIZANT. We may not be correct in our decisions, which would limit the sales we could achieve from HORIZANT and could lead to our failure to capitalize on its market opportunity. For example, we have chosen where to locate our sales representatives based on certain characteristics of the relevant territories where we promote HORIZANT. If other territories where we have chosen not to locate our sales team could have generated greater HORIZANT sales than the territories where we are promoting HORIZANT, we would be unable to capture the full potential value of HORIZANT. Further, new or future territories may not perform as well as the initial territories.

In addition, our ability to grow HORIZANT sales in future periods is also dependent on price increases, and we have periodically increased the price of HORIZANT, most recently in January 2016. Price increases on HORIZANT and negative publicity regarding drug pricing and price increases generally, whether on HORIZANT or products distributed by other pharmaceutical companies, could negatively affect market acceptance of, and sales of, HORIZANT. In any event, we cannot assure you that price increases we have taken or may take in the future will not in the future negatively affect HORIZANT sales. We could also fail to comply with applicable regulatory guidelines with respect to the marketing and manufacturing of HORIZANT or with post-marketing commitments or requirements mandated by the FDA, which could result in administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizures or detention, product recalls and total or partial suspension of production.

Other factors that may inhibit or delay our efforts to commercialize HORIZANT include:

 

    the inability of our contract sales organization to provide our sales team with appropriate technical expertise or our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 

    our inability to successfully retain, or increase the reach of, our sales force;

 

    potential disruption arising from realignment or redistribution of established sales territories in connection with any expansion of the sales force team;

 

    our inability to effectively manage and maintain third-party logistical support for our sales representatives;

 

    the inability of our sales team personnel to obtain access to adequate numbers of physicians to provide appropriate information on the advantages and risks of prescribing HORIZANT;

 

27


Table of Contents
    inability to obtain coverage and adequate reimbursement from third-party payers;

 

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

 

    unforeseen costs and expenses associated with maintaining our sales representatives, or to add or replace current sales representatives.

The competition for qualified personnel in the pharmaceutical and biotechnology field is intense, and we may experience difficulties in recruiting, hiring and retaining qualified individuals. Prior to our commercial launch of HORIZANT, we had no experience commercializing products on our own, and we have only limited management expertise in developing and maintaining a commercial organization. Due to our limited internal resources, we have contracted, and anticipate that we will continue to contract, with third-party vendors to manage and support much of our growth and sales infrastructure. We will be at risk to the extent we rely on such third parties without effective oversight. In addition, such third-party contractors may not be the most efficient allocation of resources if we could implement such infrastructure internally in a more cost-effective manner. If we are not successful in recruiting and retaining qualified sales and marketing personnel or in otherwise maintaining and expanding sales and marketing infrastructure, we will have difficulty commercializing HORIZANT, which would adversely affect our business and financial condition.

Astellas initiated sales of REGNITE in Japan in July 2012. We have limited control over the amount and timing of resources that Astellas dedicates to the marketing of REGNITE, and Astellas could fail to effectively commercialize, market and distribute REGNITE. In May 2013, Astellas informed us that they did not have plans for commercialization of REGNITE in the five other Asian countries in their licensed territory. As a result, in May 2013, all rights to gabapentin enacarbil in Korea, the Philippines, Indonesia, Thailand and Taiwan reverted to us, and we will not receive any revenues from Astellas for the development and commercialization of gabapentin enacarbil in these territories. For the three months ended March 31, 2016, we received and recognized only $0.2 million in royalty revenue from Astellas.

HORIZANT or REGNITE may not achieve significant sales, even if we or Astellas devote substantial resources to its commercialization. Even if we achieve significant levels of sales of HORIZANT, the costs of maintaining and expanding sales and marketing capabilities and a distribution and supply chain infrastructure will be substantial and may outweigh any sales of HORIZANT, preventing us from achieving or maintaining profitability. The success of HORIZANT and REGNITE is dependent on a number of factors, which include competition from alternative treatments for RLS and, in the case of HORIZANT, for the management of PHN, including branded and unbranded (generic) treatments in the United States, pricing pressures and whether HORIZANT can obtain sufficient third-party coverage or reimbursement, among other factors that are described in this section.

In 2013, due to manufacturing delays, there was a stockout of HORIZANT, meaning that an insufficient amount of HORIZANT was in the supply chain to meet the demand of orders by pharmacies and wholesalers. As a result, starting in March 2013, certain patients who had been prescribed HORIZANT were not able to have such prescriptions filled. Although this stockout was resolved in May 2013, the implementation of our full commercial promotion of HORIZANT was delayed for approximately one month. If we or Patheon Pharmaceuticals Inc., our contract manufacturer of HORIZANT, or our third-party distribution, warehousing and inventory control service providers experience further delays or issues or otherwise fail to maintain adequate supplies of HORIZANT, our ability to fully commercialize HORIZANT could be hindered, the future demand for, and product sales of, HORIZANT could be further reduced and our business could be harmed, all of which could accelerate our need for additional capital.

We have only limited experience in maintaining a commercial sales force on our own and, to the extent we do not successfully maintain a commercial sales force, sales of HORIZANT and our business will be harmed.

As of January 2016, we have converted all of our HORIZANT contract sales representatives to XenoPort-employed sales representatives. Our sales force has continued to expand and is now up to approximately 135 territories in the United States. We will continue to rely on our third-party contract sales organization to provide back office logistical support for our sales representatives. We have only limited experience in maintaining a commercial sales force on our own, and we may not be able to successfully maintain our sales force in a cost-effective or timely manner, or otherwise realize a positive return on our investment. We will also need to commit additional resources to maintain our sales representatives, and maintaining such sales personnel will impose significant added responsibilities on members of management, including the need to recruit, maintain and integrate additional employees. We will also have to compete with other pharmaceutical and life sciences companies to recruit and retain our dedicated sales team. Our ability to commercialize HORIZANT will depend, in part, on our ability to establish and maintain our dedicated sales team effectively. Because of the numerous risks and uncertainties involved with establishing and maintaining a commercial sales force, we may experience difficulties commercializing HORIZANT, which would adversely affect our business and financial results.

We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.

 

28


Table of Contents

In February 2015, we issued $115.0 million aggregate principal amount of our 2.50% convertible senior notes due 2022, or the 2022 Notes. Our ability to make payments on, and to refinance, the 2022 Notes, and to fund planned capital expenditures, sales and marketing efforts, research and development efforts, working capital and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to repay our indebtedness, including any amounts due under the 2022 Notes at their maturity, or to fund our liquidity needs, we may be forced to refinance all or a portion of the 2022 Notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to affect any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our present and potential future indebtedness and other factors, including market conditions. In addition, in the event of a default with respect to the 2022 Notes, the holders of the 2022 Notes and/or the trustee under the indenture governing the 2022 Notes may accelerate the payment of our obligations under 2022 Notes, which could have a material adverse effect on our business, financial condition and results of operations. A default under the indenture governing the 2022 Notes could also lead to a default under agreements governing future indebtedness, which could also have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have a material adverse effect on our business, financial condition and results of operations.

In addition, our significant indebtedness combined with our other financial obligations and contractual commitments could have other important consequences. For example, it could:

 

    make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

 

    limit our flexibility in planning for, or reacting to, changes in our business and our industry;

 

    require the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;

 

    result in dilution to our stockholders in the event of conversions of the 2022 Notes;

 

    place us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources; and

 

    limit our ability to obtain additional financing or borrow additional amounts for working capital, capital expenditures, debt service requirements, execution of our business strategy or other purposes.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, which we are not prohibited from doing under the terms of the indenture governing the 2022 Notes, the risks related to our business and our ability to service our indebtedness would increase.

We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our commercialization efforts.*

We may need to raise additional capital to fund our operations, to maintain a sales infrastructure and marketing and distribution capabilities for HORIZANT, as well as to fund any required repurchases of the 2022 Notes and/or our repayment obligations under the 2022 Notes. Our future funding requirements will depend on many factors, including:

 

    the timing, receipt and amount of sales or royalties from HORIZANT and REGNITE;

 

    the costs of our sales and marketing, supply chain, distribution, pharmacovigilance, compliance and safety infrastructure to promote and distribute HORIZANT, including the internal and external expenses of supporting and maintaining our sales representatives and any potential future expansions to our dedicated sales team;

 

    the costs of manufacturing clinical and commercial supplies of HORIZANT;

 

    the timing and costs of complying with the remaining post-marketing commitments and post-marketing requirements established in connection with the approval of HORIZANT, and any future additional commitments or requirements imposed on us by the FDA;

 

    the number and characteristics of any additional potential indications for HORIZANT we pursue, such as the treatment of patients with AUD;

 

    the costs, timing and outcomes of regulatory approvals, if any;

 

    the timing of any contingent-event based and royalty payments under our licensing arrangement with Indivior and, subject to and effective upon clearance under the Hart-Scott-Rodino Antitrust Improvements Act, as amended, or HSR Act, our licensing arrangement with Dr. Reddy’s Laboratories, S.A., or Dr. Reddy’s;

 

29


Table of Contents
    the terms and timing of any collaboration, partnership, licensing and other strategic arrangements with third-party business partners that we may establish or modify;

 

    the costs associated with any potential litigation;

 

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

 

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

In addition, we are required to make periodic interest payments to the holders of the 2022 Notes and to make payments of principal upon maturity. In this regard, if holders of the 2022 Notes do not convert their 2022 Notes prior to the maturity date, we will be required to repay the principal amount of all then outstanding 2022 Notes plus any accrued and unpaid interest. We may also be required to repurchase the 2022 Notes for cash upon the occurrence of a change of control or certain other fundamental changes involving us. If our capital resources are insufficient to satisfy our debt service obligations, we will be required to seek to sell additional equity or debt securities or to obtain debt financing.

Until we can generate a sufficient amount of product revenues, if ever, we expect to finance future cash needs through public or private equity or equity-linked offerings, debt financings or collaboration, partnership, licensing and other strategic arrangements with third-party business partners. If we raise additional funds by issuing our common stock, or securities convertible into, exchangeable or exercisable for common stock, our stockholders will experience dilution. Any debt financing or additional equity that we raise may contain terms that are not favorable to our stockholders or us. To the extent that we raise additional capital through partnerships, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates. Our ability to raise additional funds and the terms upon which we are able to raise such funds may be adversely impacted by the uncertainty regarding our financial condition, the commercial prospects of HORIZANT and REGNITE based on their respective sales to date and our relative lack of experience in commercializing products, the uncertainty regarding whether and to what extent we can establish any partnerships for the further development of XP23829 outside the United States and XP21279 globally, and the terms of any such partnerships, and/or current economic conditions, including the effects of disruptions to, and volatility in, the credit and financial markets in the United States, Asia, the European Union and other regions of the world.

We believe that our existing capital resources, together with interest income from our investments and anticipated product revenue, will be sufficient to meet our projected operating requirements for at least the next twelve months. We have based our cash sufficiency estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for commercialization sooner than planned. We have no credit facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our partnerships with Astellas, Indivior and Dr. Reddy’s. With the exception of the clinical trial in patients with AUD that the NIAAA initiated in June 2015, we are solely responsible for all HORIZANT commercialization and development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate, or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional capital.

Additional funds may not be available to us on terms that are acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may, among other things, reduce the amount of resources devoted to advertising, promotion, sales or medical affairs of HORIZANT, or conduct additional workforce or other expense reductions. For example, in 2012, we suspended clinical development activities for XP21279 to focus our resources on development of our other product candidates. In addition, in May 2013, we terminated further investment in AP as a treatment for spasticity in patients with MS to focus our resources on the commercialization of HORIZANT and continued development of XP23829. Most recently, in October 2015, in connection with our strategic shift to focus on HORIZANT, we discontinued internal development of XP23829 apart from the completion of ongoing non-clinical carcinogenicity studies of XP23829. If we are required to reduce the amount of resources devoted to advertising, promotion, sales or medical affairs of HORIZANT or conduct additional workforce or other expense reductions, our business and prospects could be materially and adversely affected. In addition, we may face substantial financial costs in order to comply with the remaining post-marketing commitments and post-marketing requirements required by the FDA in connection with the approval of HORIZANT, and our inability to carry out and fund such efforts to comply with these requirements could have material adverse consequences to us, including the loss of marketing approval for HORIZANT.

We rely on third parties to perform many essential services for HORIZANT, including services related to warehousing and inventory control, distribution, customer service, government price reporting, recording of sales, accounts receivable management, cash collection and adverse event reporting, and if such third parties fail to provide us with accurate information, perform as expected or comply with legal and regulatory requirements, our efforts to commercialize HORIZANT may be significantly impacted and/or we may be subject to regulatory sanctions.

We intend to continue to rely on third-party service providers to perform a variety of functions related to the sale and distribution of HORIZANT, key aspects of which are out of our direct control. The services provided by these third parties include

 

30


Table of Contents

warehousing and inventory control, distribution, customer service, government price reporting, recording of sales, accounts receivable management and cash collection. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties to us, or if supplies of HORIZANT encounter physical or natural damage at their facilities, our ability to deliver HORIZANT to meet commercial demand would be significantly impaired. If these third parties do not provide us with timely and accurate information, it could impact our ability to comply with our financial reporting, state and federal healthcare professional aggregate spend reporting, government price reporting and securities laws obligations, which could expose us to the risk of stockholder lawsuits and/or regulatory actions and adversely affect our business. In addition, we have engaged third parties to perform various other services for us relating to adverse event reporting, safety database management, fulfillment of requests for medical information regarding HORIZANT and related services. If the quality or accuracy of the data maintained or services performed by these third parties is insufficient, we could be subject to regulatory sanctions.

