LJPC2018
LJPC2018
LJPC2018
FORM 10-K
OR
California
33-0361285
(State or other jurisdiction of incorporation or organization)
Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Securities Act. Yes o No x
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 the filing requirements for the
past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files). Yes x No o
Accelerated filer
x
Non-accelerated filer
o
If an emerging growth company, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of voting and non-voting common stock held by non-
affiliates of the Company as of June 29, 2018 was approximately $603.7 million,
based on the closing price on the Nasdaq Capital Market reported for such date.
Shares of common stock held by each officer and director and by each person who is
known to own 10% or more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates of the Company. This determination of
affiliate status is not necessarily a conclusive determination for other purposes.
As of February 20, 2019, there were 27,076,171 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1. Business
1
Item 1A. Risk Factors
13
Item 1B. Unresolved Staff Comments
26
Item 2. Properties
26
Item 3. Legal Proceedings
26
Item 4. Mine Safety Disclosures
26
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
26
Item 6. Selected Financial Data
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
31
Item 8. Financial Statements and Supplementary Data
32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
32
Item 9A. Controls and Procedures
32
Item 9B. Other Information
34
PART III
This Annual Report on Form 10-K contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can be identified by words such as “intends,” “believes,” “anticipates,”
“indicates,” “plans,” “expects,” “suggests,” “may,” “should,” “potential,”
“designed to,” “will” and similar references. In addition, any statements that
refer to expectations, intentions, projections or other characterizations of future
events or circumstances are forward-looking statements. These statements relate to
future events or the Company’s anticipated future results of operations. These
statements are only predictions and involve known and unknown risks, uncertainties
and other factors, which may cause actual results to be materially different from
these forward-looking statements. The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
they were made. Certain of these risks, uncertainties, and other factors are
described in greater detail in the Company’s filings with the U.S. Securities and
Exchange Commission (SEC), all of which are available free of charge on the SEC’s
website www.sec.gov. Actual results may differ materially from those expressed or
implied in such statements. These risks include, but are not limited to, risks
relating to: our ability to successfully commercialize GIAPREZATM (angiotensin II);
the timing for commencement of preclinical studies and clinical studies; the
anticipated timing for completion of such studies and trials, and the anticipated
timing for regulatory actions; the success of future development activities for our
product candidates; potential indications for which our product candidates may be
developed; and the expected duration over which the Company’s cash balances will
fund its operations.
Important factors that could cause our actual results and financial condition to
differ materially from those indicated in the forward-looking statements include,
among others:
•
our ability to successfully commercialize, market and achieve market acceptance of
GIAPREZATM (angiotensin II), formerly known as LJPC-501, and other product
candidates, including our positioning relative to competing products;
•
our ability to grow net sales of GIAPREZA;
•
our ability to meet the demand for GIAPREZA in a timely manner;
•
the timing and prospects for approval of GIAPREZA by the European Medicines Agency
(EMA) or other regulatory authorities;
•
potential market sizes for our products, including the market for the treatment of
septic or other distributive shock;
•
the anticipated treatment of data by the FDA, EMA or other regulatory authorities
of La Jolla’s product candidates;
•
the cost of producing and selling GIAPREZA;
•
unforeseen safety issues from the administration of product and product candidates
in patients;
•
the timing, costs, conduct and outcome of preclinical studies and clinical studies;
•
the expectation for future clinical and regulatory milestones, such as NDA
submission and expected timing for commencement and completion of clinical studies;
•
the risk that our clinical studies with our product candidates may not be
successful in evaluating their safety and tolerability or providing evidence of
efficacy;
•
the successful and timely completion of clinical studies;
•
our plans and timing with respect to seeking regulatory approvals and uncertainties
regarding the regulatory process;
•
the availability of funds and resources to pursue our research and development
projects, including clinical studies with our product candidates;
•
uncertainties associated with obtaining and enforcing patents and the availability
of regulatory exclusivity;
•
the uncertainty of obtaining raw materials or finished products supplies from third
parties (some of which may be single sourced) and other related supply and
manufacturing difficulties, interruptions and delays;
•
our estimates for future performance including but not limited to net sales and net
cash used in operating activities for the full-year 2019;
•
our ability to hire and retain our key employees;
•
our estimates regarding our capital requirements and our needs for, and ability to
obtain, additional financing;
•
the expected duration over which the Company’s cash balances will fund its
operations; and
•
those risk factors identified in this Annual Report on Form 10-K under the heading
“Risk Factors” and in other filings the Company periodically makes with the SEC.
PART I
In this Annual Report on Form 10-K, all references to “we,” “our,” “us,” “La Jolla”
and “the Company” refer to La Jolla Pharmaceutical Company, a California
corporation, and our subsidiaries, including La Jolla Pharma, LLC, on a
consolidated basis.
Item 1. Business.
Overview
La Jolla Pharmaceutical Company is a biopharmaceutical company focused on the
discovery, development and commercialization of innovative therapies intended to
significantly improve outcomes in patients suffering from life-threatening
diseases. GIAPREZATM (angiotensin II), formerly known as LJPC-501, was approved by
the U.S. Food and Drug Administration (FDA) on December 21, 2017 as a
vasoconstrictor indicated to increase blood pressure in adults with septic or other
distributive shock. LJPC-0118 is La Jolla’s investigational product for the
treatment of severe malaria. LJPC-401 (synthetic human hepcidin), a clinical-stage
investigational product, is being developed for the potential treatment of
conditions characterized by iron overload, such as hereditary hemochromatosis, beta
thalassemia, sickle cell disease, myelodysplastic syndrome and polycythemia vera.
In June 2018, we announced that the Marketing Authorization Application (MAA) for
GIAPREZA was validated by the EMA. Validation of the MAA confirms that the
submission is complete and starts the EMA’s centralized review process. This
followed our announcement in September 2017, in which we reported that the EMA’s
Committee for Medicinal Products for Human Use (CHMP) issued favorable Scientific
Advice regarding the EU regulatory pathway for GIAPREZA. We expect a decision on
the GIAPREZA MAA by the EMA in June 2019. If approved, GIAPREZA could be available
for marketing in the EU in early 2020.
LJPC-0118
We plan to file an NDA for LJPC-0118 with the FDA in the fourth quarter of 2019.
LJPC-401
overload diseases such as beta thalassemia (BT), sickle cell disease (SCD),
myelodysplastic syndrome (MDS) and polycythemia vera.
BT, SCD and MDS are genetic diseases of blood cells that can cause life-threatening
anemia and usually require frequent and life-long blood transfusions. These blood
transfusions cause excessive iron accumulation in the body, which is toxic to vital
organs, such as the liver and heart. In addition, the underlying anemia causes
excessive iron accumulation independent of blood transfusions.
In 2015, the EMA Committee for Orphan Medicinal Products (COMP) designated LJPC-401
as an orphan medicinal product for the treatment of beta thalassemia intermedia and
major. In 2016, the EMA COMP designated LJPC-401 as an orphan medicinal product for
the treatment of SCD.
In June 2018, two presentations on LJPC-401 were given at the 23rd Congress of the
European Hematology Association (EHA). The first was an oral presentation, entitled
“A Phase 1, Open-Label Study to Determine the Safety, Tolerability, and
Pharmacokinetics of Escalating Doses of LJPC-401 (Synthetic Human Hepcidin) in
Patients with Iron Overload.” The second was a poster presentation, entitled “A
Phase 1, Placebo-Controlled Study to Determine the Safety, Tolerability, and
Pharmacokinetics of Escalating Subcutaneous Doses of LJPC-401 (Synthetic Human
Hepcidin) in Healthy Adults.”
LJ401-HH01
We expect to disclose the topline results of LJ401-HH01 in the second half of 2019.
LJ401-BT01
In September 2016, we announced that we reached agreement with the EMA on the
design of a pivotal study of LJPC-401 for the treatment of BT patients suffering
from iron overload, a major unmet need in an orphan patient population. In December
2017, we announced the initiation of LJ401-BT01, a pivotal, multinational,
multicenter, randomized, controlled study that is designed to evaluate the safety
and efficacy of LJPC-401 as a treatment for BT patients who, despite chelation
therapy, have cardiac iron levels above normal. The primary efficacy endpoint of
this study is the change in iron content in the
We have not had long-term agreements with any third parties and will likely
continue to not have long-term arrangements as they relate to our commercial
product and clinical and preclinical product candidates. In all of our
manufacturing and processing agreements, we require that third-party contract
manufacturers produce active pharmaceutical ingredients (API) and finished products
in accordance with the FDA’s current Good Manufacturing Practices (cGMP) and all
other applicable laws and regulations. We maintain confidentiality agreements with
potential and existing manufacturers in order to protect our proprietary rights
related to our product and product candidates.
With regard to GIAPREZA, we have utilized third parties to manufacture the API,
formulate, fill and finish, and perform the analytical release testing of the drug
product. We have also completed our commercial scale-up of manufacturing process
development and the validation of commercial production runs. The commercial
success of GIAPREZA will depend in part on the ability of our contract
manufacturers to produce cGMP-compliant API and drug product in commercial
quantities and at competitive costs. Further, some of the critical materials and
components used in manufacturing GIAPREZA are sourced from single suppliers. An
interruption in the supply of key materials could significantly delay our sales or
increase our expenses.
Patents and other proprietary rights are important to our business. As part of our
strategy to protect our current product and product candidates and to provide a
foundation for future products, we have filed a number of patent applications and
have licensed rights from third parties for other patent applications related to
our product candidates.
As of December 31, 2018, we owned or had the rights to 49 issued patents (21 U.S.
and 28 foreign) and 100 pending applications (22 U.S. and 78 foreign). These
patents and patent applications owned or licensed by us cover GIAPREZA, LJPC-401
and other product candidates.
United States
Foreign
Description
Issued
Pending
Expiration
Issued
Pending
Expiration
GIAPREZA
12
2029 - 2038
49
2034 - 2037
LJPC-401
2022 - 2038
18
2022 - 2037
Other
13
2022 - 2038
21
11
2022 - 2037
Material Contracts
In December 2014, we entered into a patent license agreement with the George
Washington University (GW), which the parties amended and restated on March 1,
2016. Pursuant to the amended and restated license agreement, GW exclusively
licensed to us certain intellectual property rights relating to GIAPREZA, including
the exclusive rights to certain issued patents
and patent applications covering GIAPREZA. Under the license agreement, we are
obligated to use commercially reasonable efforts to develop, commercialize, market
and sell GIAPREZA. We have paid a one-time license initiation fee, annual
maintenance fees, an amendment fee, additional payments following the achievement
of certain development and regulatory milestones, and royalty payments. We may be
obligated to make additional milestone payments of up to $0.5 million in the
aggregate. Following the commencement of commercial sales of GIAPREZA, we paid
tiered royalties in the low- to mid-single digits on products covered by the
licensed rights. The patents and patent applications covered by the GW license
agreement are expected to expire between 2029 and 2038, and the obligation to pay
royalties under this agreement extends through the last-to-expire patent covering
GIAPREZA.