The commercial success of HORIZANT and REGNITE depends upon the degree of market acceptance among physicians, patients, healthcare payers and the medical community.

If HORIZANT and REGNITE do not achieve an adequate level of market acceptance among physicians, patients, healthcare payers and the medical community, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of HORIZANT and REGNITE depends on a number of factors, including:

 

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

 

    sufficient third-party payer coverage and reimbursement for such products;

 

    the product labeling required by the FDA, the Japanese MHLW or any other regulatory authorities;

 

    demonstrated efficacy and safety in clinical trials;

 

    the prevalence and severity of any side effects;

 

    potential or perceived advantages over alternative treatments;

 

    perceptions about the relationship or similarity between HORIZANT and REGNITE and the parent drug, gabapentin, upon which HORIZANT and REGNITE are based;

 

    the timing of market entry relative to competitive treatments;

 

    relative convenience and ease of administration; and

 

    the strength of marketing and distribution support.

For example, as HORIZANT is a prodrug of an already approved drug, gabapentin, and is indicated for the treatment of conditions that also have been treated by branded and unbranded (generic) competitors, there could be a perception among physicians and payers that HORIZANT may not offer a significant clinical advantage or be sufficiently differentiated from competitive treatments to justify its price, thereby limiting the market acceptance and sales that we may achieve with HORIZANT. In addition, HORIZANT’s limited past sales performance under GSK and a HORIZANT inventory stockout in 2013 may have created a negative market perception that could be difficult to overcome in our marketing efforts.

Our ability to generate revenue from HORIZANT and REGNITE depends on the availability of coverage and adequate reimbursement from third-party payers and drug pricing policies and regulations.

Our ability and that of Astellas to successfully commercialize HORIZANT and REGNITE, respectively, as well as our ability to attract strategic partners for our products and product candidates, depends in significant part on the availability of financial coverage and adequate reimbursement from third-party payers, including, in the United States, governmental payers such as the Medicare and Medicaid programs, managed care organizations and private health insurers. Many patients may be unable to pay for HORIZANT and REGNITE. We cannot be sure that coverage and adequate reimbursement in the United States and Japan will be available for HORIZANT or REGNITE, and any reimbursement that may become available may be decreased or eliminated in the future. Additionally, coverage and reimbursement determinations are made on a payer-by-payer basis. Therefore, obtaining acceptable coverage and reimbursement from one payer does not guarantee we will obtain similar acceptable coverage or reimbursement from another payer. Third-party payers increasingly are challenging prices charged for medical products and services, and many third-party payers may refuse to provide reimbursement for particular drugs when an equivalent generic drug or suitable alternative treatment is available. Although we believe HORIZANT and REGNITE represent an improvement over gabapentin and should be considered unique and not subject to substitution by generic gabapentin, it is possible that a third-party payer may consider HORIZANT or REGNITE, on the one hand, and gabapentin, on the other, as equivalents and only offer to reimburse patients for the generic gabapentin. Even if we or Astellas show improved efficacy or improved convenience of administration with HORIZANT or REGNITE, generic gabapentin pricing may limit the amount we or Astellas can charge for HORIZANT or REGNITE. If reimbursement is not available or is available only at limited levels, we or Astellas may not be able to successfully commercialize HORIZANT or REGNITE, and may not be able to obtain a satisfactory financial return on such products.

 

31


Table of Contents

Some states have implemented, and other states are considering, price controls or patient access constraints under the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of their populations that are not Medicaid-eligible. If legislation were enacted to mandate rebates or provide for direct government negotiation in prescription drug benefits, access and reimbursement for HORIZANT could be restricted. In addition, drug pricing strategies by pharmaceutical companies have recently come under close scrutiny. We expect that healthcare policies and reforms intended to curb healthcare costs will continue to be proposed, which could limit the prices that we charge for HORIZANT, limit our commercial opportunity and/or negatively impact revenues from sales of HORIZANT. Also, price increases on HORIZANT, and negative publicity regarding pricing and price increases generally, whether with respect to HORIZANT or products distributed by other pharmaceutical companies, could negatively affect market acceptance of HORIZANT.

The trend toward managed healthcare in the United States and the changes in health insurance programs, as well as the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, enacted in 2010, may result in lower prices for pharmaceutical products, including HORIZANT. In addition, if PPACA were amended or other legislation were enacted to impose direct governmental price controls and access restrictions, these could have a significant adverse impact on our business, including on product sales revenue from HORIZANT. For example, in 2015, Democrats on the House Committee on Oversight and Government Reform formed the Affordable Drug Pricing Task Force aimed, in part, to address rising costs of pharmaceutical products. They intend to seek improved transparency in drug pricing and increased power for the federal government to negotiate prices of drugs. Additionally, there have been several recent U.S. Congressional inquiries regarding certain drug manufacturers’ pricing practices and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. Any future regulatory changes regarding the healthcare industry or third-party coverage and reimbursement may affect demand for HORIZANT or any other products that may result from our product candidates and could harm our sales and prospects for profitability.

If competitors are able to develop and market products that are more effective, safer or less costly than HORIZANT or REGNITE, our commercial opportunity will be reduced or eliminated.

We face competition from established pharmaceutical and biotechnology companies, including generic competitors, as well as from academic institutions, government agencies and private and public research institutions. Our commercial opportunities will be reduced or eliminated if competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than HORIZANT or REGNITE.

Products that we believe compete with HORIZANT in the United States include the following drugs approved for the treatment of moderate-to-severe primary RLS in adults: MIRAPEX (pramipexole) from Boehringer Ingelheim GmbH, and generic pramipexole; REQUIP (ropinirole) from GSK and generic ropinirole; and NEUPRO (a rotigotine transdermal system), a dopamine agonist patch from UCB S.A. In Japan, we believe that REGNITE competes with Boehringer Ingelheim’s SIFROL (pramipexole) and the UCB rotigotine transdermal system, which was launched in February 2013 by Otsuka Pharmaceutical Co., Ltd., which has exclusive rights to market in Japan. Products that we believe compete with HORIZANT in the United States for the management of PHN include drugs that act on the same target as HORIZANT, such as LYRICA (pregabalin) and NEURONTIN (gabapentin) from Pfizer Inc., GRALISE (once-daily formulation of gabapentin) from Depomed, Inc. and generic gabapentin. HORIZANT could also experience competition from a capsaicin patch (marketed as QUTENZA by Acorda Therapeutics, Inc.) and transdermal patches containing the anesthetic known as lidocaine (marketed as LIDODERM by Endo Pharmaceuticals, Inc.). In addition, while not a treatment for shingles or PHN, HORIZANT could experience competition from a shingles vaccine, known as ZOSTAVAX marketed by Merck & Co., Inc., that is a live attenuated vaccine to help prevent shingles. There is also a shingles vaccine in late stage development, known as HZ/su, which is being developed by GSK. Products that could compete with HORIZANT/gabapentin enacarbil for the treatment of AUD include ANTABUSE (disulfiram) marketed by TEVA; REVIA and VIVITROL, oral and injectable formulations of naltrexone, marketed by Barr Pharmaceuticals, Inc. and Alkermes, Inc., respectively; and CAMPRAL (acamprosate), marketed by Actavis Inc.

There may be other compounds of which we are not aware that are at an earlier stage of development and may compete with HORIZANT and REGNITE. If any of those compounds are successfully developed and approved, they could compete directly with HORIZANT and REGNITE.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing, distributing and selling approved products than we do. Established pharmaceutical companies may invest heavily to quickly discover and develop novel compounds that could make HORIZANT and REGNITE obsolete. Larger pharmaceutical companies also may have significantly greater sales forces, distribution capabilities and marketing expertise, which may result in more effective communication and awareness of their products. Smaller or early-stage companies may also prove to be significant competitors, particularly through strategic arrangements with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and

 

32


Table of Contents

commercializing medicines before we or our current and potential future business partners do. We are also aware of other companies that may currently be engaged in the discovery of medicines that will compete with HORIZANT and REGNITE. In addition, in the markets that we are targeting, we are competing and expect to continue to compete against current market-leading medicines. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.

Off-label sale or use of gabapentin products could lead to pricing pressure or decrease sales of HORIZANT.

U.S. physicians are permitted to prescribe legally available drugs for uses that are not described in the drug’s labeling and that differ from those uses tested and approved by the FDA. The occurrence of such off-label uses in the practice of medicine could significantly reduce our ability to market and sell HORIZANT or any other products that our current and potential future business partners may develop.

Off-label prescriptions written for gabapentin for indications for which we are marketing or may develop HORIZANT could adversely affect our ability to generate revenue from the sales of HORIZANT. This could result in reduced sales and increased pricing pressure on HORIZANT, which in turn would reduce our ability to generate meaningful revenue and have a negative impact on our results of operations.

If product liability lawsuits are brought against us, we will incur substantial liabilities and may be required to limit commercialization of HORIZANT.

We face an inherent risk of product liability exposure related to the commercial use of HORIZANT and the testing of HORIZANT in human clinical trials. If we cannot successfully defend ourselves against claims that HORIZANT caused injuries, we will incur substantial liabilities.

Regardless of merit or eventual outcome, liability claims may result in:

 

    decreased demand for HORIZANT;

 

    injury to our reputation;

 

    costly recalls of HORIZANT;

 

    withdrawal of clinical trial participants;

 

    costs to defend the related litigation;

 

    substantial monetary awards to clinical trial participants or patients; and

 

    loss of revenue.

We have product liability insurance that covers our commercial use and clinical trials up to a $15.0 million annual aggregate limit. Insurance coverage is increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.

If third parties do not manufacture HORIZANT or REGNITE in sufficient quantities or at an acceptable cost, the development and commercialization of HORIZANT and REGNITE would be harmed or delayed.

        Under the terms of the November 2012 termination and transition agreement with our former HORIZANT commercial partner, Glaxo Group Limited, or GSK, we acquired an inventory of approximately 50 metric tons of gabapentin enacarbil, the active pharmaceutical ingredient, or API, of HORIZANT. We continue to use this acquired inventory to supply our commercial manufacturing partner Patheon Pharmaceuticals Inc. We have accordingly never either ourselves, or through a third party, manufactured commercially suitable gabapentin enacarbil in any quantity in connection with our HORIZANT commercial supply efforts. Although our existing inventory of gabapentin enacarbil API has reached the end of its initially specified re-test period, we believe that such inventory will remain in specification and will continue to be usable for HORIZANT manufacturing upon re-test or, in the alternative, we believe that the API can be re-crystallized into usable form. Independent of its usable lifespan, the supply of gabapentin enacarbil inventory that we acquired from GSK will not provide sufficient material to support drug product manufacturing. In September 2015, we entered into a statement of work under our manufacturing services agreement with our contract pharmaceutical material manufacturing partner, Lonza Ltd, for production of 20 metric tons of new gabapentin enacarbil scheduled for release by the end of 2016. Lonza was the single source supplier of gabapentin enacarbil for GSK and manufactured the inventory that we acquired from GSK. Lonza is now our single source supplier of API and manufactures gabapentin enacarbil for us under license to our manufacturing technologies. If we are incorrect about the future usability of our existing inventory of gabapentin enacarbil, are unable to have it meet specifications upon re-crystallization or if Lonza is unable to successfully manufacture new inventory of gabapentin enacarbil for us and/or if we are unable to identify, contract and qualify an alternative API manufacturer, we may be limited in the amount of HORIZANT we could have manufactured and the commercialization of HORIZANT could be impaired or interrupted. In addition, under the terms of our manufacturing services agreement with Lonza, both parties have termination rights without cause pursuant to an 18-month notice period, as well as early termination rights arising from the counterparty’s uncured breach. If, for any reason, Lonza is unable or unwilling to perform under our manufacturing services agreement, we may not be able to locate alternative

 

33


Table of Contents

API manufacturers or enter into favorable agreements with them. In addition, identifying, contracting and qualifying a new gabapentin enacarbil manufacturer will take a significant period of time, giving rise to potential impaired or interrupted supply of HORIZANT. Under the terms of our license agreement with Astellas, they are solely responsible for the manufacture of REGNITE API (gabapentin enacarbil) and finished drug product to support its commercialization efforts in Japan. To our knowledge, Astellas is currently relying on single source suppliers for commercial supplies of REGNITE. As a result, if Astellas fails to manufacture or contract to manufacture sufficient quantities of REGNITE API and/or finished drug product, commercialization of REGNITE could be impaired in Japan.

Although we do own the dedicated HORIZANT manufacturing equipment and line at Patheon, we do not own or operate pharmaceutical manufacturing facilities for the production of clinical or commercial quantities of HORIZANT or REGNITE. We also have limited management expertise in commercial supply operations. Currently, we rely on Patheon as our single source supplier of clinical and commercial HORIZANT drug product pursuant to a commercial supply agreement. Our purchase price for the manufacture and supply of HORIZANT is volume-based. Both parties have early termination rights with notice periods of varying lengths for various causes, including for the counterparty’s uncured breach. Patheon also has the right to terminate the supply agreement upon 18 months prior notice if we sell, assign or otherwise transfer rights to HORIZANT to a competitor of Patheon. If, for any reason, Patheon is unable or unwilling to perform under our commercial supply agreement, we may not be able to locate alternative manufacturers or enter into favorable agreements with them. In addition, qualifying and then successfully registering a new HORIZANT manufacturer with the FDA is time consuming and could require at least about 18 months to carry out.

If we are unable to manufacture or contract to manufacture sufficient quantities of HORIZANT API and/or drug product, the development and commercialization of HORIZANT could be impaired or interrupted. For example, manufacturing delays resulted in a stockout of HORIZANT in 2013. As a result of those manufacturing delays, our full commercial promotion of HORIZANT was delayed for approximately one month. If we, Lonza and/or Patheon experience similar delays or manufacturing issues, our ability to commercialize HORIZANT could be further impaired. In particular, our inability to acquire sufficient quantities of HORIZANT could result in future stockouts and existing patients not having access to HORIZANT. Under the terms of our license agreement with Astellas, Astellas is solely responsible for the manufacture of REGNITE to support its commercialization in Japan. To our knowledge, Astellas is currently relying on single source suppliers for commercial supplies of REGNITE. As a result, if Astellas fails to manufacture or contract to manufacture sufficient quantities of REGNITE, commercialization of REGNITE could be impaired in Japan.

If we or Astellas are required to obtain alternate third-party manufacturers, it could delay or prevent the clinical development and commercialization of HORIZANT or REGNITE.

We or Astellas may not be able to maintain or renew existing, or obtain new, third-party manufacturing arrangements on acceptable terms, if at all. If we or Astellas are unable to continue relationships with suppliers for HORIZANT/gabapentin enacarbil, or to continue relationships at an acceptable cost or if these suppliers fail to meet our requirements for HORIZANT or REGNITE for any reason, we or Astellas would be required to obtain alternative suppliers. Any inability to obtain qualified alternative suppliers, including an inability to obtain, or a delay in obtaining, approval of an alternative supplier from the FDA, would delay or prevent the clinical development and commercialization of HORIZANT or REGNITE.

Use of third-party manufacturers may increase the risk that we or Astellas will not have adequate supplies of HORIZANT or REGNITE.

Reliance on third-party manufacturers by us and Astellas creates exposure that could result in disruptions to the supply chain, product stockouts, patients not having access to their regular treatment, higher costs or lost product revenues, or it could delay or prevent:

 

    the commercialization of HORIZANT or REGNITE;

 

    the initiation or completion of current and potential future clinical trials of HORIZANT;

 

    the submission of applications for regulatory approvals; and

 

    the approval to market HORIZANT for any additional indications.

In particular, our or Astellas’ contract manufacturers:

 

    could encounter difficulties in achieving volume production, quality control and quality assurance or suffer shortages of qualified personnel, which could result in their inability to manufacture sufficient quantities of drugs to meet commercial needs or clinical supplies of HORIZANT or REGNITE;

 

    could terminate or choose not to renew manufacturing agreements, based on their own business priorities, at a time that is costly or inconvenient for us or Astellas;

 

    could fail to establish and follow FDA-mandated current good manufacturing practices, or cGMPs, which are required as a condition of FDA approval, or fail to document their adherence to cGMPs, either of which could require costly recalls of products that have already received approval, lead to significant delays in the availability of material for clinical study or delay or prevent potential additional marketing approvals for HORIZANT;

 

34


Table of Contents
    could encounter financial difficulties that would interfere with their obligations to supply HORIZANT or REGNITE; and

 

    could breach, or fail to perform as agreed under, manufacturing agreements.

For example, in 2013, due to manufacturing delays by GSK and Patheon, there was an insufficient amount of HORIZANT in the supply chain to meet the demand of orders of HORIZANT by pharmacies and wholesalers, leading to approximately a one-month delay in our full commercial promotion of HORIZANT.

If we or Astellas are not able to obtain and maintain adequate supplies of HORIZANT or REGNITE, it will have a significant impact on the commercialization efforts for HORIZANT or REGNITE. HORIZANT and REGNITE may also compete with other products and product candidates for access to manufacturing facilities.

In addition, the manufacturing facilities of Lonza and a storage facility of drug substance, are located outside of the United States. This may give rise to difficulties in importing HORIZANT drug substance or its components into the United States or other countries as a result of, among other things, shipping losses, regulatory agency import inspections, incomplete or inaccurate import documentation, customs detention or seizures or defective packaging.

HORIZANT and REGNITE remain subject to ongoing regulatory review. If we or Astellas fail to comply with continuing regulations, these approvals could be rescinded and the sale of HORIZANT or REGNITE could be suspended.

Any regulatory approval to market a product could be conditioned on conducting additional, costly, post-approval studies or implementing a risk evaluation and mitigation strategy or could contain strict limits on the indicated uses included in the labeling. For example, the FDA approval of HORIZANT for the treatment of moderate-to-severe primary RLS was associated with the requirement to conduct a program of post-marketing commitments, or PMCs, and post-marketing requirements, or PMRs, in adults, including: a 12-week, double-blind, placebo-controlled efficacy study evaluating 300 mg, 450 mg and 600 mg tablets of HORIZANT dosed once per day, or the adult low-dose efficacy study; two simulated driving studies; a drug-drug interaction study with morphine; and a cardiovascular safety, or QTc, study. Additionally, the RLS approval included a requirement to conduct a pediatric clinical program for subjects 13 years of age and older. The pediatric clinical program, which commenced in 2016, includes: a pharmacokinetics, or PK, study; a double-blind, parallel group, efficacy and safety study; an open-label long-term safety extension study; and a simulated driving study. The specific protocol submission and trial completion dates for these PMCs/PMRs range from April 2011 through July 2024. Many of these PMC/PMR studies, including conduct of the adult low-dose efficacy study, have been conducted and completed by GSK, and most of the FDA commitments/requirements for this study are considered fulfilled; however, we are responsible for fulfilling the remaining, and any additional future post-marketing commitments and/or requirements, which will be expensive and time-consuming and may divert management time and resources away from our commercialization efforts.

HORIZANT has certain warnings and precautions in the label, including information that HORIZANT may cause significant driving impairment. A medication guide, which contains information about the labeling intended for the patient, is also required to be distributed with HORIZANT. Moreover, HORIZANT may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries or indications. In addition, our contract manufacturers and their facilities continue to be subject to FDA review and periodic inspections to ensure adherence to applicable regulations, and the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to HORIZANT and REGNITE remain subject to extensive regulatory requirements. Furthermore, the NIAAA has initiated a clinical trial to evaluate HORIZANT in patients with AUD that will be subject to statutory reporting of safety information and subject to FDA review and potential inspections to ensure adherence to applicable regulations. There is always the risk that new data generated from the NIAAA clinical trial, or from investigator-initiated clinical trials of HORIZANT, could be perceived in a negative fashion by either the physician community or the health authorities. Likewise, adverse events or safety concerns involving HORIZANT observed in the NIAAA clinical trial or in investigator-initiated clinical trials could result in regulatory authorities denying or withdrawing approval of HORIZANT for any or all indications, including the use of HORIZANT for the treatment of patients in its currently-approved indications.

We are also subject to federal and state healthcare laws, and if we do not comply, we may be subject to significant penalties.

We are also subject to regulation by regional, national, state and local agencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may commercialize products in the future. The FDCA, the Public Health Service Act and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. These statutes and regulations include, but are not limited to, anti-kickback statutes and false claims statutes, as well as data privacy and security and transparency.

 

35


Table of Contents

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare good, facility, item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting identified common activities from prosecution, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.

Federal false claims laws, including the federal civil False Claims Act, prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.

Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company’s marketing of the product for unapproved, and thus non-reimbursable, uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare fraud. Federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals, and several states have similar healthcare professional aggregate spend reporting obligations or prohibitions. Other states require the posting of information relating to clinical studies. In addition, California and certain other states require pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or payments to, individual medical or health professionals. We have adopted a comprehensive compliance program that we believe complies with California law. Several additional states are considering similar proposals.

In addition to the federal Anti-Kickback Statute and federal false claims laws, the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their implementing regulations, also impose on certain types of individuals and entities certain requirements relating to the privacy, security and transmission of individually identifiable personal information, including health information. State and foreign laws governing the privacy and security of health information in certain circumstances differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and the federal false claims laws that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.

The federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians and their immediate family members.

It is possible that some of our business activities could be subject to challenge under one or more such healthcare laws. Such a challenge could have a material adverse effect on our business, financial condition, results of operations and growth prospects. If we or 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 potentially significant criminal, civil and/or administrative penalties, damages, fines, individual imprisonment, exclusion of products from reimbursement under U.S. federal or state healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which could materially adversely affect our ability to operate our business and our financial results.

Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. 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. Moreover, achieving and sustaining compliance with these laws may prove costly.

 

36


Table of Contents

We previously contracted with a contract sales organization to employ our contract sales representatives who help promote HORIZANT as part of our dedicated sales team. Although we have converted all such contract sales representatives to XenoPort- employed sales representatives in January 2016, we continue to rely on that organization to provide back office support for our sales representatives. If we or our contract sales organization fails to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities or if previously unknown problems with HORIZANT or REGNITE or our manufacturers or their manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:

 

    restrictions on HORIZANT, REGNITE, our manufacturers or their manufacturing processes;

 

    warning letters;

 

    civil or criminal penalties or fines;

 

    injunctions;

 

    product seizures, detentions or import bans;

 

    voluntary or mandatory product recalls and publicity requirements;

 

    suspension or withdrawal of regulatory approvals;

 

    total or partial suspension of production; and

 

    refusal to approve pending applications for marketing approval of supplements to approved applications.

Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to profitably sell HORIZANT.*

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals designed to change the healthcare system in ways that could affect our ability to sell HORIZANT profitably. Among policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

For example, in 2010, PPACA became law in the United States. PPACA has the potential to substantially change healthcare financing and delivery by both governmental and private insurers, and significantly impact the pharmaceutical industry. Among the provisions of PPACA of importance to the pharmaceutical industry are the following:

 

    an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

 

    an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for branded (with certain exceptions) and generic drugs, respectively;

 

    a new Medicare Part D coverage gap discount program, in which manufacturers must agree to reimburse Medicare Part D sponsors 50% off the wholesale acquisition cost of applicable brand drugs utilized by eligible beneficiaries during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D. The coverage discount is subject to increase;

 

    extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

    expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty level that took effect in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

    expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

    new requirements to report annually certain payments or “transfers of value” provided to physicians and teaching hospitals, as each is defined in PPACA and its implementing regulations, and to report any ownership and investment interests held by physicians and their immediate family members during the preceding calendar year, with data collection requirements that began on August 1, 2013 and to report to the Centers for Medicare & Medicaid Services on an annual basis;

 

    a new requirement to track and annually report certain drug samples that manufacturers and distributors provide to licensed practitioners;

 

    expansion of healthcare laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance under certain healthcare laws;

 

    a licensure framework for follow-on biologic products; and

 

37


Table of Contents
    a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

We expect that PPACA may result in more rigorous coverage criteria and lower reimbursement, and in additional downward pressure on the price that we receive for any approved product. We are still unsure the full impact that PPACA may have on our business. There have been judicial and Congressional challenges to certain aspects of PPACA, and we expect there will be additional challenges and amendments in the future.

In addition, other legislative changes have been proposed and adopted since PPACA was enacted. In 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which started in 2013 and, pursuant to the Bipartisan Budget Act of 2015, will continue through 2025, unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations.

Additionally, other recent federal legislation imposes new obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing. Among the requirements of this new legislation, manufacturers are required to provide certain information regarding the drug product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product. Further, under this new legislation, manufacturers will have drug product investigation, quarantine, disposition, notification and purchaser license verification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences or death. In addition, multiple counties (including King County in Washington, and Alameda, San Mateo, Santa Clara and San Francisco counties in California) have enacted pharmaceutical manufacturer take-back ordinances/regulations that place primary responsibility for end-of-life management of drug products on drug producers. These new take-back programs will require the creation, administration, promotion and payment of costs including county administrative costs of administering and enforcing the programs.

In 2015, Democrats on the House Committee on Oversight and Government Reform formed the Affordable Drug Pricing Task Force aimed, in part, to address rising costs of pharmaceutical products. They intend to demand transparency in drug pricing and increased power for the federal government to negotiate prices of drugs. Additionally, there have been several recent U.S. Congressional inquiries regarding certain drug manufacturers’ pricing practices and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.

We anticipate that PPACA, the Budget Control Act of 2011, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for HORIZANT, and could seriously harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payers will reimburse for HORIZANT, which in turn will put pressure on the pricing of HORIZANT.