On May 10, 2018, the Company closed a $125.0 million royalty financing agreement
(the Royalty Agreement) with HealthCare Royalty Partners (HCR). Under the terms of
the Royalty Agreement, the Company received $125.0 million in exchange for tiered
royalty payments on worldwide net product sales of GIAPREZA. HCR is entitled to
receive quarterly royalties on worldwide net product sales of GIAPREZA beginning
April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a
maximum royalty rate, with step-downs based on the achievement of annual net
product sales thresholds. Through December 31, 2021, the royalty rate will be a
maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by
4% if an agreed-upon, cumulative sales threshold has not been met, and, starting
January 1, 2024, the maximum royalty rate may increase by an additional 4% if a
different agreed-upon, cumulative sales threshold has not been met. The Royalty
Agreement is subject to maximum aggregate royalty payments to HCR of 180% of the
$125.0 million to be received by the Company, at which time the payment obligations
under the Royalty Agreement would expire. In the event of certain material breaches
of the Royalty Agreement, HCR would have the right to terminate the Royalty
Agreement and demand payment by La Jolla Pharma, LLC of an amount equal to either
$125.0 million, minus aggregate royalties paid to HCR, or $225.0 million, minus
aggregate royalties paid to HCR, depending on the type of breach. The Royalty
Agreement was entered into by the Company’s wholly-owned subsidiary, La Jolla
Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla
Pharmaceutical Company or any assets other than GIAPREZA.
Customers
Competition
Government Regulation
Pharmaceutical Regulation
In the U.S., the FDA regulates pharmaceutical products. FDA regulations govern the
testing, research and development activities, manufacturing, quality, storage,
advertising, promotion, labeling, sale and distribution of pharmaceutical products.
Accordingly, there is a rigorous process for the approval of new drugs and ongoing
oversight of marketed products. We are also subject to foreign regulatory
requirements governing clinical studies and drug products if products are tested or
marketed abroad. The approval process outside the U.S. varies from jurisdiction to
jurisdiction and the time required may be longer or shorter than that required for
FDA approval.
See Item 1A. Risk Factors of this Annual Report on Form 10-K for a discussion of
the factors that could adversely impact our development of commercial products and
industry regulation.
The FDA testing and approval process requires substantial time, effort and money.
We cannot assure you that any of our product candidates will ever obtain approval.
The FDA approval process for new drugs includes, without limitation:
•
preclinical studies;
•
submission in the U.S. of an IND for clinical studies conducted in the U.S.;
•
adequate and well-controlled human clinical studies to establish safety and
efficacy of the product;
•
review and approval of an NDA in the U.S.; and
•
inspection of the facilities used in the manufacturing of the drug to assess
compliance with the FDA’s current cGMP regulations.
The FDA monitors the progress of clinical studies conducted in the U.S. under an
IND and may, at its discretion, re-evaluate, alter, suspend or terminate testing
based on the data accumulated to that point and the FDA’s benefit-risk assessment
with regard to the patients enrolled in the trial. The FDA may also withdraw
approval for an IND for that drug if deemed warranted. Furthermore, even after
regulatory approval is obtained, under certain circumstances, such as later
discovery of previously unknown problems, the FDA can withdraw approval or subject
the drug to additional restrictions.
Preclinical Testing
The testing and approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our product candidates
will be granted on a timely basis, if at all. Preclinical studies include
laboratory evaluation of the product, as well as animal studies to assess the
potential safety and effectiveness of the product. Most of these studies must be
performed according to Good Laboratory Practices (GLP), a system of management
controls to assure the quality and reliability of data from nonclinical laboratory
studies that are intended to support applications for research or marketing permits
for FDA-regulated products.
Clinical Studies
Clinical trials involve the administration of the product candidate that is the
subject of the trial to volunteers or patients under the supervision of a qualified
principal investigator and in accordance with a clinical trial protocol, which sets
forth details, such as the study objectives and the safety and effectiveness
criteria to be evaluated. Each clinical trial must be reviewed and approved by an
independent institutional review board (IRB) in the U.S. or ethics committee in the
European Union (EU) at each institution at which the study will be conducted. The
IRB or ethics committee will consider, among other things, ethical factors, safety
of human subjects and the possible liability of the institution arising from the
conduct of the
6
proposed clinical trial. In addition, clinical studies in the U.S. must be
performed according to current good clinical practices (cGCPs), which are
enumerated in FDA regulations and are intended to protect the rights of patients
and to define the roles of trial sponsors, administrators and monitors. Some
studies include oversight by an independent group of experts, known as a data
safety monitoring board, which provides authorization for whether a study may move
forward based on certain data from the study and may stop the clinical trial if it
determines that there is an unacceptable safety risk for subjects or on other
grounds.
The FDA may order the temporary, or permanent, discontinuation of a clinical trial
at any time, or impose other sanctions, if it believes that the clinical trial is
not being conducted in accordance with FDA requirements or presents an unacceptable
risk to the clinical trial patients. An IRB may also require the clinical trial at
the site to be halted, either temporarily or permanently, for failure to comply
with the IRB’s requirements, or may impose other conditions.
Clinical trials in the U.S. typically are conducted in sequential phases: Phases 1,
2, 3 and 4. The phases may overlap. The FDA may require that we suspend clinical
studies at any time on various grounds, including if the FDA makes a finding that
the subjects participating in the trial are being exposed to an unacceptable health
risk.
We cannot assure you that any of our current or future clinical studies will result
in approval to market our product candidates.
The data from the clinical studies, together with preclinical data and other
supporting information that establishes a product candidate’s safety, are submitted
to the FDA in the form of an NDA, or NDA supplement (for approval of a new
indication if the product candidate is already approved for another indication).
Under applicable laws and FDA regulations, FDA reviews the NDA within 60 days of
receipt of the NDA to determine whether the application will be accepted for filing
based on FDA’s threshold determination that the NDA is sufficiently complete to
permit substantive review. If deemed complete, the FDA will “file” the NDA, thereby
triggering substantive review of the application. The FDA can refuse to file any
NDA that it deems incomplete or not properly reviewable. Along with the preclinical
and clinical data, the FDA will evaluate the proposed product labeling and other
information in the cGMP. In addition, the FDA may convene a scientific advisory
committee, comprised of clinicians and other experts, to review and provide a non-
binding recommendation as to whether the application should be approved.
The FDA has established internal substantive review goals of 10 months for most
NDAs. The FDA also has special programs, including Fast Track, Breakthrough
Therapy, priority review, and accelerated approval, which are intended to expedite
or simplify the process for reviewing drugs, and/or provide for approval based on
surrogate endpoints. Generally, drugs that may be eligible for these programs are
those for serious or life-threatening conditions, those with the potential to
address unmet medical needs, and those that offer meaningful benefits over existing
treatments. For example, Fast Track designation is designed to facilitate the
development, and expedite the review of drugs that are intended to treat serious
diseases
and address an unmet medical need. Breakthrough Therapy designation may be granted
for a drug that is intended to treat a serious condition and if preliminary
evidence indicates that the drug may demonstrate substantial clinical improvement
over available therapies. Both Fast Track and Breakthrough Therapy designations may
be requested at the time of IND submission, and the FDA will respond within 60
calendar days of receipt of the request. Priority review, which is requested at the
time of an NDA submission, is designed to give drugs that offer major advances in
treatment or provide a treatment where no adequate therapy exists, an initial
review within six months as compared to a standard review time of 10 months.
Although Fast Track, Breakthrough Therapy, and priority review do not affect the
standards for approval, the FDA will attempt to facilitate early and frequent
meetings with sponsors of Fast Track and Breakthrough Therapy drugs, and the FDA
aims to expedite review of drugs granted priority review. Accelerated approval
provides an earlier approval of drugs to treat serious diseases and that address an
unmet medical need based on a surrogate or intermediate endpoint that is reasonably
likely to predict clinical benefit. Under these special programs, the FDA is not
legally required to complete its review within an expedited time period, and
performance goals may change over time. Furthermore, the FDA may later decide that
a drug no longer qualifies for review under one or more of these programs.
The 21st Century Cures Act of 2016 amended section 506 of the U.S. Federal Food,
Drug, and Cosmetic Act to provide for the expedited development and review of
regenerative medicine therapies, which are defined as cell therapies, therapeutic
tissue engineering products, human cell and tissue products, or any combination
product using such therapies or products, except for those regulated solely under
Section 361 of the Public Health Service Act and part 1271 of Title 21, Code of
Federal Regulations. A regenerative medicine therapy is eligible for “regenerative
medicine advanced therapy” (RMAT) designation if it is intended to treat, modify,
reverse or cure a serious condition, and the preliminary clinical evidence
indicates that the regenerative medicine therapy has the potential to address unmet
medical needs for such condition. RMAT designation gives the applicant the benefits
of fast track and Breakthrough Therapy designations, including early interactions
with the FDA to discuss potential surrogate or intermediate endpoints to support
accelerated approval, and FDA may grant priority review. In a guidance document,
dated February 2019, the FDA stated that the preliminary clinical evidence required
to support the RMAT designation should be generated on the product intended for
clinical development but that the types of evidence required would be determined on
a case-by-case basis, but could include evidence such as data from historical
controls, studies conducted outside the United States, and retrospective studies.
If the FDA approves the NDA, it will issue an approval letter authorizing the
commercial marketing of the drug with prescribing information for specific
indications. As a condition of NDA approval, the FDA may require a risk evaluation
and mitigation strategy (REMS) to help ensure that the benefits of the drug
outweigh the potential risks. REMS can include medication guides, communication
plans for healthcare professionals, and elements to assure safe use. Moreover,
product approval may require substantial post-approval testing and surveillance to
monitor the drug's safety or efficacy. Once granted, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or problems are
identified following initial marketing. In many cases, the outcome of the review,
even if generally favorable, is not an actual approval, but a “complete response”
that generally outlines the deficiencies in the submission, which may require
substantial additional testing, or information, in order for the FDA to reconsider
the application. If, or when, those deficiencies have been addressed to the FDA’s
satisfaction in a resubmission of the NDA, the FDA will issue an approval letter.
Once issued, the FDA may withdraw product approval or request product recalls if
ongoing regulatory standards are not met or if safety problems occur after the
product reaches the market. In addition, the FDA may require testing and
surveillance programs to monitor the safety or effectiveness of approved products
which have been commercialized, and the FDA has the power to prevent or limit
further marketing of a product based on the results of these post-marketing
programs. The FDA may also request or require additional Phase 4 clinical studies
after a product is approved. The results of Phase 4 clinical studies can confirm
the effectiveness of a product candidate and can provide important safety
information to augment the FDA’s voluntary adverse drug reaction reporting system.
8
In addition, both before and after approval is sought, we are required to comply
with a number of FDA requirements. For example, we are required to report certain
adverse reactions and production problems, if any, to the FDA, and to comply with
certain limitations and other requirements concerning advertising and promotion for
our products. In addition, quality control and manufacturing procedures must
continue to conform to cGMP after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with continuing cGMP. In addition,
discovery of problems, such as safety problems, may result in changes in labeling
or restrictions on a product manufacturer or NDA holder, including removal of the
product from the market.
The FDA closely regulates the marketing and promotion of drugs and drugs may only
be marketed in a manner consistent with their FDA-approved labeling. Approval may
be subject to post-marketing surveillance and other record-keeping and reporting
obligations, and involve ongoing requirements. Product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
The failure to comply with FDA’s requirements can result in adverse publicity,
warning letters, corrective advertising, restrictions on marketing or
manufacturing, refusals to review pending product applications, refusals to permit
the import or export of products, seizures, injunctions, and civil and criminal
penalties.