We also cannot be certain that HORIZANT will successfully be placed on the list of drugs covered by particular health plan formularies, nor can we predict the negotiated price for HORIZANT in the future, which will be determined by market factors. Many states have also created preferred drug lists and include drugs on those lists only when the manufacturers agree to pay a supplemental rebate. If HORIZANT is not included on these preferred drug lists, physicians may not be inclined to prescribe them to their patients, thereby diminishing the potential market for HORIZANT. Astellas faces similar pricing and reimbursement restrictions in Japan for REGNITE, and further efforts to reform the Japanese healthcare system may increase such restrictions.

If we do not establish and maintain partnerships or other strategic transactions for HORIZANT and our product candidates, our revenue potential and prospects will be limited and our business could suffer.*

In October 2015, we announced that we would focus our resources on the continued commercialization of HORIZANT, discontinue the internal development of XP23829 and seek partners for the further development of XP23829 and XP21279. In March 2016, we entered into a license agreement with Dr. Reddy’s pursuant to which we will grant to Dr. Reddy’s exclusive U.S. rights for the development and commercialization of XP23829, and we continue to seek partners for the further development of XP23829 outside the United States. The Dr. Reddy’s agreement is subject to and will become effective upon clearance under the HSR Act. We face significant competition in seeking appropriate business partners, and partnering or other divestiture transactions are complex and

 

38


Table of Contents

time consuming to negotiate and document. We may not be successful in entering into new partnerships with third parties on acceptable terms, or at all. In addition, we are unable to predict when, if ever, we will enter into any additional partnering arrangements for our product candidates because of the numerous risks and uncertainties associated with establishing such arrangements. If we are unable to successfully maintain and/or negotiate and enter into new partnerships, we may be unable to realize any return on our investments in XP23829 and XP21279. In this regard, we implemented a workforce reduction of approximately 25 employees following our announcement that we were discontinuing internal development of XP23829 in connection with our strategic shift to focus on the commercialization of HORIZANT, which workforce reduction included the substantial elimination of our research and development function. Accordingly, we do not expect to, nor are we currently in a position to, undertake meaningful development activities for XP23829 and XP21279 on our own, and our prospects for realizing any return on our investments in XP23829 and XP21279 are therefore substantially dependent on our ability to enter into new and/or maintain partnerships for XP23829 and XP21279. Likewise, given our focus on commercializing HORIZANT, we believe that the potential for HORIZANT may be enhanced through relationships that would enable further development and/or expanded commercialization efforts of HORIZANT. However, there can be no assurance that we will be able to execute on any such strategic relationships, and our inability to do so would limit future prospects for HORIZANT and our business could suffer. In any event, our inability to obtain and maintain new partnerships for XP23829 and XP21279 and/or enter into strategic relationships for the further development and/or commercialization of HORIZANT could limit our revenue potential and prospects, which would adversely affect our business and financial condition.

Our success also depends on our development-stage product candidates. If our current and potential future business partners are unable to bring any of these product candidates to market, or experience significant delays in doing so, our ability to generate revenue from our product candidates and our likelihood of success will be reduced.*

We have granted to Dr. Reddy’s exclusive, U.S. rights for the development and commercialization of XP23829, and have granted to Indivior exclusive, world-wide rights to develop and commercialize AP Products. We are currently seeking to partner with potential third party business partners for the continued development of XP23829 outside the United States and for XP21279 globally. Any one of our product candidates could be unsuccessful if it:

 

    does not demonstrate acceptable safety and efficacy in preclinical studies or clinical trials or otherwise does not meet applicable regulatory standards for approval;

 

    does not offer therapeutic or other improvements over existing or future drugs used to treat the same conditions;

 

    is not capable of being produced in commercial quantities at acceptable costs;

 

    is not accepted in the medical community; or

 

    is not reimbursed by third-party payers or is reimbursed only at limited levels.

Moreover, even if clinical trial results of our product candidates are successful, our current and potential future business partners may determine not to continue development of a particular product candidate. If we are unable to maintain our partnerships with Dr. Reddy’s for development and commercialization of XP23829 in the United States or with Indivior for AP Products, the continued development of these product candidates may be substantially curtailed or abandoned altogether. Additionally, if we are not able to establish and maintain partnerships for the development and commercialization of XP23829 outside the United States or XP21279 globally, we will be unable to advance the development of these product candidates outside the United States or globally for XP23829 and XP21279, respectively. If our current and future business partners are unable to make our product candidates commercially available, we may not be able to generate substantial revenues or otherwise derive significant value from our product candidates, which would adversely affect our business and financial condition.

We currently depend, and may in the future depend, on partnerships to complete the development, regulatory approval and commercialization of our products and product candidates. These partnerships will likely place the development of our product candidates outside our control, may require us to relinquish important rights, may otherwise be on terms unfavorable to us and may ultimately not be successful. *

Our dependence on current and future business partners for the development, regulatory approval and commercialization of our products and product candidates subjects us to a number of risks, including:

 

    we are not able to control the amount and timing of resources that our current and potential future business partners devote to the development or commercialization of our products and product candidates, or to their marketing and distribution;

 

    disputes may arise between us and our current and potential future business partners, such as the litigation proceedings with GSK in 2012, that result in the delay or termination of the research, development or commercialization of our products and product candidates or that result in costly litigation or arbitration that diverts management’s attention and resources;

 

    our current and potential future business partners may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

39


Table of Contents
    significant delays in the development of our product candidates by current and potential future business partners could allow competitors to bring products to market before our product candidates are approved and impair the ability of current and potential future business partners to effectively commercialize these product candidates;

 

    if we do not receive timely and accurate information from any business partner or our third-party vendors regarding sales activities, expenses and resulting operating profits and losses, our estimates at a given point in time could be incorrect and we could be required to record adjustments in future periods or restate our financial results for prior periods;

 

    our current and potential future business partners may not be successful in their efforts to obtain regulatory approvals in a timely manner, or at all;

 

    our current and potential future business partners may receive regulatory sanctions relating to other aspects of their business that could adversely affect the approval or commercialization of our products or product candidates;

 

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

 

    business combinations or significant changes in a business strategy may also adversely affect a business partner’s willingness or ability to complete its obligations under any arrangement;

 

    a business partner could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors;

 

    our current and potential future business partners may experience financial difficulties; and

 

    strategic arrangements may be terminated or allowed to expire, which would delay development or commercialization and may also increase the cost of developing or commercializing our products or product candidates.

For example, in 2007, we entered into a business relationship with Xanodyne Pharmaceuticals, Inc. for the development and commercialization of XP21510 in the United States. In 2009, Xanodyne terminated the arrangement. Likewise, in 2007, we entered into an exclusive collaboration arrangement with GSK to develop and commercialize gabapentin enacarbil worldwide, excluding the original Astellas territory. Following a significant dispute in 2012, including the filing of lawsuits in California and Delaware, we terminated our collaboration with GSK pursuant to a termination and transition agreement, under which the product rights to HORIZANT returned to us in May 2013.

As a result of our license agreement with each of Dr. Reddy’s and Indivior, we are wholly dependent on Dr. Reddy’s and Indivior to develop and commercialize XP23829 and AP Products, respectively. Future financial returns to us, if any, under our license agreement with Dr. Reddy’s and Indivior depend on the achievement of contingent-event based development and/or regulatory and commercialization payments, plus royalties on potential future net product sales. Therefore, any associated future financial returns to us and our stockholders under license agreements with Dr. Reddy’s and Indivior depend entirely on the efforts of, and funding by, Dr. Reddy’s and Indivior for the development and commercialization of XP23829 and AP Products, respectively. If Dr. Reddy’s is not successful in developing and commercializing XP23829, or Indivior is not successful in developing and bringing AP Products to market, our ability to generate revenue from XP23829 or AP, respectively, will be substantially diminished, the development or commercialization of XP23829 or AP could be delayed or terminated, and our business and financial condition could be harmed. Under the terms of our license, agreement with Dr. Reddy’s, Dr. Reddy’s is solely responsible for manufacture and supply of XP23829 to support its development and commercialization of XP23829 Products. If Dr. Reddy’s fails to establish itself and/or identify and qualify one or more suitable manufacturers of XP23829, or if such manufacturers terminate their agreement with Dr. Reddy’s and Dr. Reddy’s is otherwise unable to manufacture or contract to manufacture sufficient quantities of XP23829, development and commercialization of XP23829 Products could be impaired or delayed. In addition, if the Dr. Reddy’s license terminates in such a way that XP23829 reverts to us and we seek alternative arrangements with one or more other third parties to develop and commercialize XP23829, we may not be able to enter into such an agreement with another suitable third-party or third-parties on acceptable terms, or at all. Further, under the terms of our license agreement with Indivior, Indivior is solely responsible for the manufacture of AP to support its development and commercialization of AP Products. If Indivior fails to establish itself and/or identify and qualify one or more suitable manufacturers of AP, or if such manufacturers terminate their agreement with Indivior and Indivior is otherwise unable to manufacture or contract to manufacture sufficient quantities of AP, development and commercialization of AP Products could be impaired or delayed. In addition, if the Indivior license terminates in such a way that AP reverts to us and we seek alternative arrangements with one or more other third parties to develop and commercialize AP, we may not be able to enter into such an agreement with another suitable third-party or third-parties on acceptable terms, or at all. Although we have a retained a right of first negotiation to collaborate to develop and commercialize AP Products for non-addiction indications, this right is limited and Indivior is under no obligation to us to enter into a collaboration with us for AP Products. Moreover, given our current strategic focus on the commercialization of HORIZANT, our ability to collaborate with Indivior to develop and commercialize AP Products is limited. Accordingly, we could fail to capitalize on, or share in, any successful development of AP by Indivior apart from the contingent-event based and royalty payment obligations to us under the Indivior license agreement.

 

40


Table of Contents

In December 2005, we entered into a license agreement with Astellas for the development and commercialization of gabapentin enacarbil, also known as REGNITE, in Japan, Korea, the Philippines, Indonesia, Thailand and Taiwan. We cannot control the amount and timing of resources that Astellas devotes to the development or commercialization of REGNITE or to its marketing and distribution. For example, in May 2013, Astellas informed us that they did not have plans for the commercialization of REGNITE in the countries other than Japan in their licensed territory. As a result, all rights to gabapentin enacarbil in Korea, the Philippines, Indonesia, Thailand and Taiwan reverted to us. In addition, Astellas may abandon further commercialization of REGNITE in Japan, or terminate their license agreement with us at any time, which could delay or impair the development and commercialization of REGNITE and harm our business.

In addition to our partnerships with Astellas, Indivior and Dr. Reddy’s, we may enter into future partnerships or other strategic arrangements with third parties to further develop and commercialize HORIZANT/gabapentin enacarbil, such as our clinical trial agreement with the NIAAA pursuant to which the NIAAA is conducting a clinical trial of HORIZANT in patients with AUD. However, there can be no assurance that we will be able to execute on any future strategic arrangements, and our inability to do so would limit future prospects for HORIZANT which could harm our business.

If our current and potential future business partners’ preclinical studies do not produce successful results or clinical trials do not demonstrate safety and efficacy in humans, our current and potential future business partners will not be able to commercialize our product candidates.

To obtain the requisite regulatory approvals to market and sell any of our product candidates, our current and potential future business partners must demonstrate, through extensive preclinical studies and clinical trials, that the product candidate is safe and effective in humans. Preclinical and clinical testing is expensive, can take many years and has an uncertain outcome. A failure of one or more of our current and potential future business partners’ clinical trials could occur at any stage of testing. For example, in July 2010, GSK announced top-line results from a 30-week, double-blind, placebo-controlled, Phase 2 clinical trial of HORIZANT as a potential prophylactic treatment for migraine headaches in which HORIZANT did not demonstrate a statistically significant improvement on the primary endpoint when compared to placebo. In addition, long-term safety concerns may prevent the approval of any of our product candidates by a regulatory authority. For example, in February 2010, safety concerns related to a preclinical finding of pancreatic acinar cell tumors in rats delayed FDA approval of the HORIZANT NDA at that time. Furthermore, success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. In addition, the results of clinical trials by third parties evaluating a prodrug sharing the same parent drug as our prodrug candidates, including prodrugs of MMF such as TECFIDERA, developed by Biogen and approved by the FDA in March 2013, may not be indicative of the results in clinical trials that we or others may conduct with HORIZANT or that our current and potential future business partners may conduct with our product candidates. Further, unfamiliarity with novel patient-reported outcome tools, trial assessments or endpoints or with certain patient populations, including related subject drop-out rates, could result in additional cost, delay or failure of our or our current and potential future business partners’ clinical trials. For example, in 2013, we announced that our first Phase 3 clinical trial in MS patients with spasticity was unsuccessful in demonstrating that AP provided statistically significant improvement relative to placebo in the co-primary endpoints of the study.

Our current and potential future business partners may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process, which could delay or prevent our current and potential future business partners’ ability to commercialize our product candidates, including:

 

    regulators or institutional review boards may not authorize a business partner to commence a clinical trial at a prospective trial site;

 

    preclinical testing or clinical trials may produce negative or inconclusive results, which may require the conduct of additional preclinical or clinical testing or abandonment of projects that our current and potential future business partners expect to be promising;

 

    our current and potential future business partners may suspend or terminate their clinical trials if the participating patients are being exposed to unacceptable health risks;

 

    risks associated with clinical trial design may result in a failure of the clinical trial to show statistically significant results even if the product candidate is effective;

 

    regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; and

 

    the effects of our product candidates may not be the desired effects or may include undesirable side effects.