Some of our product candidates may be eligible for submission of applications for
approval under the FDA’s Section 505(b)(2) approval process, which provides an
alternate path to FDA approval for new or improved formulations or new uses of
previously approved products. Section 505(b)(2) was enacted as part of the Drug
Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-
Waxman Act, and allows approval of NDAs that rely, at least in part, on studies
that were not conducted by or for the applicant and to which the applicant has not
obtained a right of reference. Such studies can be provided by published
literature, or the FDA can rely on previous findings of safety and efficacy for a
previously approved drug. If the 505(b)(2) applicant can establish that reliance on
the FDA's previous approval is scientifically appropriate, it may eliminate the
need to conduct certain preclinical studies or clinical studies of the new product.
Section 505(b)(2) applications may be submitted for drug products that represent a
modification (e.g., a new indication or new dosage form) of an eligible approved
drug. In such cases, the additional information in 505(b)(2) applications necessary
to support the change from the previously approved drug is frequently provided by
new studies submitted by the applicant. Because a Section 505(b)(2) application
relies in part on previous studies or previous FDA findings of safety and
effectiveness, preparing 505(b)(2) applications is generally less costly and time-
consuming than preparing an NDA based entirely on new data and information from a
full set of clinical studies. The FDA may approve the new product candidate for
all, or some, of the label indications for which the referenced product has been
approved, as well as for any new indication sought by the
Section 505(b)(2) applicant. The law governing Section 505(b)(2) or FDA’s current
policies may change in such a way as to adversely affect our applications for
approval that seek to utilize the Section 505(b)(2) approach. Such changes could
result in additional costs associated with additional studies or clinical studies
and delays.
The FDA provides that reviews and/or approvals of applications submitted under
Section 505(b)(2) will be delayed in various circumstances. For example, the holder
of the NDA for the listed drug may be entitled to a period of market exclusivity
during which the FDA will not approve, and may not even review, a Section 505(b)(2)
application from other sponsors. If the listed drug is claimed by one or more
patents that the NDA holder has listed with the FDA, the Section 505(b)(2)
applicant must submit a certification with respect to each such patent. If the
505(b)(2) applicant certifies that a listed patent is invalid, unenforceable or not
infringed by the product that is the subject of the Section 505(b)(2) application,
it must notify the patent holder and the NDA holder. If, within 45 days of
providing this notice, the NDA holder sues the 505(b)(2) applicant for patent
infringement, the FDA will not approve the Section 505(b)(2) application until the
earlier of 30 months, a court decision favorable to the Section 505(b)(2)
applicant, settlement of the lawsuit or expiration of the patent. The regulations
governing marketing exclusivity and patent protection are complex, and it is often
unclear how they will be applied in particular circumstances.
Commercial success of GIAPREZA, and any of our other product candidates that are
approved or commercialized for any indication will depend, in part, on the
availability of coverage and reimbursement from third-party payors at the federal,
state and private levels. Government payor programs, including Medicare and
Medicaid, private healthcare insurance companies and managed care plans have
attempted to control costs by limiting coverage and the amount of reimbursement for
particular procedures or drug treatments. The U.S. Congress and state legislatures,
from time to time, propose and adopt initiatives aimed at cost containment. Ongoing
federal and state government initiatives directed at lowering the total cost of
healthcare will likely continue to focus on healthcare reform, the cost of
prescription pharmaceuticals and on the reform of the Medicare and Medicaid payment
systems.
Examples of how limits on drug coverage and reimbursement in the U.S. may cause
reduced payments for drugs in the future include:
•
changing Medicare reimbursement methodologies;
•
fluctuating decisions on which drugs to include in formularies;
•
revising drug rebate calculations under the Medicaid program or requiring that new
or additional rebates be provided to Medicare, Medicaid, other federal or state
healthcare programs; and
•
reforming drug importation laws.
Some third-party payors also require pre-approval of coverage for new drug
therapies before they will reimburse healthcare providers that use such therapies.
While we cannot predict whether any proposed cost-containment measures will be
adopted or otherwise implemented in the future, the announcement or adoption of
these proposals could have a material adverse effect on our ability to obtain
adequate prices for our product candidates and to operate profitably.
Regulations under applicable federal and state healthcare laws and regulations
include the federal healthcare programs’ Anti-Kickback Law, which prohibits, among
other things, persons from knowingly and willfully soliciting, receiving, offering
or paying remuneration, directly or indirectly, in exchange for or to induce either
the referral or purchase of any good or service for which payment may be made under
federal healthcare programs such as the Medicare and Medicaid programs.
Remuneration has been broadly defined to include anything of value, including cash,
improper discounts, and free or reduced-price items and services. Many states have
similar laws that apply to their state healthcare programs as well as private
payors. In addition, the False Claims Act (FCA) imposes liability on persons who,
among other things, present or cause to be presented false or fraudulent claims for
payment by a federal healthcare program. The FCA has been used to prosecute persons
submitting claims for payment that are inaccurate or fraudulent, that are for
services not provided as claimed, or for services that are not medically necessary.
Actions under the FCA may be brought by the Attorney General or as a qui tam action
by a private individual in the name of the government. Violations of the FCA can
result in significant monetary penalties and treble damages. The federal government
is using the FCA, and the accompanying threat of significant liability, in its
investigation and prosecution of pharmaceutical and biotechnology companies
throughout the country, for example, in connection with the promotion of products
for unapproved uses and other sales and marketing practices.
The risk of being found in violation of these laws is increased by the fact that
many of them have not been fully interpreted by the regulatory authorities or the
courts, and their provisions are open to a variety of interpretations. Moreover,
recent healthcare reform legislation has strengthened many of these laws. For
example, the Patient Protection and Affordable Care Act (PPACA), among other
things, amends the intent requirement of the federal anti-kickback and criminal
healthcare fraud statutes to clarify that a person or entity does not need to have
actual knowledge of this statute or specific intent to violate it. In addition,
PPACA provides that a claim including items or services resulting from a violation
of the federal anti-kickback statute constitutes a false or fraudulent claim for
purposes of the false claims statutes.
The continuing interpretation and application of these laws could have a material
adverse impact on our business and our ability to compete should we commence
marketing a product.
We must comply with federal “sunshine” laws that require transparency regarding
financial arrangements with healthcare providers. This would include the reporting
and disclosure requirements imposed by the PPACA on drug manufacturers regarding
any “payment or transfer of value” made or distributed to physicians and teaching
hospitals. Failure to submit required information can result in civil monetary
penalties. A number of states have laws that require the implementation of
commercial compliance programs, impose restrictions on drug manufacturer marketing
practices, and/or require pharmaceutical companies to track and report payments,
gifts and other benefits provided to physicians and other healthcare professionals
and entities.
We are subject to the Foreign Corrupt Practices Act of 1997 (FCPA). The FCPA and
other similar anti-bribery laws in other jurisdictions, such as the U.K. Bribery
Act, generally prohibit companies and their intermediaries from providing money or
anything of value to officials of foreign governments, foreign political parties,
or international organizations with the intent to obtain or retain business or seek
a business advantage. Recently, there has been a substantial increase in anti-
bribery law enforcement activity by U.S. regulators, with more frequent and
aggressive investigations and enforcement proceedings by both the Department of
Justice and the SEC. A determination that our operations or activities are not, or
were not, in compliance with U.S. or foreign laws or regulations could result in
the imposition of substantial fines, interruptions of business, loss of supplier,
vendor or other third-party relationships, termination of necessary licenses and
permits, and other legal or equitable sanctions. Other internal or government
investigations or legal or regulatory proceedings, including lawsuits brought by
private litigants, may also follow as a consequence.
11
We are required to comply, as applicable, with numerous federal and state laws,
including state security breach notification laws, state health information privacy
laws and federal and state consumer protection laws, and to govern the collection,
use and disclosure of personal information. Other countries also have, or are
developing, laws governing the collection, use and transmission of personal
information. In addition, most healthcare providers who may prescribe products we
may sell in the future and from whom we may obtain patient health information are
subject to privacy and security requirements under the Health Insurance Portability
and Accountability Act of 1996 (HIPAA), as amended by the Health Information
Technology and Clinical Health Act (HITECH), and its implementing regulations. We
are not a HIPAA covered entity, do not currently intend to become one, and we do
not operate as a business associate to any covered entities. Therefore, these
privacy and security requirements do not apply to us. However, we could be subject
to civil and criminal penalties if we knowingly obtain individually identifiable
health information from a covered entity in a manner that is not authorized or
permitted by HIPAA or for aiding and abetting the violation of HIPAA. The
legislative and regulatory landscape for privacy and data protection continues to
evolve, and there has been an increasing amount of focus on privacy and data
protection issues with the potential to affect our business, including recently
enacted laws in a majority of states requiring security breach notification. These
laws could create liability for us or increase our cost of doing business, and any
failure to comply could result in harm to our reputation and potential fines and
penalties.
In addition, state laws govern the privacy and security of health information in
certain circumstances, many of which differ from each other in significant ways and
may not have the same effect, thus complicating compliance efforts.
In May 2018, the EU Data Protection Directive was replaced with the recently
adopted European General Data Protection Regulation (GDPR) which contains new
provisions specifically directed at the processing of health information, higher
sanctions and extraterritoriality measures intended to bring non-EU companies under
the regulation. We currently conduct clinical studies in the EU are subject to such
requirements. We anticipate that over time we may expand our business operations to
include additional operations in the EU. With such expansion, we would be subject
to increased governmental regulation in the EU countries in which we might operate,
including the GDPR.
Our operations and those of our third-party manufacturers are subject to complex
and increasingly stringent environmental, health and safety laws and regulations.
Further, in the future, we may open manufacturing facilities that would likely be
subject to environmental and health and safety authorities in the relevant
jurisdictions. These authorities typically administer laws which regulate, among
other matters, the emission of pollutants into the air (including the workplace),
the discharge of pollutants into bodies of water, the storage, use, handling and
disposal of hazardous substances, the exposure of persons to hazardous substances,
and the general health, safety and welfare of employees and members of the public.
Violations of these laws could subject us to strict liability, fines, or liability
to third parties.
Other Laws
Employees
12
We file electronically with the U.S. Securities and Exchange Commission (SEC) our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. We make available on our website at
www.ljpc.com, free of charge, copies of these reports as soon as reasonably
practicable after filing or furnishing these reports with the SEC. The SEC
maintains a website at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
An investment in shares of our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and the other
information before deciding to invest in our common stock. The risks described
below are not the only ones facing our Company. Additional risks not presently
known to us or that we currently consider immaterial may also adversely affect our
business. We have attempted to identify below the major factors that could cause
differences between actual and planned or expected results, but we cannot assure
you that we have identified all of those factors.
If any of the following risks actually happen, our business, financial condition
and operating results could be materially adversely affected. In this case, the
trading price of our common stock could decline, and you could lose all or part of
your investment.
I. RISK FACTORS RELATING TO THE COMPANY AND THE INDUSTRY IN WHICH WE OPERATE
Even if our sales organization performs as expected, the revenue that we may
receive from sales of GIAPREZA may be less than anticipated due to factors that are
outside of our control. These factors that may impact revenue include:
•
the perception of physicians and other members of the healthcare community of the
safety and efficacy and cost-competitiveness relative to that of competing
products;
•
our ability to maintain successful sales, marketing and educational programs for
certain physicians and other healthcare providers;
•
our ability to raise patient and physician awareness;
•
the cost-effectiveness of our product;
•
acceptance by institutional formulary committees;
•
patient and physician satisfaction with our product;
•
the size of the potential market for our product;
•
our ability to obtain adequate reimbursement from government and third-party
payors;
•
unfavorable publicity concerning our product or similar products;
•
the introduction, availability and acceptance of competing treatments;
•
adverse event information relating to our product or similar classes of drugs;
•
product liability litigation alleging injuries relating to the product or similar
classes of drugs;
•
our ability to maintain and defend our patents for GIAPREZA;
•
our ability to have GIAPREZA manufactured at a commercial production level
successfully and on a timely basis;
•
the availability of raw materials;
•
our ability to access third parties to manufacture and distribute our product on
acceptable terms or at all;
•
regulatory developments related to the manufacture or continued use of our product;
•
any pediatric investigation plan requirements and the results thereof;
13
•
any post-approval study requirements and the results thereof;
•
the extent and effectiveness of sales and marketing and distribution support for
our product;
•
our competitors’ activities, including decisions as to the timing of competing
product launches, generic entrants, pricing and discounting; and
•
any other material adverse developments with respect to the potential
commercialization of our product.
Our business will be adversely affected if, due to these or other factors, our
commercialization of GIAPREZA does not achieve the acceptance and demand necessary
to sustain revenue growth. If we are unable to successfully commercialize GIAPREZA,
our business and results of operations will suffer.
If we fail to comply with our reporting and payment obligations under U.S.
governmental pricing and contracting programs, we could be subject to additional
reimbursement requirements, penalties and fines, which could have a material
adverse effect on our business, financial condition, and results of operations.
The Medicare program and certain government pricing programs, including the
Medicaid drug rebate program, the Public Health Services’ 340B drug pricing
program, and the pricing program under the Veterans Health Care Act of 1992 impact
the reimbursement we may receive from sales of GIAPREZA, or any other products that
are approved for marketing. Pricing and rebate calculations vary among programs.
The calculations are complex and are often subject to interpretation by
manufacturers, governmental or regulatory agencies, and the courts. We are required
to submit a number of different pricing calculations to government agencies on a
quarterly basis. Failure to comply with our reporting and payment obligations under
U.S. governmental pricing and contracting programs may result in additional
payments, penalties and fines due to government agencies, which may have a material
adverse effect on our business, financial condition and results of operations.
We have only limited assets and will need to raise additional capital before we can
expect to become profitable.
As of December 31, 2018, we had GIAPREZA sales as our sole revenue source and
available cash and cash equivalents of $172.6 million. To fund future operations to
the point where we are able to generate positive cash flow from GIAPREZA and our
product candidates, we will need to raise significant additional capital. The
amount and timing of future funding requirements will depend on many factors,
including the success of our commercialization efforts for GIAPREZA, the timing and
results of our ongoing development efforts, the potential expansion of our current
development programs, potential new development programs and related general and
administrative support. We anticipate that we will seek to fund our operations
through equity, debt, royalty-based financings or other sources, such as potential
collaboration agreements. We cannot provide assurance that additional financing
will be available to us on favorable terms, or at all. Although we have previously
been successful in obtaining financing through equity offerings, there can be no
assurance that we will be able to do so in the future. If we are unable to raise
additional capital to fund our clinical development, commercialization efforts, and
other business activities, we could be forced to abandon one or more programs and
curtail or cease our operations.
We have generated limited revenue from product sales and may never be profitable.
14
•
obtaining regulatory and marketing approvals for GIAPREZA outside of the United
States, as well as our ability to obtain marketing approvals for other product
candidates for which we complete clinical studies;
•
obtaining market acceptance of our product candidates as viable treatment options;
•
addressing any competing technological and market developments;
•
identifying, assessing, acquiring or developing new product candidates;
•
negotiating favorable terms in any collaboration, licensing or other arrangements
into which we may enter;
•
maintaining, protecting and expanding our portfolio of intellectual property
rights, including patents, trade secrets and know-how; and
•
attracting, hiring and retaining qualified personnel.
We anticipate incurring significant costs associated with continued commercializing
GIAPREZA and development of our product candidates. Our expenses could increase
beyond expectations if we are required by the FDA, the EMA or other regulatory
agencies, domestic or foreign, to change our manufacturing processes or assays, or
to perform additional clinical, nonclinical or other types of studies in addition
to those that we currently anticipate. For GIAPREZA and other product candidates
that may be approved, our revenue will be dependent, in part, on the size of the
markets in the territories for which we gain regulatory approval, the accepted
price for the product, the ability to get reimbursement at any price, and whether
we own the commercial rights for that territory. If the number of our addressable
patients is not as significant as we estimate, the indication approved by
regulatory authorities is narrower than we expect, or the reasonably accepted
population for treatment is narrowed by competition, physician choice or treatment
guidelines, we may be unable to generate significant revenue from sales of approved
products.
Results from our clinical studies may not be sufficient to obtain regulatory
approvals to market our product candidates in the U.S. or other countries on a
timely basis, if at all.
Even where we have obtained regulatory approval for a product in one jurisdiction,
such as FDA approval of GIAPREZA in the United States, there can be no assurance
that we will be able to obtain regulatory approval for that same product in other
jurisdictions. Regulatory authorities such as the FDA and EMA have substantial
discretion in the approval process and may not agree that we have demonstrated that
our product candidates are safe and effective. If our product candidates are
ultimately not found to be safe and effective, we would be unable to obtain
regulatory approval to manufacture, market and sell them. We can provide no
assurances that the FDA, EMA or other foreign regulatory authorities will approve
our product candidates or, if approved, what the scope of the approved indication
might be.
15
Any clinical studies of our product candidates that we may conduct in the future
may be delayed or halted for various reasons, including:
•
we do not have sufficient financial resources;
•
supplies of drug product are not sufficient to treat the patients in the studies;
•
patients do not enroll in the studies at the rate we expect;
•
the product candidates are not effective;
•
patients experience negative side effects or other safety concerns are raised
during treatment;
•
the trials are not conducted in accordance with applicable clinical practices;
•
there is political unrest at foreign clinical sites; or
•
there are natural disasters at any of our clinical sites.
If any future trials are delayed or halted, we may incur significant additional
expenses, and our potential approval of our product candidates may be delayed,
which could have a severe negative effect on our business.
We rely on third parties to conduct our preclinical and clinical studies. If these
third parties do not successfully carry out their contractual duties or meet
expected deadlines, our studies may not be completed in a timely fashion or in a
manner that generates acceptable data, and we may not be able to obtain regulatory
approval for or commercialize our product candidates.
If any of our relationships with these third-party CROs terminate, we may not be
able to enter into arrangements with alternative CROs or to do so on commercially
reasonable terms. In addition, our CROs are not our employees, and except for
remedies available to us under our agreements with such CROs, we cannot control
whether or not they devote sufficient time and resources to our ongoing preclinical
and clinical programs. If CROs do not successfully carry out their contractual
duties or obligations or meet expected deadlines, if they need to be replaced or if
the quality or accuracy of the clinical data they obtain is compromised due to the
failure to adhere to our clinical protocols, regulatory requirements or for other
reasons, our clinical studies may be extended, delayed or terminated and we may not
be able to obtain regulatory approval for or successfully commercialize our product
candidates. As a result, we may incur significant additional expenses, and our
potential approval of our product candidates may be delayed, which could have a
severe negative effect on our business.
16
Any of these factors could cause us to delay or suspend any future commercial
sales, clinical studies, regulatory submissions, required approvals or
commercialization of one or more of our products or product candidates, entail
higher costs and result in our being unable to effectively commercialize products.
Our success in developing and marketing our product and product candidates depends
significantly on our ability to obtain patent protection and operate without
infringing on the rights of others.
There can be no assurance that third-party patents will not ultimately be found to
impact the sales of GIAPREZA or the advancement of our product candidates. While we
intend to challenge the issuance and validity of this patent, we may not be
successful. If the USPTO or any foreign counterpart issues or has issued any other
patents containing competitive or conflicting claims, and if these claims are
valid, the protection provided by our existing patents or any future patents that
may be issued could be significantly reduced, and our ability to prevent
competitors from developing products or technologies identical or similar to ours
could be negatively affected. In addition, there can be no guarantee that we would
be able to obtain licenses to these patents on commercially reasonable terms, if at
all, or that we would be able to develop or obtain alternative technology. Our
failure to obtain a license to a technology or process that may be required to
develop or commercialize one or more of our product candidates may have a material
adverse effect on our business.
We do not have complete patent protection for GIAPREZA or our other product
candidates, as the active pharmaceutical ingredients in GIAPREZA and our other
product candidates are known compounds that are not themselves covered by
composition of matter patents, and thus may only be protected by formulation or
method-of-use patents (to the extent that such patents are granted and are
enforceable) and/or regulatory exclusivity (to the extent available). Therefore, it
is possible that a competitor could develop the same or similar technology if we
fail to obtain protection of this type. We may have to incur significant expense
and management time in defending or enforcing our patents. If we cannot obtain and
maintain effective patent rights and/or regulatory exclusivity for our product
candidates, we may not be able to compete effectively and our business and results
of operations would be harmed.
17
Patent policy and rule changes could increase the uncertainties and costs
surrounding the prosecution of our patent applications and the enforcement or
defense of our issued patents.
Changes in either the patent laws or interpretation of the patent laws in the U.S.
and other countries may diminish the value of our patents or narrow the scope of
our patent protection. The laws of foreign countries may not protect our rights to
the same extent as the laws of the U.S. Publications of discoveries in the
scientific literature often lag behind the actual discoveries, and patent
applications in the U.S. and other jurisdictions are typically not published until
18 months after filing, or in some cases not at all. We therefore cannot be certain
that we or our licensors were the first to make the inventions claimed in our owned
and licensed patents or pending applications, or that we or our licensor were the
first to file for patent protection of such inventions.
Assuming the other requirements for patentability are met, in the U.S. prior to
March 15, 2013, the first to make the claimed invention is entitled to the patent,
while outside the U.S., the first to file a patent application is entitled to the
patent. After March 15, 2013, under the Leahy-Smith America Invents Act (Leahy-
Smith Act), enacted on September 16, 2011, the U.S. has moved to a first-to-file
system. The Leahy-Smith Act also includes a number of significant changes that
affect the way patent applications will be prosecuted and may also affect patent
litigation. The effects of these changes are currently unclear as the USPTO must
still implement various regulations, the courts have yet to address any of these
provisions and the applicability of the act and new regulations on specific patents
discussed herein have not been determined and would need to be reviewed. In
general, 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 and financial condition.
Our competitors or others may have patent rights that they choose to assert against
us or our licensees, suppliers, customers or potential collaborators. Moreover, we
may not know about patents or patent applications that our products would infringe.