As a result of our limited resources and our decision to focus on the commercialization of HORIZANT, we may fail to capitalize on other products or product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

 

41


Table of Contents

As a result of our limited financial and managerial resources and our current strategic focus on the commercialization of HORIZANT, we are no longer conducting meaningful development of our product candidates and we are focusing our HORIZANT development and commercialization efforts on the specific indications that we believe are the most promising. As a result, we have discontinued the pursuit of development opportunities for our product candidates on our own, and we may also forego or delay the development of HORIZANT for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products, including HORIZANT, or profitable market opportunities. In this regard, we have had to make decisions on how best to allocate our resources to efficiently promote HORIZANT. We may not be correct in our decisions, which would limit the sales we could achieve from HORIZANT and could lead to our failure to capitalize on its market opportunity. In addition, we may spend valuable time and managerial and financial resources assisting in the development of product candidates with a business partner for specific indications that ultimately do not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for HORIZANT or our product candidates, we may relinquish valuable rights to HORIZANT or our product candidates through strategic arrangements in situations where it would have been more advantageous for us to retain sole rights to development and commercialization.

If we or our current and potential future business partners are not able to obtain or maintain required regulatory approvals, we or our current and potential future business partners will not be able to commercialize HORIZANT, REGNITE or our product candidates, our ability to generate revenue will be materially impaired and our business will not be successful.

Activities associated with the development and commercialization of HORIZANT and REGNITE are subject to comprehensive regulation by the FDA and other agencies in the United States and by comparable authorities in other countries. The inability to obtain or maintain FDA approval or approval from comparable authorities in other countries would prevent us and Astellas from commercializing HORIZANT or REGNITE in the United States, Japan or in other countries. In addition, we or our current and potential future business partners may never receive regulatory approval for the commercial sale of our product candidates. Moreover, even if a product candidate ultimately receives regulatory approval, the regulatory process may include significant delays that could harm our business. For example, in 2010, our former collaborator GSK received a Complete Response letter from the FDA in which a preclinical finding of pancreatic acinar cell tumors in rats precluded approval of the HORIZANT NDA for the treatment of moderate-to-severe primary RLS at that time. GSK responded to questions raised by the FDA in the Complete Response letter with an NDA resubmission and amended the NDA from a Section 505(b)(1) to a 505(b)(2) application in order for the FDA to be able to consider published gabapentin nonclinical data in their assessment of HORIZANT. HORIZANT subsequently received approval from the FDA in 2011. However, our business was harmed due to the delay in obtaining approval for HORIZANT as a treatment for moderate-to-severe primary RLS. Moreover, if the FDA requires that any of our products or product candidates be scheduled by the U.S. Drug Enforcement Agency, or DEA, we or our current and potential future business partners will be unable to continue or begin commercial sale of that product until the DEA completes scheduling proceedings. If any of our products or product candidates is classified as a controlled substance by the DEA, we or our current and potential future business partners would have to register annually with the DEA and those products or product candidates would be subject to additional regulation.

We have only limited experience in preparing and filing the applications necessary to gain regulatory approvals. The process of applying for regulatory approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the product candidates involved. The application process begins with the submission of an NDA that the FDA initially reviews and either accepts or rejects for filing. NDA submissions are complex electronic filings, which include vast compilations of data sets, integrated documents and data calculations. The FDA has substantial discretion in the submission process and may refuse to accept an NDA submission for any reason, including insufficient information or if there are errors or omissions relating to the electronic transmittal process, data entry, data compilation or formatting. For example, in 2008, GSK withdrew a previously submitted NDA for HORIZANT for the treatment of moderate-to-severe primary RLS in connection with the FDA’s request that the data from a single study be reformatted. For these reasons among others, we may not be successful in expanding HORIZANT’s label to include additional indications, including as a potential treatment for AUD.

Changes in the regulatory approval policy during the development period, changes in, or the enactment of, additional regulations or statutes or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an NDA. If the FDA were to miss a Prescription Drug User Fee Act, or PDUFA, timing goal for one of our product candidates, the development and commercialization of the product candidate by our current and potential future business partners could be delayed or impaired. For example, in 2009, the FDA notified GSK that it was extending the PDUFA timing goal for HORIZANT for the treatment of moderate-to-severe primary RLS for three months. In addition, the FDA may convene an advisory committee at any time during the review process. The advisory committee review process can be a lengthy and uncertain process that could delay the FDA’s NDA approval and delay or impair the development and commercialization of our product candidates.

        The FDA has substantial discretion in the approval process and may refuse to approve any application or decide that data submitted related to an NDA (or supplemental NDA) filing for HORIZANT or our product candidate is insufficient for approval and require additional preclinical, clinical or other studies. Varying interpretations of the data obtained from preclinical and clinical testing or other studies could delay, limit or prevent regulatory approval of any of our product candidates. As part of their review process, the FDA could require additional studies or trials to satisfy particular safety concerns. For example, although we had discussions with the FDA in 2012 regarding the studies required by the FDA to support an NDA submission for XP21279 for the potential treatment of

 

42


Table of Contents

advanced idiopathic Parkinson’s disease, when or if we are able to secure a third party business partner to pursue these studies and the approval of XP21279, the FDA could change their guidance or require additional studies, resulting in delay or the termination of any potential partnerships for XP21279. Even if the FDA or other regulatory agency approves a product candidate or the marketing of HORIZANT for any additional indications, 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 commitments or requirements for post-approval studies, including additional research and development and clinical trials, and we or our current and potential future business partners may be unable to maintain regulatory approvals for any approved products. In addition, the FDA and other agencies also may impose various civil or criminal sanctions for failure to comply with regulatory requirements, including withdrawal of product approval.

We and our current and potential future business partners will need to obtain regulatory approval from authorities in foreign countries to market HORIZANT and our product candidates in those countries. Approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions. If we or our current and potential future business partners fail to obtain approvals from foreign jurisdictions, the geographic market for HORIZANT and our product candidates would be limited.

An NDA submitted under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act would subject current and potential future business partners to the risk of a patent infringement lawsuit that would delay or prevent the review and approval of our product candidate.

The product candidates for which we are seeking a future business partner for their further development could potentially be submitted to the FDA for approval under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, as amended, or FDCA, which was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act. Section 505(b)(2) permits the submission of an NDA 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.

For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman Act, such NDAs may be required to include certifications, known as Paragraph IV certifications, that certify that any patents listed in the Patent and Exclusivity Information Addendum of the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book, with respect to any product referenced in the Section 505(b)(2) application, are invalid, unenforceable or will not be infringed by the manufacture, use or sale of the product that is the subject of the Section 505(b)(2) application. Under the Hatch-Waxman Act, the holder of patents that the Section 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the Paragraph IV certification. Filing of a patent infringement lawsuit within 45 days of the patent owner’s receipt of notice triggers a one-time, automatic, up to 30-month stay of the FDA’s ability to approve the 505(b)(2) application. If any of our current or potential future business partners provide a Paragraph IV certification, the patent holder may file a patent infringement lawsuit, triggering up to a 30-month stay on the FDA’s ability to approve our Section 505(b)(2) application. Accordingly, our current and potential future business partners could experience significant delay and patent litigation before any products resulting from our product candidates may be commercialized, if at all. A Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, or NCE, listed in the Orange Book for the referenced product has expired. The FDA may also require our current and potential future business partners to perform one or more additional clinical studies or measurements to support the change from the approved product. To avoid such potential delay or for other reasons, our current and potential future business partners may pursue a full development pathway of our product candidates under Section 505(b)(1) of the FDCA, which could be more expensive and time consuming. Even if our current and potential future business partners submit an NDA under Section 505(b)(2), the FDA may reject their future Section 505(b)(2) submissions and require them to file such submissions under Section 505(b)(1). These factors, among others, may limit the ability of our current and potential future business partners to successfully commercialize our product candidates, which could adversely affect our revenue potential and prospects.

Safety issues with HORIZANT, REGNITE or our product candidates, or the parent drugs or other components of HORIZANT, REGNITE or our product candidates, or with approved products of third parties that are similar to HORIZANT, REGNITE or our product candidates, could decrease sales of HORIZANT and REGNITE, or give rise to delays in the regulatory approval process, restrictions on labeling or product withdrawal.

Discovery of previously unknown problems, or increased focus on a known problem, with an approved product may result in restrictions on its permissible uses, including withdrawal of the medicine from the market. The label for HORIZANT currently includes warnings and precautions related to driving impairment, somnolence/sedation and dizziness, lack of interchangeability with gabapentin, suicidal behavior or ideation, multiorgan hypersensitivity, discontinuation and tumorigenic potential. Under our clinical trial agreement with the NIAAA, the NIAAA is conducting a new clinical trial evaluating HORIZANT in patients with AUD which is subject to statutory reporting of safety information and subject to FDA review. If we, the NIAAA or others later identify undesirable side effects caused by HORIZANT or any of our other product candidates that receive marketing approval:

 

    regulatory authorities may require the addition of labeling statements, specific warnings, contraindications or field alerts to physicians and pharmacies;

 

43


Table of Contents
    regulatory authorities may withdraw their approval of the product and require us to take our approved drug off the market;

 

    we may be required to change the way the product is administered, conduct additional clinical trials, change the labeling of the product or conduct a Risk Evaluation and Mitigation Strategies, or REMS, program;

 

    we may have limitations on how we promote our drugs;

 

    sales of products may decrease significantly;

 

    we may be subject to litigation or product liability claims; and

 

    our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from its sale.

HORIZANT, REGNITE and our product candidates may also be affected by the safety of the parent drugs or drugs related to our products or product candidates. Although gabapentin, baclofen (which includes the R-isomer of baclofen) and levodopa, the parent drugs of HORIZANT/REGNITE/gabapentin enacarbil, AP and XP21279, respectively, have been used successfully in patients for many years, newly observed toxicities or worsening of known toxicities, in preclinical studies of, or in patients receiving, gabapentin, baclofen or levodopa, or reconsideration of known toxicities of gabapentin, baclofen or levodopa in the setting of new indications, could result in increased regulatory scrutiny of HORIZANT/REGNITE/gabapentin enacarbil, AP and XP21279, respectively. For example, the label for baclofen, the R-isomer of which is the parent drug of AP, includes a warning that hallucinations and seizures have occurred on abrupt withdrawal of baclofen dosing without proper tapering in spasticity patients. As another example, although a product called FUMADERM, which contains fumaric acid ester compounds, including dimethyl fumarate, or DMF (another prodrug of MMF), has been approved and used in Germany for the treatment of psoriasis, FUMADERM has not been approved in the United States. In addition, in March 2013, the FDA approved Biogen’s TECFIDERA, a prodrug of MMF, as a treatment for relapsing forms of MS. Any safety concerns or other problems noted by regulators with respect to FUMADERM, DMF, TECFIDERA or MMF could increase the risk of regulatory scrutiny of XP23829, our product candidate that is a prodrug of MMF, possibly delaying or preventing any regulatory approval of XP23829. For example, it has been reported that some patients taking TECFIDERA and FUMADERM have developed progressive multifocal leukoencephalopathy, or PML, a rare and serious brain infection that can lead to severe disability or death. In addition, the label for TECFIDERA includes a warning that a fatal case of PML occurred in a patient with MS who received TECFIDERA. If a link between PML and TECFIDERA, FUMADERM, DMF and/or MMF is established, it could increase regulatory scrutiny of XP23829 or delay or prevent its approval.

The FDA has substantial discretion in the NDA approval process and may refuse to approve any application if the FDA concludes that the risk/benefit analysis of a potential drug treatment for a specific indication does not warrant approval. For example, in 2010, safety concerns related to a preclinical finding of pancreatic acinar cell tumors in rats precluded FDA approval of the HORIZANT NDA in RLS in its form at that time. Although there were similar findings of rat pancreatic acinar cell tumors following treatment with gabapentin, the parent drug of HORIZANT, the FDA has, to date, not prevented the use of gabapentin. In the 2010 Complete Response letter, the FDA noted that they had concluded that the seriousness and severity of refractory epilepsy and the benefit to patients provided by gabapentin justified the potential risk at that time. Thus, although the parent drug for, or a drug related to, one of our product candidates may be approved by the FDA in a particular indication, the FDA may conclude that our product candidate’s risk/benefit profile does not warrant approval in a different indication, and the FDA may delay or refuse to approve our product candidate. Such conclusion and refusal would prevent our current or potential future business partners from developing and commercializing our product candidates and could severely harm our business and financial condition. For example, even with the approval of TECFIDERA for relapsing forms of MS, the FDA may not agree that the risk/benefit profile of XP23829 for the treatment of psoriasis or other potential indications, if established, would warrant approval in such indications. For example, if a link between PML and TECFIDERA, FUMADERM, DMF and/or MMF is established, the FDA may determine that the risk of developing PML outweighs any benefit of XP23829 for the treatment of psoriasis, a less serious medical condition than MS. HORIZANT, REGNITE and our product candidates are engineered to be broken down by the body’s natural metabolic processes and to release the active drug and other substances. While these breakdown products are generally regarded as safe, it is possible that there could be unexpected toxicity associated with these breakdown products that will cause any or all of HORIZANT/REGNITE/gabapentin enacarbil, XP23829, XP21279 and AP to be poorly tolerated by, or toxic to, humans. Any unexpected toxicity of, or suboptimal tolerance to, our product or product candidates could reduce sales of HORIZANT and REGNITE, and delay or prevent commercialization of our product candidates by our current or potential future business partners.