For example, because patent applications do not publish for at least 18 months and
can take many years to issue, there may be currently pending applications unknown
to us that may later result in issued patents that our product candidates would
infringe. In addition, if third parties file patent applications or obtain patents
claiming technology also claimed by us or our licensors in issued patents or
pending applications, we may have to participate in interference proceedings in the
USPTO to determine priority of invention. If third parties file oppositions in
foreign countries, we may also have to participate in opposition proceedings in
foreign tribunals to defend the patentability of our foreign patent applications.
If a third party claims that we infringe its proprietary rights, any of the
following may occur:
•
we may become involved in time-consuming and expensive litigation, even if the
claim is without merit;
•
we may become liable for substantial damages for past infringement if a court
decides that our technology infringes a competitor’s patent;
•
a court may prohibit us from selling or licensing our product without a license
from the patent holder, which may not be available on commercially acceptable
terms, if at all, or which may require us to pay substantial royalties or grant
cross licenses to our patents; and
•
we may have to redesign our product candidates or technology so that they do not
infringe patent rights of others, which may not be possible or commercially
feasible.
If any of these events occur, our business and prospects will suffer and the market
price of our common stock will likely decline substantially.
The patent protection and patent prosecution for GIAPREZA and certain of our
product candidates is dependent on third parties.
While we normally seek and gain the right to fully prosecute the patents relating
to our product and product candidates, there may be times when patents relating to
our products or product candidates are controlled by our licensors, such as with
GIAPREZA, where patent prosecution is controlled by our licensor, the George
Washington University. If any of our licensing partners fail to appropriately
prosecute and maintain patent protection for patents covering any licensed patents,
our ability to develop and commercialize those product candidates may be materially
adversely affected and we may not be able to prevent competitors from making,
using, selling and importing competing products. In addition, even where we now
have the right to control patent prosecution of patents and patent applications we
have licensed from third parties, we may still be
18
Although we expect all of our employees and consultants to assign their inventions
to us, and all of our employees, consultants, advisors, and any third parties who
have access to our proprietary know-how, information, or technology to enter into
confidentiality agreements, we cannot provide any assurances that all such
agreements have been duly executed, that our trade secrets and other confidential
proprietary information will not be disclosed or that competitors will not
otherwise gain access to our trade secrets or independently develop substantially
equivalent information and techniques. Misappropriation or unauthorized disclosure
of our trade secrets could impair our competitive position and may have a material
adverse effect on our business. Additionally, if the steps taken to maintain our
trade secrets are deemed inadequate, we may have insufficient recourse against
third parties for misappropriating our trade secrets.
Because a number of companies compete with us, many of which have greater resources
than we do, and because we face rapid changes in technology in our industry, we
cannot be certain that our products will be accepted in the marketplace or capture
market share.
19
Our product and product candidates may cause undesirable side effects or have other
properties that could delay or prevent their market acceptance or regulatory
approval, limit the commercial profile of an approved label, or result in
significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product or product candidates could cause us
or regulatory authorities to interrupt, delay, or halt clinical studies and
commercial sales and could result in a more restrictive label or the delay or
denial of regulatory approval by the FDA or other comparable foreign authorities.
Results of our studies could reveal a high and unacceptable severity and prevalence
of undesirable side effects. In such an event, our studies could be suspended or
terminated, and the FDA or comparable foreign regulatory authorities could order us
to cease further development of or deny or withdraw approval of our product or
product candidates for any or all targeted indications.
The drug-related side effects could affect commercial sales, patient recruitment,
the ability of enrolled patients to complete the study, or result in potential
product liability claims. We carry product liability insurance in the amount of
$10.0 million in the aggregate. We believe our product liability insurance coverage
is sufficient in light of our clinical programs; however, we may not be able to
maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to liability. A successful product liability claim or
series of claims brought against us could cause our stock price to decline and, if
judgments exceed our insurance coverage, could adversely affect our results of
operations and business. In addition, regardless of merit or eventual outcome,
product liability claims may result in impairment of our business reputation,
withdrawal of clinical trial participants, costs due to related litigation,
distraction of management’s attention from our primary business, initiation of
investigations by regulators, substantial monetary awards to patients or other
claimants, the inability to commercialize our product candidates and decreased
demand for our product candidates, if approved for commercial sale.
Any regulatory approvals that we have received or may receive for our product and
product candidates are and may be subject to limitations on the approved indicated
uses for which the product may be marketed or to the conditions of approval, or
contain requirements for potentially costly post-marketing testing, including Phase
4 clinical studies, and surveillance to monitor the safety and efficacy of the
product candidate. We will be required to report certain adverse reactions and
production problems, if any, to the FDA and comparable foreign regulatory
authorities. Any new legislation addressing drug safety issues could result in
delays in product development or commercialization, or increased costs to assure
compliance. We will have to
20
comply with requirements concerning advertising and promotion for our products.
Promotional communications with respect to prescription drugs are subject to a
variety of legal and regulatory restrictions and must be consistent with the
information in the product’s approved label. As such, we may not promote our
products for indications or uses for which they do not have approval. The holder of
an approved NDA, BLA, or MAA must submit new or supplemental applications and
obtain approval for certain changes to the approved product, product labeling or
manufacturing process. We could also be asked to conduct post-marketing clinical
studies to verify the safety and efficacy of our products in general or in specific
patient subsets. If original marketing approval were obtained via the accelerated
approval pathway, we could be required to conduct a successful post-marketing
clinical trial to confirm clinical benefit for our products. An unsuccessful post-
marketing study or failure to complete such a study could result in the withdrawal
of marketing approval.
Although a substantial amount of our effort will focus on the continued clinical
testing, potential approval, and commercialization of our existing product
candidates, the success of our business also depends on our ability to identify,
license, discover, develop or commercialize additional product candidates. Research
programs to identify new product candidates require substantial technical,
financial and human resources. We may focus our efforts and resources on potential
programs or product candidates that ultimately prove to be unsuccessful. Our
research programs or licensing efforts may fail to yield additional product
candidates for clinical development and commercialization for a number of reasons,
including but not limited to the following:
•
our research or business development methodology or search criteria and process may
be unsuccessful in identifying potential product candidates;
•
we may not be able or willing to assemble sufficient resources to acquire or
discover additional product candidates;
•
our product candidates may not succeed in preclinical or clinical testing;
•
our potential product candidates may be shown to have harmful side effects or may
have other characteristics that may make the products unmarketable or unlikely to
receive marketing approval;
•
competitors may develop alternatives that render our product candidates obsolete or
less attractive;
•
product candidates we develop may be covered by third parties’ patents or other
exclusive rights;
•
the market for a product candidate may change during our program so that such a
product may become unreasonable to continue to develop;
•
a product candidate may not be capable of being produced in commercial quantities
at an acceptable cost, or at all; and
•
a product candidate may not be accepted as safe and effective by patients, the
medical community or third-party payors.
21
If any of these events occur, we may be forced to abandon our development efforts
for a program or programs, or we may not be able to identify, license, discover,
develop or commercialize additional product candidates, which would have a material
adverse effect on our business and could potentially cause us to cease operations.
If the market opportunities for our products are smaller than we believe, our
revenue may be adversely affected, and our business may suffer.
Our estimates of the potential market opportunity for each of our products include
several key assumptions based on our industry knowledge, industry publications,
third-party research reports and other surveys. For example, GIAPREZA was approved
for use in adult patients with septic or other distributive shock. However,
determining the approximate number of hypotension patients in a given market
requires numerous estimates and assumptions. While we believe that our internal
assumptions are reasonable, no independent source has verified such assumptions. If
any of these assumptions proves to be inaccurate, then the actual market for our
product candidates could be smaller than our estimates of our potential market
opportunity. Moreover, hospital and third-party payors may only approve GIAPREZA
for a subset of the total patient population, such as those patients who have
failed a first-line or second-line therapy. In that case, the total addressable
market for GIAPREZA may be smaller than we estimated. If the actual market for our
products is smaller than we estimate, our product revenue may be limited and it may
be more difficult for us to achieve or maintain profitability.
We are subject to federal and state healthcare fraud and abuse laws, false claims
laws and health information privacy and security laws. If we are unable to comply,
or have not fully complied, with such laws, we could face substantial penalties.
Our operations are subject to various federal and state fraud and abuse laws,
including, without limitation, the federal Anti-Kickback Statute, the federal FCA
and physician sunshine laws and regulations. These laws impact, among other things,
our sales, marketing and education programs. In addition, we are subject to patient
privacy regulation by both the federal government and the states in which we
conduct our business. The laws that affect our ability to operate include:
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons
from knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, to induce, or in return for, the purchase or
recommendation of an item or service reimbursable under a federal healthcare
program, such as the Medicare and Medicaid programs;
•
federal civil and criminal false claims laws and civil monetary penalty laws, which
prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid or other third-
party payors that are false or fraudulent;
•
HIPAA, which created new federal criminal statutes that prohibit executing a scheme
to defraud any healthcare benefit program and making false statements relating to
healthcare matters;
•
HIPAA, as amended by the federal Health Information Technology for Economic and
Clinical Health Act and its implementing regulations, which imposes certain
requirements relating to the privacy, security and transmission of individually
identifiable health information;
•
the federal physician sunshine requirements under the Patient Protection and
Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
(Health Care Reform Laws) require manufacturers of drugs, devices, biologics, and
medical supplies to report annually to the U.S. Department of Health and Human
Services information related to payments and other transfers of value to
physicians, other healthcare providers, and teaching hospitals, and ownership and
investment interests held by physicians and other healthcare providers and their
immediate family members and applicable group purchasing organizations; and
•
state law equivalents of each of the above federal laws, such as anti-kickback and
false claims laws that may apply to items or services reimbursed by any third-party
payor, including commercial insurers; state laws to comply with the pharmaceutical
industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government, or otherwise restrict payments that may be
made to healthcare providers and other potential referral sources; state laws that
require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing
expenditures; and state laws governing the privacy and security of health
information in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance
efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions
and safe harbors available, our business activities could be subject to challenge
under one or more of such laws. In addition, recent healthcare reform legislation
has strengthened these laws. For example, the Health Care Reform Laws, among other
things, amends the intent
22
If our operations are found to be in violation of any of the laws described above
or any other governmental regulations that apply to us, we may be subject to
penalties, including civil and criminal penalties, damages, fines, exclusion from
participation in government healthcare programs, such as Medicare and Medicaid,
imprisonment and the curtailment or restructuring of our operations, any of which
could adversely affect our ability to operate our business and our results of
operations.
Current and future legislation and court rulings may increase the difficulty and
cost needed to obtain marketing approval and the subsequent commercialization of
our product candidates and affect the prices we may obtain.
In the U.S. and some foreign jurisdictions, there have been a number of legislative
and regulatory changes and proposed changes regarding the healthcare system that
could prevent or delay marketing approval of our product candidates, restrict or
regulate post-approval activities and affect our ability to profitably sell any
product candidates for which we obtain marketing approval.
For example, the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Affordability Reconciliation Act, (collectively, the
PPACA), currently provides the following:
•
an annual, nondeductible fee on any entity that manufactures or imports specified
branded prescription drugs and biologic agents;
•
an increase in the statutory minimum rebates a manufacturer must pay under the
Medicaid Drug Rebate Program;
•
expansion of healthcare fraud and abuse laws, including the False Claims Act and
the Anti-Kickback Statute, new government investigative powers, and enhanced
penalties for noncompliance;
•
a new Medicare Part D coverage gap discount program, in which manufacturers must
agree to offer 50% point-of-sale discounts off negotiated prices;
•
extension of manufacturers’ Medicaid rebate liability;
•
expansion of eligibility criteria for Medicaid programs;
•
new requirements to report financial arrangements with physicians and teaching
hospitals;
•
a new requirement to annually report drug samples that manufacturers and
distributors provide to physicians; and
•
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities
in, and conduct comparative clinical effectiveness research, along with funding for
such research.
In addition, other legislative changes have been proposed and adopted since the
PPACA was enacted. These changes included aggregate reductions of Medicare payments
to providers of up to 2% per fiscal year. Additionally, the American Taxpayer
Relief Act of 2012 reduced Medicare payments to several providers, and increased
the statute of limitations period for the government to recover overpayments to
providers from 3 to 5 years. Further, it is possible that additional regulatory
changes, as well as the repeal (in whole or in part) of the PPACA or the striking
down of the PPACA by a court, could negatively affect insurance coverage and drug
prices. These new laws may result in additional reductions in Medicare and other
healthcare funding.
We expect that the PPACA, as well as other healthcare reform measures that may be
adopted in the future, may result in more rigorous coverage criteria and additional
downward pressure on the price that we receive for any approved product. Any
reduction in reimbursement from Medicare or other government programs may result in
a similar reduction in payments from private payers. The implementation of cost
containment measures or other healthcare reforms may prevent us from being able to
generate revenue, attain profitability, or commercialize our products.
23
Recent partial shutdowns of the U.S. Government have adversely affected the ability
of companies in our industry to operate. Future shutdowns could result in material
delays in regulatory actions and could limit our ability to access capital markets
in the normal fashion.
Commencing in December 2018, the U.S. Federal Government was partially shut down
for a period of 35 days. During this time, the FDA was not reviewing or acting on
IND submissions or NDA filings. As a result, companies were effectively unable to
receive regulatory clearance to commence new clinical studies and were unable to
have new drugs approved. Similarly, the SEC was shut down during this time, which
meant that the SEC was unable to review registration statements filed under the
Securities Act of 1933, as amended. While this shutdown did not directly adversely
affect our operations, future shutdowns could negatively affect our ability to
interact with the FDA and/or the SEC, which could negatively affect our ability to
operate in the ordinary course. Any such future event could negatively affect our
prospects and our stock price.
Governments outside the U.S. tend to impose strict price controls, which may
adversely affect our revenues, if any.
In some countries, particularly the countries of the European Union, the pricing of
prescription pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a product. To obtain reimbursement
or pricing approval in some countries, we may be required to conduct a clinical
trial that compares the cost-effectiveness of our product candidate to other
available therapies. If reimbursement of our products is unavailable or limited in
scope or amount, or if pricing is set at unsatisfactory levels, our business could
be harmed, possibly materially.
We rely on certain key employees, and the loss of their service could negatively
impact our future success.
Our business and operations may be materially adversely affected in the event of
computer system failures or security breaches.
Despite the implementation of security measures, our internal computer systems, and
those of our third-party CROs and other third parties on which we rely, are
vulnerable to damage from computer viruses, unauthorized access, cyber-attacks,
natural disasters, fire, terrorism, war and telecommunication and electrical
failures. If such an event were to occur and interrupt our operations, it could
result in a material disruption of our development programs. For example, the loss
of data from ongoing or planned clinical studies could result in delays in our
regulatory approval efforts and significantly increase our costs to recover or
reproduce the data. To the extent that any disruption or security breach results in
a loss of or damage to our data or applications, loss of trade secrets or
inappropriate disclosure of confidential or proprietary information, including
protected health information or personal data of employees or former employees,
access to our clinical data or disruption of the manufacturing process, we could
incur liability and the further development of our product candidates could be
delayed. We may also be vulnerable to cyber-attacks by hackers or other
malfeasance. This type of breach of our cybersecurity may compromise our
confidential information or our financial information and adversely affect our
business or result in legal proceedings.
We and our subsidiary have certain operational covenants in our Royalty Agreement
with HealthCare Royalty Partners. If we or our subsidiary are found to have
breached these covenants, our subsidiary may be required to pay a substantial sum
to HealthCare Royalty Partners.
On May 10, 2018, the La Jolla Pharmaceutical Company (LJPC), through its wholly-
owned subsidiary, La Jolla Pharma, LLC (the Subsidiary), closed a $125.0 million
royalty financing agreement (the Royalty Agreement) with HealthCare Royalty
Partners (HCR). In this transaction, LJPC contributed certain assets related to,
and including, GIAPREZA to the Subsidiary (the Contributed Assets). The royalty
payment obligations under the Royalty Agreement are limited to the Subsidiary, and
HCR has no recourse under the Royalty Agreement against LJPC or any assets other
than the Contributed Assets and LJPC’s equity interest in the Subsidiary. LJPC and
the Subsidiary are required to comply with certain covenants
24
As of December 31, 2018, we had approximately 26.3 million shares of common stock
outstanding and currently may be required to issue up to a total of approximately
14.0 million additional shares of common stock upon conversion of existing
convertible preferred stock and upon exercise of outstanding stock option grants
and warrants. Such an issuance would be significantly dilutive to our existing
common shareholders. You will experience further dilution if we issue additional
equity securities in future fundraising transactions.
As of December 31, 2018, there were approximately 3,906 shares of Series C-12
Convertible Preferred Stock and approximately 2,737 shares of Series F Convertible
Preferred Stock issued and outstanding. In light of the conversion rate of our
preferred stock (approximately 1,724 shares of common stock are issuable upon the
conversion of one share of Series C-12 Convertible Preferred Stock, and
approximately 286 shares of common stock are issuable upon the conversion of one
share of Series F Convertible Preferred Stock), the presence of such a large number
of convertible preferred shares may dilute the ownership of our existing
shareholders and provide the preferred investors with a sizeable interest in the
Company.
Assuming the conversion of all preferred stock into common stock at the current
conversion rates, and the exercise of all outstanding options and warrants, we
would have approximately 40.3 million shares of common stock issued and outstanding
following any such conversion and exercise, although the issuance of the common
stock upon the conversion of our preferred stock is limited by a 9.999% beneficial
ownership cap for each preferred shareholder, which such cap may be amended or
waived by each such holder with no less than 61 days’ notice to the Company. With
approximately 26.3 million shares of common stock issued and outstanding as of
December 31, 2018, the issuance of this number of shares of common stock underlying
the convertible preferred stock and outstanding stock options and warrants would
represent approximately 35% dilution to our existing shareholders.
The price of our common stock has been, and will be, volatile and may decline.
Our stock has historically experienced significant price and volume volatility and
could continue to be volatile. Market prices for securities of biotechnology and
pharmaceutical companies, including ours, have historically been highly volatile,
and the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. The following factors, among others, can have a significant effect on
the market price of our securities:
•
significant conversions of preferred stock into common stock and sales of those
shares of common stock;
•
results from our preclinical studies and clinical studies;
•
limited financial resources;
•
announcements regarding financings, mergers or other strategic transactions;
•
future sales of significant amounts of our capital stock by us or our shareholders;
•
developments in patent or other proprietary rights;
•
developments concerning potential agreements with collaborators; and
•
general market conditions and comments by securities analysts.
The realization of any of the risks described in these “Risk Factors” could have a
negative effect on the market price of our common stock. In addition, class action
litigation is sometimes instituted against companies whose securities have
25
Because we do not expect to pay dividends on our common stock in the foreseeable
future, you must rely on stock appreciation for any return on your investment.
We have paid no cash dividends on our common stock to date, and we currently intend
to retain our future earnings, if any, to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends on our common
stock in the foreseeable future, and payment of cash dividends, if any, will also
depend on our financial condition, results of operations, capital requirements and
other factors and will be at the discretion of our board of directors. Furthermore,
we may in the future become subject to contractual restrictions on, or prohibitions
against, the payment of dividends. Accordingly, the success of your investment in
our common stock will likely depend entirely upon any future appreciation. There is
no guarantee that our common stock will appreciate in value or even maintain the
price at which you purchased your shares, and you may not realize a return on your
investment in our common stock.
Not applicable.
Item 2. Properties.
Our corporate headquarters is located at 4550 Towne Centre Court, San Diego,
California 92121. We lease 83,008 square feet of office and laboratory space. Our
lease commenced on October 30, 2017 for a 10-year period and provides an option to
extend the lease for an additional 5 years at the end of the initial term. The
annual rent is subject to escalation during the term. In addition to rent, the
lease requires us to pay certain taxes, insurance and operating costs relating to
the leased premises. The lease contains customary default provisions,
representations, warranties and covenants.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities.
Market Information
Shares of our common stock are traded on the Nasdaq Capital Market, under the
symbol “LJPC.”
Holders of Record
As of February 20, 2019, we had three holders of record. Certain shares of common
stock are held in “street” name, and, accordingly, the number of beneficial owners
of such shares of common stock is not known or included in the foregoing number.
This number of holders of record also does not include stockholders whose shares
may be held in trust by other entities.
Dividends
We have never paid dividends on shares of our common stock, and we do not
anticipate paying dividends in the foreseeable future.
26
We are a smaller reporting company, as defined by Rule 12b-2 under the Securities
and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not
required to provide the information under this item.
Introduction
Business Overview
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP). The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical
experience and on other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under different
assumptions or conditions.
While our significant accounting policies are more fully described in the notes to
our consolidated financial statements included in Item 15 of this Annual Report on
Form 10-K, we believe that the following critical accounting policies are most
critical to understanding and evaluating our reported financial result.
Revenue Recognition
27
Inventory Valuation
Inventory consist of finished goods held for sale and distribution and work in
process. The Company periodically analyzes inventory levels and writes down
inventory as cost of product sales when inventory has become obsolete or has a cost
basis in excess of its estimated net realizable value and inventory quantities are
in excess of expected product sales. The determination of events requiring the
establishment of inventory valuation reserves, together with the calculation of the
amount of such reserves may require judgment. Assumptions utilized in our
quantification of inventory reserves include, but are not limited to, estimates of
future product demand, consideration of current and future market conditions, net
selling price of the product, potential product obsolescence and other events
related to special circumstances surrounding the product. Adverse changes in
assumptions utilized in our inventory reserve calculations could result in an
increase to our inventory valuation reserves and higher cost of product sales.
Accrued Expenses
We base our accrued expenses on our estimates of the services received and efforts
expended pursuant to our contractual arrangements. The financial terms of these
agreements are subject to negotiation, vary from contract to contract and may
result in uneven payment flows. There may be instances in which payments made to
our service providers will precede the level of services provided and result in a
prepayment of the expense. In accruing service fees, we estimate the time period
over which services will be performed and the level of effort to be expended in
each period. If the actual timing of the performance of services or the level of
effort varies from our estimate, we adjust the accrual or prepayment accordingly.