        Additionally, problems with approved products marketed by third parties that utilize the same therapeutic target or that belong to the same therapeutic class as the parent drug of HORIZANT, REGNITE or our product candidates could adversely affect the commercialization of HORIZANT or REGNITE or the development of our product candidates. For example, if either gabapentin or pregabalin, drugs from Pfizer that are marketed as NEURONTIN and LYRICA, respectively, encounters unexpected toxicity problems in humans, the FDA may restrict the use of HORIZANT since it is believed to share the same therapeutic target as gabapentin and pregabalin. In 2008, the FDA added warnings to 11 antiepileptic drugs, including gabapentin, regarding an increased risk of suicide or suicidal thoughts. In 2009, the FDA approved safety label changes for all approved antiepileptic drugs, except those

 

44


Table of Contents

indicated only for short-term use, to include a warning about an increased risk of suicidal thoughts or actions. In addition, in 2011, the FDA added warnings to the labels of antiepileptic drugs regarding an increased risk of drug reaction with Eosinophilia and Systemic Symptoms, or DRESS, also known as multiorgan hypersensitivity, which has been reported in patients taking antiepileptic drugs. HORIZANT, as a compound that is believed to share the same therapeutic target as antiepileptic drugs such as gabapentin and pregabalin, has similar warnings regarding suicidality and DRESS in its label. Additional scrutiny could be placed on HORIZANT if it is found to have an increased risk of suicides or suicidal behavior. In 2010, the FDA released draft guidance recommending that prospective suicidality assessments be performed in clinical trials of any drug with central nervous system activity. We expect that the FDA will follow this guidance, and our current and potential future business partners will be required to perform suicidality assessments in all clinical trials of any of our product candidates with central nervous system activity. Finally, if the FDA determines that a drug may present a risk of substance abuse, it can recommend to the DEA that the drug be scheduled under the Controlled Substances Act. While gabapentin is not a scheduled drug at the present time, pregabalin has been scheduled as a controlled substance. Since pregabalin is a scheduled drug, it is possible that the FDA may require additional testing of HORIZANT in the future, the results of which could lead the FDA to conclude that HORIZANT should be scheduled as well. Scheduled substances are subject to DEA regulations relating to manufacturing, storage, distribution and physician prescription procedures, and the DEA regulates the amount of a scheduled substance that is available for clinical trials and commercial distribution. Accordingly, any scheduling action that the FDA or DEA may take with respect to HORIZANT may limit HORIZANT’s marketing approval. In addition, any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates would delay commercialization of our product candidates by our current or potential future business partners, which could severely harm our business and financial condition.

We may not develop additional prodrug product candidates and we also may not acquire and/or in-license other products, product candidates, programs or companies to grow and diversify our business.*

As part of a restructuring in 2010, we eliminated our discovery research department, which prevents our ability to discover additional product candidates at this time. Similarly, in connection with our strategic shift to focus on commercializing HORIZANT, in October 2015, we implemented a workforce reduction of approximately 25 employees, which workforce reduction included the substantial elimination of our research and development function. While we are seeking to enter into partnerships for the further development of XP23829 outside the United States and XP21279 globally, we are not conducting any clinical development of our product candidates and currently have no plans or the personnel necessary to conduct any such development. Accordingly, the future growth of our business is currently substantially dependent on our HORIZANT commercialization efforts. However, to grow our business over the longer term and diversify our sole product risk, we may seek to acquire and/or in-license other products, product candidates, programs or companies. Future growth through acquisition or in-licensing will depend upon the availability of suitable products, product candidates, programs or companies for acquisition or in-licensing on acceptable prices, terms and conditions. Any growth through development will depend upon our identifying and obtaining product opportunities and in some circumstances product candidates, our ability to develop those products and the availability of funding to complete such development activities and obtain regulatory approval for and successfully commercializing any new potential product opportunities. Even if appropriate opportunities are available, we may not be able to successfully identify them, or we may not have the financial resources or personnel necessary to pursue them. In this regard, to obtain additional product candidates, we may need to find appropriate internal or external development functions, which would require the expenditure of significant resources and efforts that could divert time and resources from the commercialization of HORIZANT. In addition, the competition to acquire or in-license rights to promising products, product candidates, programs and companies is fierce, and many of our competitors are large, multinational pharmaceutical and biotechnology companies with considerably more financial, development and commercialization resources and experience than we have. In order to compete successfully in the current business climate, we may have to pay higher prices for assets than may have been paid historically, which may make it more difficult for us to realize an adequate return on any acquisition. Thus, even if we succeed in identifying promising products, product candidates or programs, we may not be able to acquire rights to them on acceptable terms, or at all. If we are unable to develop or obtain suitable products or product candidates, our growth prospects will be limited, which could result in significant harm to our financial position and adversely impact our stock price. Even if we are able to successfully identify and acquire or in-license new products, product candidates, programs or companies, we cannot assure you that we will be able to successfully manage the risks associated with integrating any products, product candidates, programs or companies into our business or the risks arising from anticipated and unanticipated problems in connection with an acquisition or in-licensing. In any event, we may not be able to realize the anticipated benefits of any acquisition or in-licensing for a variety of reasons, including the possibility that a product candidate proves not to be safe or effective in clinical trials, a product fails to reach its forecasted commercial potential or the integration of a product, product candidate, program or company gives rise to unforeseen difficulties and expenditures. Any failure in identifying and managing these risks and uncertainties effectively would have a material adverse effect on our business.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our intellectual property and our business will suffer.

 

45


Table of Contents

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies, HORIZANT, REGNITE and our product candidates both in the United States and other countries. We have a number of U.S. and foreign patents, patent applications and rights to patents related to our compounds, product candidates, products and related technologies, but we cannot guarantee that issued patents will be enforceable or that pending or future patent applications will result in issued patents. Alternatively, a third-party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

The degree of future protection for our proprietary technologies, HORIZANT, REGNITE and our product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

    it is possible that we will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them;

 

    we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

 

    we might not have been the first to file patent applications for these inventions;

 

    others may independently develop similar or alternative technologies that avoid our patent rights;

 

    it is possible that any one or more of our pending patent applications will not result in issued patents;

 

    it is possible that the claims of our pending patent applications will be narrowed during prosecution, which may limit the scope of patent protection that may be obtained;

 

    our patents do not provide us with any affirmative rights to practice our technologies;

 

    any patents issued to us or our current and potential future business partners may not provide a basis for commercially viable products or may be challenged by third parties; or

 

    the patents of others may have an adverse effect on our ability to do business.

Even if valid and enforceable patents cover HORIZANT, REGNITE or our product candidates and technologies, the patents will provide protection only for a limited amount of time.

        Our and our current and potential future business partners’ ability to obtain patents is highly uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and interpretation of patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical patents outside the United States are even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. For example, in 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These changes include provisions that affect the way patent applications are being filed, prosecuted and litigated. The United States Patent Office has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective in March 2013. While we cannot predict with certainty the impact the Leahy-Smith Act will have on the operation of our business, the Leahy-Smith Act and its implementation 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, financial condition, results of operations and growth prospects. For example, the Leahy-Smith Act enacted proceedings involving post-issuance patent review procedures, such as inter partes review, or IPR, and other post-grant review pathways. Each proceeding has different eligibility criteria and different patentability challenges that can be raised. In this regard, the IPR process generally permits any person, whether they are accused of infringing the patent at issue or not, to challenge the validity of a patent on the grounds that it was anticipated or made obvious by prior art. As a result, numerous entities have challenged valuable pharmaceutical patents through the IPR process. A decision in such a proceeding adverse to our interests could result in the loss of valuable patent rights which would have a material adverse effect on our business, financial condition, results of operations and growth prospects. 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. Consequently, we may not be able to prevent third parties from practicing our inventions in 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 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 HORIZANT, REGNITE and products that may result from the development of our product candidates by our current and potential future business partners, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Our issued patents regarding HORIZANT and REGNITE and any future patents that may issue regarding these products or our product candidates or methods of using them can be challenged by our competitors who can argue such patents are invalid and/or

 

46


Table of Contents

unenforceable. For example, in 2008, a law firm on behalf of an undisclosed client filed an opposition against the patent grant of one of our European patent applications covering gabapentin enacarbil. The European Patent Office in opposition proceedings in 2010, undertook a formal review of the issues raised by the opponent and decided to maintain the grant of our European patent covering the composition of matter of gabapentin enacarbil. While the law firm that filed the opposition initially appealed the ruling on behalf of the undisclosed client, that appeal was withdrawn in 2010. Patents also may not protect HORIZANT, REGNITE or our product candidates if competitors devise ways of making them or similar products without legally infringing our patents. The FDCA and FDA regulations and policies provide incentives to manufacturers to challenge patent validity and these same types of incentives encourage manufacturers to submit NDAs that rely on literature and clinical data not prepared for or by the drug sponsor.

We may obtain patents for product candidates many years before marketing approval is obtained for any resulting products. Because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of the patent may be limited. However, we may be able to apply for patent term extension rights.

As part of the approval process of any of our product label extensions or product candidates in the United States, the FDA may grant us a data exclusivity period during which other manufacturers’ applications for approval of generic versions of our products will not be accepted and/or approved. Generic manufacturers can submit an abbreviated new drug application, or ANDA, referencing an approved product at any time after the relevant acceptance exclusivity period has tolled for the approved product, and thereby initiate a challenge to the approved product’s listed patents by way of a Paragraph IV certification. In addition, the FDA can approve an ANDA any time after the approval exclusivity period (if different from the acceptance exclusivity period) has tolled. For example, the FDA granted HORIZANT five years of data exclusivity based on it being an NCE. Thus, beginning in April 2015, at the end of the first four years of HORIZANT’s data exclusivity period, the FDA can now accept an ANDA that contains unauthorized reference to HORIZANT. Beginning in April 2016, after the full five-year data exclusivity period has tolled, the FDA can now approve such ANDA submissions. It is possible that generic manufacturers are considering attempts to seek FDA approval for a similar or identical drug as HORIZANT through submission of an ANDA, which would require a Paragraph IV certification, thereby triggering challenges to our Orange Book-listed patents. If our patents are subject to such challenges, we may need to spend significant resources to defend such challenges and we may not be able to defend our patents successfully. We expect that the approval of an ANDA that results in the launch of a similar or identical drug as HORIZANT could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As part of the approval process for a supplemental new drug application, or sNDA, for a new indication for our products, the FDA may grant a 3-year period of data exclusivity even though the drug product contains an active moiety that was previously approved and subject to an earlier data exclusivity right. However, the sNDA needs to contain reports of new clinical investigations (other than bioavailablity studies) conducted or sponsored by the entity submitting the sNDA. Under the terms of our agreement with the NIAAA, they are responsible for the conduct and financial support (with the exception of our supply of the clinical trial materials) of the ongoing AUD clinical trial for HORIZANT. As a result, if we submit an sNDA for HORIZANT based solely on the current clinical trial being conducted by the NIAAA, we may not be able to demonstrate to the FDA that we provided the type of substantial support of those clinical trial activities sufficient for a new 3-year data exclusivity right.

In June 2012, HORIZANT was granted orphan drug designation by the FDA for treatment of PHN. As a result of this designation, we are entitled to seven years of orphan drug exclusivity for HORIZANT for the management of PHN in adults. As the holder of this orphan drug exclusivity, we are required to assure the availability of sufficient quantities of HORIZANT to meet the needs of patients. Failure to do so could result in withdrawal of our orphan drug exclusivity.