Interest Expense
In the second quarter of 2018, we entered into a financing arrangement and recorded
a deferred royalty obligation in our consolidated financial statements at December
31, 2018. The deferred royalty obligation is repaid based on royalties from the net
product sales of GIAPREZA. Interest expense and the amortization of issuance costs
related to the deferred royalty
28
obligation are recognized over the expected repayment term using the effective
interest method. The assumptions used in determining the expected repayment term of
the deferred royalty obligation require us to make estimates that could impact the
effective interest rate. Each reporting period, we update our estimate of accrued
interest under this agreement based on actual and forecasted net product sales of
GIAPREZA. Changes in interest expense resulting from changes in the effective
interest rate, if any, are recorded on a prospective basis.
Results of Operations
The following table summarizes our results of operations for each of the periods
below (in thousands):
2018
2017
2016
Net product sales
$
10,056
$
—
$
—
616
(62,288
)
Selling, general and administrative expense
(85,162
)
(30,852
)
(16,700
)
Other (expense) income, net
(5,418
)
624
187
Net loss
$
(199,469
)
$
(114,803
)
$
(78,185
)
For the year ended December 31, 2018, GIAPREZA net product sales were $10.1
million. La Jolla launched GIAPREZA in the U.S. in March 2018.
For the year ended December 31, 2018, we recognized cost of product sales of $1.6
million for sales of GIAPREZA related to royalty, labeling, shipping and
distribution costs and a one-time charge of $0.8 million for inventory reserves.
Prior to approval by the FDA, approximately $0.6 million of direct material costs
to manufacture GIAPREZA were recorded to research and development expense in 2017.
As of December 31, 2018, inventory excludes approximately $0.2 million of
manufacturing costs that were recorded to research and development expense.
The following table summarizes our research and development expense for each of the
periods below (in thousands):
2017
2016
Clinical development costs
$
42,766
$
34,420
$
32,798
26,735
13,570
11,980
5,657
11,440
10,263
$
84,575
$
62,288
29
Years Ended December 31, 2018 and 2017
During the year ended December 31, 2018, research and development expense increased
to $117.3 million from $84.6 million for the same period in 2017. The increase was
primarily due to increased personnel and related costs and share-based compensation
expense in support of the advancement of GIAPREZA and the clinical development of
LJPC-401 and our other product candidates.
During the year ended December 31, 2017, research and development increased to
$84.6 million from $62.3 million for the same period in 2016. The increase was
primarily due to increased personnel and related costs and share-based compensation
expense in support of the advancement and clinical development of GIAPREZA and
LJPC-401.
The following table summarizes our selling, general and administrative expense for
each of the periods below (in thousands):
2018
2017
2016
Personnel and related costs
$
38,355
$
9,367
$
4,020
5,033
8,889
6,637
3,791
$
30,852
$
16,700
During the year ended December 31, 2018, selling, general and administrative
expense increased to $85.2 million from $30.9 million for the same period in 2017.
The increase was due to increased personnel and related costs, share-based
compensation and commercialization and promotional activities to support the
product launch of GIAPREZA. We anticipate selling, general and administrative
expense will decrease in 2019 as a result of our Company-wide realignment.
During the year ended December 31, 2017, selling, general and administrative
expense increased to $30.9 million from $16.7 million for the same period in 2016.
The increase was primarily due to increased personnel costs and professional and
outside service costs to support our increased development and pre-
commercialization activities.
During the year ended December 31, 2018, other (expense) income, net increased to
$5.4 million from $0.6 million for the same period in 2017. The increase was due to
amounts accrued pursuant to our deferred royalty obligation balance outstanding
during the year ended December 31, 2018.
During the year ended December 31, 2017, other (expense) income, net increased to
$0.6 million from $0.2 million for the same period in 2016. The increase was due to
higher cash balance.
30
Since January 2012, when the Company was effectively restarted with new assets and
a new management team, through December 31, 2018, our cash used for operating
activities was $340.9 million. From inception through December 31, 2018, we have
incurred an accumulated deficit of $921.0 million and have financed our operations
through public and private offerings of securities, a royalty financing, revenues
from collaborative agreements and net product sales, equipment financings and
interest income on invested cash balances. As of December 31, 2018, we had $172.6
million in cash and cash equivalents, compared to $90.9 million in cash and cash
equivalents as of December 31, 2017. The Company had no debt as of December 31,
2018 and 2017. Based on our current operating plans and projections, we believe
that our cash and cash equivalents as of December 31, 2018 will be sufficient to
fund operations for at least one year from the date this Annual Report on Form 10-K
is filed with the SEC.
Cash used for operating activities for the year ended December 31, 2018 was $152.4
million, compared to $85.1 million for the same period in 2017. The increase in
cash used for operating activities was a result of the increase in our net loss,
primarily offset by increases in share-based compensation, non-cash interest
expense, depreciation and amortization and changes in working capital.
Cash used for investing activities for the year ended December 31, 2018, was $2.3
million compared to $9.2 million for the same period in 2017.
Cash provided by financing activities for the year ended December 31, 2018 was
$236.4 million, compared to $120.2 million for the same period in 2017. The
increase in cash provided by financing activities was primarily a result of $109.8
million of net proceeds from the March 2018 common stock offering and $124.3
million of net proceeds from the May 2018 royalty financing.
Contractual Obligations
Total
Less Than
1 Year
1 - 3 Years
3 - 5 Years
More Than
5 Years
Leases
$
39,286
$
3,951
$
8,262
$
8,765
$
18,308
Purchase obligations
8,277
2,759
5,518
License agreements
600
120
240
240
—
Total
$
48,163
$
6,830
$
14,020
$
9,005
$
18,308
Our exposure to market risk for changes in interest rates relates primarily to
interest earned on our cash equivalents and investments. The primary objective of
our investment activities is to preserve our capital to fund operations. A
secondary objective is to maximize income from our investments without assuming
significant risk. Our investment policy provides for investments in low-risk,
investment-grade debt instruments. As of December 31, 2018, we had cash and cash
equivalents of $172.6 million. A hypothetical 10% change in interest rates during
any of the periods presented would not have had a material
31
The financial statements required by this item are set forth at the end of this
Annual Report on Form 10-K beginning on page F-2 and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
(a) Disclosure Controls and Procedures; Changes in Internal Control Over Financial
Reporting
Our management, with the participation of our principal executive and principal
financial officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of December 31, 2018. Based on this evaluation, our principal executive and
principal financial officer concluded that our disclosure controls and procedures
were effective as of December 31, 2018.
During the year ended December 31, 2018, we implemented controls in connection with
the newly-adopted accounts receivable, inventory, revenue recognition and interest
expense policies as disclosed in Note 2 to our consolidated financial statements
included in Item 15 of this Annual Report on Form 10-K.
Management has assessed the effectiveness of our internal control over financial
reporting as of December 31, 2018 and has concluded that such internal control over
financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting has
been audited by Squar Milner LLP, an independent registered public accounting firm,
as stated in their attestation report appearing below, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2018.
32
33
Item 9B. Other Information.
None.
PART III
We have adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive, principal
financial and principal accounting officers, or persons performing similar
functions. Our Code of Business Conduct and Ethics is posted on our website located
at www.ljpc.com in the Corporate Governance section under “Investor Relations.” We
intend to disclose future amendments to certain provisions of the Code of Business
Conduct and Ethics, and waivers of the Code of Business Conduct and Ethics granted
to executive officers and directors, on the website within 4 business days
following the date of the amendment or waiver.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
34
PART IV
Item 15. Exhibits, Financial Statement Schedules.
1.
The following financial statements of La Jolla Pharmaceutical Company are filed as
part of this report under Item 8 — Financial Statements and Supplementary Data:
Report of Independent Registered Public Accounting Firm
F - 1
Consolidated Statements of Operations for the years ended December 31, 2018, 2017
and 2016
F - 3
Consolidated Statements of Shareholders’ Equity for the years ended December 31,
2018, 2017 and 2016
F - 4
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017
and 2016
F - 5
2.
Financial Statement Schedules.
None.
3.
Exhibits.
List of Exhibit required by Item 601 of Regulation S-K. See part (b) below.
(b) Exhibits:
Incorporated by Reference
Exhibit
No.
Exhibit
Description
Form
Date
Filed
Filed
Herewith
3.1.1
S-8
12/20/2013
3.1.2
8-K
1/15/2014
3.1.3
10/17/2014
3.2
8-A12B/A
10/17/2014
4.1
8-K
9/25/2013
10.1*
10-Q
11/17/2005
10.7*
Employment Offer Letter by and between La Jolla Pharmaceutical Company and George
F. Tidmarsh, M.D., Ph.D., dated as of January 19, 2012
8-K
1/20/2012
10.11*
8-K
9/25/2013
10.12*
Employment Offer Letter by and between La Jolla Pharmaceutical Company and Lakhmir
Chawla, M.D., dated as of February 3, 2015
10-K
2/25/2016
10.13*
Employment Offer Letter by and between La Jolla Pharmaceutical Company and Dennis
Mulroy dated as of March 12, 2015
8-K
4/10/2015
10.14*
Employment Offer Letter by and between La Jolla Pharmaceutical Company and Jennifer
Anne Carver dated January 1, 2016
10-K
2/25/2016
35
10.15
Lease between BMR-Axiom LP and La Jolla Pharmaceutical Company, dated December 29,
2016
10-K
2/23/2017
10.16
10-K
2/22/2018
10.17
Revenue Interest Agreement, dated May 10, 2018, among La Jolla Pharma, LLC,
HealthCare Royalty Partners III, L.P., HCRP Overflow Fund, L.P. and HCR Molag Fund,
L.P.
8-K
5/14/2018
21.1
X
23.1
24.1
31.1
X
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
X
101.PRE
X
*
This exhibit is a management contract or compensatory plan or arrangement.
†
Confidential treatment has been requested with respect to certain portions of the
exhibit, which portions have been omitted and filed separately with the Securities
and Exchange Commission.
None.
36
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 hereunto
duly authorized.
Date:
March 4, 2019
/s/ George Tidmarsh
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints each of George Tidmarsh, M.D., Ph.D. and Dennis Mulroy as
his or her true and lawful attorney-in-fact and agent, with full power of
substitution for him or her, and in his or her name in any and all capacities, to
sign any and all amendments to this Annual Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing requisite
and necessary to be done therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ George Tidmarsh
March 4, 2019
George Tidmarsh, M.D., Ph.D.