In January 2016, the United States Patent and Trademark Office, or USPTO, granted a patent term extension under our granted composition-of-matter patent, U.S. Patent Number 6,818,787, or the ‘787 Patent, extending the expiry date of that patent for the HORIZANT drug product out through April 6, 2025. In accordance with the applicable laws, we are not able to obtain any additional U.S. patent term extension rights for the HORIZANT drug product and we are further not able to obtain any further U.S. patent term extension rights under the ‘787 Patent for another product.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent lifecycle. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our current and potential future business partners fail to maintain the patents and patent applications covering HORIZANT, REGNITE or our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators

 

47


Table of Contents

and other advisors may unintentionally or willfully disclose our confidential information to a third party. Enforcing a claim that a third-party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Our current and potential future partners and other research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is commonly subject to certain contractual limitations. In most cases, these individuals or entities are, at the least, precluded from publicly disclosing our confidential information and are only allowed to disclose other data or information generated during the course of the research after we have been afforded an opportunity to consider whether patent and/or other proprietary protection should be sought. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

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

Competitors and other third parties may misappropriate, infringe or otherwise violate our intellectual property rights including our patent, trademark, copyright and other proprietary rights. To counter such infringement, misappropriation or other violations, we may be required to file legal actions such as claims, suits, proceedings and/or litigation, which can be expensive, distracting and time consuming. Any such legal actions could provoke the relevant parties to assert counterclaims against us, including claims alleging that we infringe their patents, have misappropriated their proprietary rights or otherwise violated their own intellectual property rights. In addition, in a patent infringement proceeding, a court may decide that one or more of the patents we assert against a third-party is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to prevent the other party from using the technology at issue on the grounds that our patents do not cover the activities. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In such a case, we could ultimately be forced to cease our use of such marks. We may also become involved in other disputes relating to our intellectual property rights, such as opposition, post-grant review, derivation, interference or re-examination proceedings before the USPTO or its foreign counterparts and, if we are unable to successfully resolve any such disputes, we could lose rights in our valuable intellectual property. In any intellectual property disputes, even if we are successful, any award of monetary damages, injunction or other remedy we receive may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Third-party claims of intellectual property infringement would require us to spend significant time and money and could prevent us and our current and potential future business partners from developing or commercializing our products.*

Our commercial success depends in part on not infringing the patents and proprietary rights of other parties and not breaching any licenses that we have entered into with regard to our technologies and products. Because others may have filed, and in the future are likely to file, patent applications covering products or other technologies of interest to us that are similar or identical to ours, patent applications or issued patents of others may have priority over our patent applications or issued patents. For example, we are aware of a family of third-party patent applications relating to prodrugs of gabapentin. We believe the applications have been abandoned in the United States, the European Patent Office, Canada, Australia and the United Kingdom. We believe that in all countries in which we hold or have licensed rights to patents or patent applications related to HORIZANT, REGNITE and gabapentin enacarbil, the composition-of-matter patents on gabapentin, the metabolite of gabapentin enacarbil, have all expired. However, it is possible that a judge or jury will disagree with our conclusions regarding the expiration of these patents that may relate to HORIZANT, and we could incur substantial costs in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits. In addition, there could be other third-party patents or patent applications covering certain aspects of our and our current and potential future business partners’ planned development or commercialization activities that we are not yet aware of. Any legal action against our current or potential future business partners or us claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us or our current or potential future business partners to potential injunction that could prevent us or our current or potential future business partners from selling the affected products, expose us to potential liability for damages and require our current or potential future business partners or us to obtain a license to continue to manufacture or market the affected products and processes. Licenses required under any of these patents may not be available on commercially acceptable terms, if at all. Failure to obtain such licenses could materially and adversely affect our and our current and potential future business partners’ ability to develop, commercialize and sell HORIZANT, REGNITE or our product candidates. Such legal actions against us could also include the theory of contributory infringement, or claiming that because our prodrugs are broken down in the body into an active metabolite and other substances, that we have infringed on patents that cover the use of the active metabolite. We believe that there may continue to be significant litigation in the biotechnology and pharmaceutical industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our management and financial resources and we may not prevail in any such litigation.

 

48


Table of Contents

Furthermore, our success will depend, in part, on our current and potential future business partners’ ability to develop our product candidates in current indications of interest or opportunities in other indications. Court decisions have indicated that the exemption from patent infringement afforded by the Hatch-Waxman Act does not encompass all research and development activities associated with product development. In some instances, we or our current and potential future business partners may be required to obtain licenses to third-party patents to conduct development activities, including activities that may have already occurred. It is not known whether any license required under any of these patents would be made available on commercially acceptable terms, if at all. Failure to obtain such licenses could materially and adversely affect any continued development product candidates and could result in the failure of our current or potential future business partners to bring new products resulting from our product candidates to market. If we are required to defend against patent suits brought by third parties relating to third-party patents that may be relevant to development activities, or if we initiate such suits, we could incur substantial costs in litigation. Moreover, an adverse result from any legal action in which we are involved could subject us to damages and/or prevent our current and potential future business partners from conducting development activities on our product candidates.

We have relied, and may in the future rely, on third parties to conduct preclinical and clinical trials on our behalf. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for, or commercialize, any future product candidates or HORIZANT in any additional indications.

We do not have the ability to independently conduct clinical trials, and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, collaborators, partners and contract laboratories, to conduct any clinical trials that we may in the future choose to conduct. We have, in the ordinary course of business, entered into agreements with such third parties, and we may continue to do so to the extent we chose in the future to pursue the development of any future product candidates, for the conduct of HORIZANT post-marketing studies and/or the development of HORIZANT for any additional indications. Nonetheless, we, as the sponsor, are responsible for confirming that each of our clinical trials that we may conduct is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. For example, we would need to prepare, and ensure our compliance with, various procedures required under good clinical practices, even though third-party contract research organizations have prepared and are complying with their own, comparable procedures. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our potential future development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for any future product candidates, or successfully commercialize HORIZANT.

As an illustrative example, in 2011, the FDA announced that certain bioanalytical studies conducted by a contract research organization may need to be repeated or confirmed by the pharmaceutical company sponsors of the marketing applications that included such studies. The FDA’s decision was the result of two inspections and an internal audit at a facility that identified significant instances of misconduct and violations of federal regulations, including falsification of documents and manipulation of samples. Although we have not contracted with this contract research organization for any studies or clinical trials, if one of the contract research organizations that conducted trials on our behalf were found to have similar or other violations, the FDA may require such trials to be repeated or it may affect the approvability of our product candidates and harm our business.

Management transition creates uncertainties and could harm our business.

We have recently had significant changes in executive leadership, and more could occur. Effective September 29, 2015, Ronald W. Barrett, Ph.D., retired as our Chief Executive Officer and as a member of our Board of Directors. In connection with Dr. Barrett’s resignation, Vincent J. Angotti, who was then serving as our Executive Vice President and Chief Operating Officer, was appointed as our Chief Executive Officer and appointed to our Board of Directors.

As a result of the recent changes in our management team, Mr. Angotti has taken on substantially more responsibility for the management of our business and of our financial reporting, which has resulted in greater workload demands and could divert his attention away from certain key areas of our business. Disruption to our organization as a result of executive management transition may have a detrimental impact on our ability to implement our strategy and could have a material adverse effect on our business, financial condition and results of operations.

Changes to company strategy, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management transition inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution and disrupt our ability to successfully manage and grow our business, and our results of operations and financial condition could suffer as a result.

 

49


Table of Contents

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop or commercialize HORIZANT. *

Our success depends on our continued ability to attract, retain and motivate highly qualified management, commercial, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading clinicians. If we are not able to retain our key personnel, we may not be able to successfully develop or commercialize HORIZANT. Competition, and our plans to relocate our corporate headquarters in 2016 due to the expiration of our current facility lease, may limit our ability to hire and/or retain highly qualified personnel on acceptable terms. Moreover, none of our employees have employment commitments for any fixed period of time and could leave our employment at will. We do not carry “key person” insurance covering members of senior management or key scientific personnel. If we fail to identify, attract and retain qualified personnel, we may be unable to continue our HORIZANT development and commercialization activities.

In October 2015, we announced a reduction of approximately 25 employees following our announcement that we were discontinuing internal development of XP23829 in connection with our strategic shift to focus on the commercialization of HORIZANT. In addition, we announced past workforce reductions in each of June 2013, May 2012 and March 2010, and our history of implementing workforce reductions, along with the potential for future workforce reductions, may negatively affect our ability to retain and/or attract talented employees. Further, to the extent we experience additional management transition, competition for top management is high and it may take many months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.

We expect that we will relocate our corporate headquarters to Redwood City, California in May 2016. We believe that the move of our corporate headquarters from Santa Clara, California, to Redwood City, California, may cause employee turnover and may make retaining key employees more difficult.

If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages.

Our development activities involve the use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We, our current and potential future business partners, the third parties that conduct clinical trials on our behalf and the third parties that manufacture HORIZANT or our product candidates are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and waste products. The cost of compliance with these laws and regulations could be significant. The failure to comply with these laws and regulations could result in significant fines and work stoppages and may harm our business.

Our facility is located in California’s Silicon Valley, in an area with a long history of industrial activity and use of hazardous substances, including chlorinated solvents. Environmental studies conducted prior to our leasing of the site found levels of metals and volatile organic compounds in the soils and groundwater at our site. While these constituents of concern predated our occupancy, certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liabilities on current operators of real property for the cost of removal or remediation of hazardous substances. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. As a result, while we have not been, we cannot rule out the possibility that we could in the future be held liable for costs to address contamination at the property beneath our facility, which costs could be material.

Our facility is located near known earthquake fault zones, and the occurrence of an earthquake, extremist attack or other catastrophic disaster could cause damage to our facilities and equipment, which could require us to cease or curtail operations.

Our facility is located near known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. In 1989, a major earthquake struck this area and caused significant property damage and a number of fatalities. We are also vulnerable to damage from other types of disasters, including power loss, attacks from extremist organizations, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.

In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property, personally identifiable information and proprietary or confidential business information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, all ranging in sophistication from an individual hacker to a

 

50


Table of Contents

state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past year, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. In addition, a data breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with federal and/or state breach notification laws, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of product revenue. Cyber-attacks could also cause us to incur significant remediation costs, result in product development or commercialization delays, disrupt key business operations, cause us to incur financial loss and other regulatory penalties because of lost or misappropriated information, including sensitive patient data, and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business.

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

Our ability to use our federal and state net operating loss, or NOL, carryforwards to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the NOL carryforwards, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to use all of our NOL carryforwards. In addition, utilization of NOL carryforwards to offset potential future taxable income and related income taxes that would otherwise be due is subject to annual limitations under the “ownership change” provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions, which may result in the expiration of NOL carryforwards before future utilization. In general, under the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research and development tax credits) to offset its post-change taxable income or taxes may be limited. Our prior equity offerings, conversions of the 2022 Notes, and other changes in our stock ownership, some of which are outside of our control, may have resulted or could in the future result in an ownership change. If a limitation were to apply, utilization of our domestic NOL and tax credit carryforwards could be limited in future periods and a portion of the carryforwards could expire before being available to reduce future income tax liabilities.

Risks Related to Our Common Stock

Our stock price historically has been volatile and is likely to continue to be volatile in the future, and purchasers of our common stock could incur substantial losses.*

The market price of our common stock, and the market prices of securities of biopharmaceutical companies in general, have been highly volatile. In this regard, the market price of our common stock is likely to continue to be subject to wide fluctuations. The market price of our common stock may be influenced by many factors, including:

 

    the commercial sales of HORIZANT, REGNITE or any of our other products that may result from our product candidates that may in the future be approved by the FDA or its foreign counterparts;

 

    the costs to maintain adequate sales, marketing and commercial capabilities to commercialize HORIZANT;

 

    adverse results or delays in clinical trials;

 

    the timing of achievement of our clinical, regulatory, collaborating, partnering and other milestones, such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or the establishment of strategic arrangements for the development and commercialization of one or more of our product candidates;

 

    announcement of FDA approvability, approval or non-approval of our product candidates, and the timing of the FDA review process;

 

    actions taken by regulatory agencies with respect to HORIZANT, REGNITE or our product candidates, our current and potential future business partners’ clinical trials or our sales and marketing activities;

 

    actions taken by regulatory agencies with respect to products or drug classes related to HORIZANT, REGNITE or our product candidates;

 

    problems in our manufacturing or supply chain that limit or exhaust the quantity of supplies of HORIZANT that are available to patients;

 

    partnering with third-party business partners for the development of our product candidates;

 

    changes in our current and potential future business partners’ business strategies;

 

51


Table of Contents
    developments in our business relationships with Astellas, Indivior, Dr. Reddy’s and/or the NIAAA, including potential disputes or the termination or further modification of our agreements with Astellas, Indivior. Dr. Reddy’s and/or the NIAAA;

 

    regulatory developments in the United States and foreign countries;

 

    changes in the structure of healthcare payment systems;

 

    any intellectual property matter involving us, including infringement lawsuits;

 

    actions taken by regulatory agencies with respect to our or our current and potential future business partners’ compliance with regulatory requirements;

 

    announcements or actions by stockholder activists;

 

    possible sales of our common stock by holders of the 2022 Notes who may view the 2022 Notes as a more attractive means of equity participation in our company;

 

    the conversion of some or all of the 2022 Notes and any sales in the public market of shares of our common stock issued upon conversion of the 2022 Notes;

 

    hedging or arbitrage trading activity involving our common stock, including in connection with arbitrage strategies employed or that may be employed by investors in the 2022 Notes;

 

    announcements of technological innovations or new products by us or our competitors;

 

    market conditions for equity investments in general, or the biotechnology or pharmaceutical industries in particular;

 

    changes in financial estimates or recommendations by securities analysts;

 

    sales of large blocks of our common stock;

 

    sales of our common stock by our executive officers, directors and significant stockholders;

 

    restatements of our financial results and/or material weaknesses in our internal controls; and

 

    the loss of any of our key scientific or management personnel.

The stock markets in general and the markets for biotechnology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. For example, recent negative publicity regarding drug pricing and price increases by pharmaceutical companies has negatively impacted, and may continue to negatively impact, the markets for biotechnology stocks. These broad market fluctuations have adversely affected and may in the future adversely affect the trading price of our common stock. In the past, purported class action lawsuits have often been instituted against companies, including our company, whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs, which would hurt our financial condition and results of operations, divert management’s attention and resources and possibly delay our clinical trials or commercialization efforts.

Fluctuations in our operating results could cause our stock price to decline. Likewise, if our operating and financial performance in any given period does not meet the guidance that we have provided to the public our stock price could also decline. *

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. In addition, we have only been commercializing HORIZANT since May 2013 and although we provide sales guidance for HORIZANT from time to time, you should not rely on HORIZANT sales results in any period as being indicative of future performance. In addition, HORIZANT sales guidance and other financial and operating guidance we may provide from time to time is based on assumptions that may be incorrect or that may change from quarter to quarter, and such guidance is subject to the risks and uncertainties described in this report and in our other public filings and public statements.

The following factors are likely to result in fluctuations of our operating results from quarter to quarter and year to year:

 

    the level and timing of commercial sales of HORIZANT, REGNITE or any other products that may result from our product candidates approved by the FDA or its foreign counterparts;

 

    the costs to maintain adequate sales, marketing and commercial capabilities to commercialize HORIZANT, and the costs associated with fulfilling the remaining, and any additional future, PMCs and PMRs for HORIZANT;

 

    changes in the amount of deductions from gross sales, including government-mandated rebates, chargebacks and discounts that can vary because of changes to the government discount percentage or due to different levels of utilization by entities entitled to government rebates and discounts and changes in patient demographics;

 

    adverse results or delays in our or our current and potential future business partners’ clinical trials;

 

52


Table of Contents
    the timing and achievement of clinical, regulatory, strategic and other milestones, such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or our establishment of strategic arrangements for one or more of our product candidates;

 

    announcement of FDA approvability, approval or non-approval of our product candidates and the timing of the FDA review process;

 

    actions taken by regulatory agencies with respect to HORIZANT, REGNITE or our product candidates, our clinical trials, our current and potential future business partners’ clinical trials or our sales and marketing activities;

 

    actions taken by regulatory agencies with respect to products or drug classes related to HORIZANT, REGNITE or our product candidates;

 

    problems in our manufacturing or supply chain that limit or exhaust the quantity of supplies of HORIZANT that are available to patients;

 

    changes in our current and potential future business partners’ business strategies;

 

    developments in our relationship with our current and potential future business partners, including potential disputes or the termination or modification of our agreements;

 

    actions taken by regulatory agencies with respect to our or our current and potential future business partners’ compliance with regulatory requirements;

 

    regulatory developments in the United States and foreign countries;

 

    changes in the structure of healthcare payment systems;

 

    any intellectual property matter involving us, including patent infringement lawsuits; and

 

    announcements of technological innovations or new products by us or our competitors.

Due to these fluctuations in our operating results, a period-to-period comparison of our results of operations may not be a good predictor of our future performance. For example, due primarily to the recognition of revenues from upfront, milestone and contingent event-based payments from our agreements with Astellas, GSK and/or Indivior, we were profitable for the year ended December 31, 2007, in the three months ended June 30, 2011 and in the three months ended September 30, 2014. However, while recognition of these revenues resulted in a profitable year or quarter for those periods, we incurred net losses in each full year since 2007. In any particular financial period, the actual or anticipated fluctuations in our operating results could be below our guidance and/or the expectations of securities analysts or investors and our stock price could decline. In addition, if, in the future, we reduce our guidance for our operating or financial results for a particular period, our stock price may decline.

We may become subject to increased stockholder activism efforts that each could cause a material disruption to our business.

Certain influential institutional investors and hedge funds have taken steps to involve themselves in the governance and strategic direction of certain companies due to governance or strategic-related disagreements between such companies and such stockholders. For example, Clinton Relational Opportunity Master Fund, L.P. conducted a proxy contest with respect to matters voted upon at our 2014 annual meeting of stockholders, which contest followed multiple communications to us urging a change in our capital allocation strategy away from our HORIZANT commercialization efforts and a change in our management. Responding to this proxy contest was time-consuming and was a significant distraction for our board of directors, management and employees, and diverted the attention of our board of directors and senior management from the pursuit of our business strategy. The expenses for legal and advisory fees and expenses and associated costs incurred in connection with this proxy contest were substantial and increased our operating expenses for the first half of 2014 by approximately $1.2 million. Increased or future stockholder activism efforts could result in substantial costs and a further diversion of management’s attention and resources, which could harm our business and adversely affect the market price of our common stock.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to, and reporting on, the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, or if we fail to maintain effective internal control over financial reporting around our commercial promotion of HORIZANT, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

 

53


Table of Contents

Because a small number of existing stockholders own a large percentage of our voting stock, they may be able to exercise significant influence over our affairs, acting in their best interests and not necessarily those of other stockholders.*

As of April 15, 2016, our executive officers, directors and holders of 5% or more of our outstanding common stock, based upon information known to us and derived from Schedules 13G filed with the SEC, beneficially owned approximately 70% of our common stock. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the market price of our common stock.

Anti-takeover provisions in our charter documents and under Delaware law, and the provisions in the indenture governing the 2022 Notes, could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws may delay or prevent an acquisition of us, a change in our management or other changes that stockholders may consider favorable. These provisions include:

 

    a classified board of directors;

 

    a prohibition on actions by our stockholders by written consent;

 

    the ability of our board of directors to issue preferred stock without stockholder approval, which could be used to make it difficult for a third party to acquire us;

 

    notice requirements for nominations for election to the board of directors; and

 

    limitations on the removal of directors.

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

Furthermore, the indenture governing the 2022 Notes requires us to repurchase the 2022 Notes for cash if we undergo certain fundamental changes and, in certain circumstances, to increase the conversion rate for a holder of 2022 Notes. A takeover of us may trigger the requirement that we repurchase the 2022 Notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in a business combination transaction with us.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management, and could under certain circumstances, reduce the market price of our common stock.

If there are large sales of our common stock, the market price of our common stock could drop substantially.*

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly. As of April 15, 2016, we had 63,526,681 outstanding shares of common stock, substantially all of which may be sold in the public market without restriction. In addition, future issuances by us of our common stock upon the exercise or settlement of equity-based awards and conversions of the 2022 Notes would dilute existing stockholders’ ownership interest in our company and any sales in the public market of these shares of common stock, or the perception that these sales might occur, could also adversely affect the market price of our common stock.

 

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

There were no unregistered sales of equity securities during the three months ended March 31, 2016.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

54


Table of Contents
Item 5. Other Information

None.

 

55


Table of Contents
Item 6. Exhibits

 

Exhibit

Number

  

Description of Document

    3.1    Amended and Restated Certificate of Incorporation of XenoPort, Inc. (1)
    3.2    Certificate of Amendment of Amended and Restated Certificate of Incorporation of XenoPort, Inc. (2)
    3.3    Certificate of Amendment of Amended and Restated Certificate of Incorporation of XenoPort, Inc. (3)
    3.4    Certificate of Designation of Series A Junior Participating Preferred Stock (4)
    3.5    Amended and Restated Bylaws of XenoPort, Inc., as amended effective May 19, 2015 (5)
    4.1    Specimen Common Stock Certificate (6)
    4.2    Form of Right Certificate (7)
    4.3    Rights Agreement, dated as of December 15, 2005, by and between XenoPort, Inc. and Mellon Investor Services LLC (8)
    4.4    Amendment No. 1 to Rights Agreement, dated as of January 29, 2015, by and between the Company and Computershare Inc., successor rights agent to Computershare Shareowner Services LLC (f/k/a Mellon Investor Services LLC) (9)
    4.5    Indenture, dated as of February 3, 2015, between XenoPort, Inc. and U.S. Bank National Association, including the form of 2.50% Convertible Senior Note due 2022 (10)
    4.6    Form of Common Stock Warrant Agreement and Warrant Certificate (11)
  10.1*    2016 Executive Compensation Information (12)
  10.2*    Employee Bonus Retention Agreement, dated January 26, 2016, by and between XenoPort, Inc. and William G. Harris (13)
  10.3†    License, Development and Commercialization Agreement, dated as of March 26, 2016, between XenoPort, Inc. and Dr. Reddy’s Laboratories, S.A.
  31.1    Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18U.S.C.§1350) (14)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Represents a management contract or compensation plan or arrangement.
Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission.
(1) Incorporated herein by reference to Exhibit 3.1 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.
(2) Incorporated herein by reference to Exhibit 3.2 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.
(3) Incorporated herein by reference to Exhibit 3.3 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.

 

56


Table of Contents
(4) Incorporated herein by reference to Exhibit 3.1 of our current report on Form 8-K (File No. 000-53129), as filed with the SEC on December 16, 2005.
(5) Incorporated herein by reference to Exhibit 3.4 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.
(6)  Incorporated herein by reference to Exhibit 4.1 of our registration statement on Form S-1, as amended (File No. 333-122156), as filed with the SEC on April 13, 2005.
(7) Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.
(8) Incorporated herein by reference to Exhibit 4.2 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on December 16, 2005.
(9) Incorporated herein by reference to Exhibit 4.2 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on February 3, 2015.
(10) Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on February 3, 2015.
(11) Incorporated herein by reference to Exhibit 4.6 of our Registration Statement on Form S-3 (File No. 333-206238), as filed with the SEC on August 7, 2015.
(12) Incorporated herein by reference to Exhibit 10.41 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on January 29, 2016.
(13) Incorporated herein by reference to Exhibit 10.42 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on January 29, 2016.
(14) This certification accompanies the quarterly report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

57


Table of Contents

SIGNATURES

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

 

  XenoPort, Inc.
  (Registrant)
May 5, 2016  

/S/ Vincent J. Angotti

  Vincent J. Angotti
  Chief Executive Officer and Director
  (principal executive officer)
May 5, 2016  

/S/ WILLIAM G. HARRIS

  William G. Harris
  Senior Vice President of Finance and Chief Financial Officer
  (principal financial and accounting officer)

 

58


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description of Document

    3.1    Amended and Restated Certificate of Incorporation of XenoPort, Inc. (1)
    3.2    Certificate of Amendment of Amended and Restated Certificate of Incorporation of XenoPort, Inc. (2)
    3.3    Certificate of Amendment of Amended and Restated Certificate of Incorporation of XenoPort, Inc. (3)
    3.4    Certificate of Designation of Series A Junior Participating Preferred Stock (4)
    3.5    Amended and Restated Bylaws of XenoPort, Inc., as amended effective May 19, 2015 (5)
    4.1    Specimen Common Stock Certificate (6)
    4.2    Form of Right Certificate (7)
    4.3    Rights Agreement, dated as of December 15, 2005, by and between XenoPort, Inc. and Mellon Investor Services LLC (8)
    4.4    Amendment No. 1 to Rights Agreement, dated as of January 29, 2015, by and between the Company and Computershare Inc., successor rights agent to Computershare Shareowner Services LLC (f/k/a Mellon Investor Services LLC) (9)
    4.5    Indenture, dated as of February 3, 2015, between XenoPort, Inc. and U.S. Bank National Association, including the form of 2.50% Convertible Senior Note due 2022 (10)
    4.6    Form of Common Stock Warrant Agreement and Warrant Certificate (11)
  10.1*    2016 Executive Compensation Information (12)
  10.2*    Employee Bonus Retention Agreement, dated January 26, 2016, by and between XenoPort, Inc. and William G. Harris (13)
  10.3†    License, Development and Commercialization Agreement, dated as of March 26, 2016, between XenoPort, Inc. and Dr. Reddy’s Laboratories, S.A.
  31.1    Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18U.S.C.§1350) (14)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Represents a management contract or compensation plan or arrangement.
Confidential treatment has been requested as to certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission.
(1) Incorporated herein by reference to Exhibit 3.1 of our quarterly report on Form 10-Q (File No. 000-51329) for the period ended June 30, 2005, as filed with the SEC on August 11, 2005.
(2) Incorporated herein by reference to Exhibit 3.2 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.
(3) Incorporated herein by reference to Exhibit 3.3 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.

 

59


Table of Contents
(4) Incorporated herein by reference to Exhibit 3.1 of our current report on Form 8-K (File No. 000-53129), as filed with the SEC on December 16, 2005.
(5) Incorporated herein by reference to Exhibit 3.4 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on May 22, 2015.
(6) Incorporated herein by reference to Exhibit 4.1 of our registration statement on Form S-1, as amended (File No. 333-122156), as filed with the SEC on April 13, 2005.
(7) Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on December 16, 2005.
(8) Incorporated herein by reference to Exhibit 4.2 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on December 16, 2005.
(9) Incorporated herein by reference to Exhibit 4.2 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on February 3, 2015.
(10) Incorporated herein by reference to Exhibit 4.1 of our current report on Form 8-K (File No. 000-51329), as filed with the SEC on February 3, 2015.
(11) Incorporated herein by reference to Exhibit 4.6 of our Registration Statement on Form S-3 (File No. 333-206238), as filed with the SEC on August 7, 2015.
(12) Incorporated herein by reference to Exhibit 10.41 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on January 29, 2016.
(13) Incorporated herein by reference to Exhibit 10.42 of our current report on Form 8-K (File No. 000-51329), filed with the SEC on January 29, 2016.
(14) This certification accompanies the quarterly report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

60