March 4, 2019
Dennis Mulroy
March 4, 2019
Kevin Tang
Director
March 4, 2019
Laura Douglass
Director
March 4, 2019
Craig Johnson
Director
March 4, 2019
Robert Rosen
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F - 1
December 31,
2018
December 31,
2017
ASSETS
Current assets:
$
90,915
Inventory, net
2,020
3,147
94,062
24,568
Restricted cash
909
909
Total assets
$
204,292
$
119,539
Current liabilities:
Accounts payable
$
8,572
$
11,484
Accrued expenses
12,988
703
4,995
1,370
18,552
12,785
Total liabilities
168,371
31,337
Shareholders’ equity:
Series C-12 Convertible Preferred Stock, $0.0001 par value; 11,000 shares
authorized,
3,906 shares issued and outstanding at December 31, 2018 and December 31, 2017,
and a liquidation preference of $3,906 at December 31, 2018 and 2017
3,906
3,906
Series F Convertible Preferred Stock, $0.0001 par value; 10,000 shares authorized,
2,737 shares issued and outstanding at December 31, 2018 and December 31, 2017,
and a liquidation preference of $2,737 at December 31, 2018 and 2017
2,737
2,737
803,071
Accumulated deficit
(920,983
)
(721,514
)
Total shareholders’ equity
35,921
88,202
$
119,539
F - 2
2018
2017
2016
Revenue
$
—
$
—
616
Total revenue
10,056
—
616
Operating expenses
84,575
62,288
30,852
16,700
115,427
78,988
(115,427
)
(78,372
)
Other (expense) income
Interest expense
(7,303
)
Interest income
1,885
624
187
624
187
Net loss
(199,469
)
(114,803
)
(78,185
)
Net loss per share, basic and diluted
$
(7.85
)
$
(5.41
)
$
(4.54
)
Weighted-average common shares outstanding, basic and diluted
25,422
21,215
17,228
F - 3
Series C-12
Convertible
Preferred Stock
Series F
Convertible
Preferred Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Shareholders’
Equity
Shares
Amount
Shares
Amount
Shares
Amount
$
3,906
3
$
2,737
18,244
$
2
$
646,408
$
(528,526
)
$
124,527
14,349
14,349
—
—
197
197
17
149
149
Net loss
—
—
(78,185
)
(78,185
)
Balance at December 31, 2016
3,906
2,737
18,261
661,103
(606,711
)
61,037
—
—
3,731
117,480
117,480
20,776
20,776
—
—
1,019
1,019
175
2,693
2,693
Net loss
—
—
(114,803
)
(114,803
)
Balance at December 31, 2017
3,906
2,737
22,167
803,071
(721,514
)
88,202
3,910
1
109,808
109,809
34,748
34,748
332
—
332
150
1,908
1,908
32
391
—
391
Net loss
(199,469
)
(199,469
)
Balance at December 31, 2018
$
3,906
$
2,737
26,259
$
3
$
950,258
$
(920,983
)
$
35,921
F - 4
2018
2017
2016
Operating activities
Net loss
$
(199,469
)
$
(114,803
)
$
(78,185
)
Adjustments to reconcile net loss to net cash used for operating activities:
21,795
14,546
Depreciation expense
4,405
1,268
730
199
75
Inventory
(2,020
)
(1,642
)
(664
)
Other assets
—
219
(149
)
Accounts payable
(2,912
)
4,832
3,600
Accrued expenses
5,451
(202
)
227
2,918
987
Deferred rent
824
335
124
(85,081
)
(58,709
)
Investing activities
(9,194
)
(2,218
)
Net cash used for investing activities
(2,340
)
(9,194
)
(2,218
)
Financing activities
117,480
Net proceeds from the exercise of stock options for common stock
1,908
2,693
149
120,173
149
25,898
(60,778
)
Cash, cash equivalents and restricted cash at beginning of period
91,824
65,926
126,704
$
91,824
$
65,926
Supplemental disclosure of cash flow information
Interest paid
$
506
$
—
$
—
$
13,696
$
—
$
90,915
$
65,726
200
909
$
91,824
$
65,926
F - 5
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
1. Business
As of December 31, 2018, the Company had $172.6 million in cash and cash
equivalents, compared to $90.9 million in cash and cash equivalents at December 31,
2017. Based on the Company’s current operating plans and projections, the Company
expects that its cash and cash equivalents as of December 31, 2018 will be
sufficient to fund operations for at least one year from the date this Annual
Report on Form 10-K is filed with the SEC.
The Company considers all highly liquid investments with maturities of three months
or less when purchased as cash equivalents. The Company maintains its cash in
checking and savings accounts. Income generated from cash held in savings accounts
is recorded as interest income. The carrying value of the Company’s money market
savings accounts is included in cash equivalents and approximates the fair value.
Cash is classified as restricted cash when certain funds are reserved for a
specific purpose and are not available for immediate or general business use.
Inventory, Net
F - 6
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
become obsolete; inventory has a cost basis in excess of its estimated net
realizable value; or inventory quantities are in excess of expected product sales.
The Company’s products are distributed in the U.S. through distributors and select
wholesalers (collectively, customers) that resell its products to hospitals, the
end users. The following table includes the percentage of net product sales and
accounts receivable balances for the Company’s three major customers, each of which
comprised 10% or more of its net product sales:
Accounts Receivable
Year Ended
December 31, 2018
37
%
44
%
Customer B
31
%
28
%
Customer C
30
%
26
%
Total
98
%
98
%
The Company adopted the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 606 – Revenue from Contracts with Customers (ASC
606) at the time of its first commercial shipment of GIAPREZA in the first quarter
of 2018. The Company had no revenue from product sales prior to the first quarter
of 2018.
Under ASC 606, the Company recognizes revenue when its customers obtain control of
the Company’s product, which typically occurs on delivery. Revenue is recognized in
an amount that reflects the consideration that the Company expects to receive in
exchange for those goods. To determine revenue recognition for contracts with
customers within the scope of ASC 606, the Company performs the following 5 steps:
(i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v)
recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue from product sales is recorded at the transaction price, net of estimates
for variable consideration consisting of chargebacks, discounts, returns and Group
Purchasing Organization (GPO) discounts, rebates and administrative fees. Variable
consideration is estimated using the most-likely amount method, which is the
single-most likely outcome under a contract and is typically at the stated
contractual rate. Actual amounts of consideration ultimately received may differ
from the Company’s estimates. If actual results vary materially from the Company’s
estimates, the Company will adjust these estimates, which will affect revenue from
product sales and earnings in the period such estimates are adjusted. These items
include:
•
Chargebacks - Chargebacks are discounts the Company provides to distributors in the
event that the sales prices to end users are below the distributors’ acquisition
price. Chargebacks are estimated based on known chargeback rates and recorded as a
reduction of revenue on delivery to the Company’s customers.
•
Discounts - The Company offers customers various forms of incentives and
consideration, including prompt-pay discounts, service fees and other contract
fees. The Company estimates discounts and fees primarily based on
F - 7
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
contractual terms. These discounts and fees are recorded as a reduction of revenue
on delivery to the Company’s customers.
•
Returns - The Company offers customers a limited right of return, generally for
damaged or expired product. The Company estimates returns based on an internal
analysis, which includes actual experience and a review of comparable companies.
The estimates for returns are recorded as a reduction of revenue on delivery to the
Company’s customers.
•
GPO Discounts and Rebates - The Company offers cash discounts to GPO members. These
discounts are taken when the GPO members purchase GIAPREZA from the Company’s
customers, who then charge the discount amount back to the Company. Additionally,
the Company offers volume and contract-tier rebates to GPO members. Rebates are
based on actual purchase levels during the quarterly rebate purchase period.
•
GPO Administrative Fees - The Company pays administrative fees to GPOs for services
and access to data. These fees are based on contracted terms and are paid after the
quarter in which the product was purchased by the GPO members.
The Company will continue to assess its estimates of variable consideration as it
accumulates additional historical data and will adjust these estimates accordingly.
Research and development expense includes salaries and benefits, facilities and
other overhead costs, research-related manufacturing costs, contract service and
clinical and preclinical-related service costs performed by clinical research
organizations, research institutions and other outside service providers. Research
and development expense is expensed as incurred when these expenditures relate to
the Company’s research and development efforts and have no alternative future uses.
Acquisition or milestone payments that the Company makes in connection with in-
licensed technology are expensed as incurred when there is uncertainty in receiving
future economic benefits from the licensed technology. The Company considers the
future economic benefits from the licensed technology to be uncertain until such
licensed technology is incorporated into products that are approved for marketing
by the FDA or when other significant risk factors are abated. For accounting
purposes, management has viewed future economic benefits for all of the Company’s
licensed technology to be uncertain.
Patent Costs
Legal costs in connection with approved patents and patent applications are
expensed as incurred, as recoverability of such expenditures is uncertain. These
costs are recorded in selling, general and administrative expense in the
consolidated statements of operations.
Share-based Compensation
The Company accounts for share-based payment arrangements in accordance with ASC
718, Compensation - Stock Compensation and ASC 505-50, Equity - Equity Based
Payments to Non-Employees, which requires the recognition of compensation expense,
using a fair-value based method, for all costs related to share-based payments,
including stock options and restricted stock awards. These standards require
companies to estimate the fair value of share-based payment awards on the date of
the grant using an option-pricing model. The Company has elected to account for
forfeitures as they occur.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are determined based on the differences between
the financial statement carrying amounts and the income tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates applicable to taxable income in the years in
F - 8
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
Interest Expense
Interest expense and the amortization of issuance costs related to the deferred
royalty obligation (see Note 8) are recognized over the expected repayment term of
the deferred royalty obligation using the effective interest method. The
assumptions used in determining the expected repayment term of the deferred royalty
obligation require the Company to make estimates that could impact the effective
interest rate. Each reporting period, the Company estimates the expected repayment
term of the deferred royalty obligation based on forecasted net product sales of
GIAPREZA. Changes in interest expense resulting from changes in the effective
interest rate, if any, are recorded on a prospective basis.
Basic net loss per share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the period, excluding unvested
restricted stock awards. Diluted net loss per share is calculated by dividing net
loss by the weighted average number of common shares outstanding plus potential
common shares. Convertible preferred stock, stock options, warrants and unvested
restricted stock awards are considered potential common shares and are included in
the calculation of diluted net loss per share using the treasury stock method when
their effect is dilutive. Potential common shares are excluded from the calculation
of diluted net loss per share when their effect is anti-dilutive. As of December
31, 2018, 2017 and 2016, there were 14.0 million shares, 13.6 million shares and
10.7 million shares, respectively, of potential common shares, which were excluded
from the calculation of diluted net loss per share because their effect was anti-
dilutive.
Comprehensive Loss
Segment Reporting
The Company follows the provisions of ASC 820-10, Fair Value Measurements and
Disclosures (ASC 820-10), which defines fair value, establishes a framework for
measuring fair value in GAAP and requires certain disclosures about fair value
measurements. Fair value is defined as an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability.
F - 9
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
The Company’s financial instruments include cash and cash equivalents, accounts
receivable, inventory, prepaid expenses and other current assets, accounts payable
and accrued expenses. The carrying amounts reported in the balance sheets for these
financial instruments approximate fair value because of their short-term nature.
In the first quarter of 2018, the Company adopted Accounting Standard Update (ASU)
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The standard
clarifies the presentation of restricted cash and cash equivalents and requires
companies to include restricted cash and cash equivalents in the beginning and
ending balances of cash and cash equivalents on the statement of cash flows. The
standard also requires additional disclosures to describe the amount and detail of
the restriction by balance sheet line item. Accordingly, restricted cash is
included as a component of cash, cash equivalents and restricted cash in the
consolidated statements of cash flows for all periods presented, and the Company
has disclosed the amount and detail of the restriction by balance sheet line item.
In the first quarter of 2018, the Company adopted ASU 2014-09, Revenue from
Contracts with Customers (Topic 606). The standard is based on the principle that
revenue should be recognized to depict 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. Since its initial
release, there have been issued several amendments to the standard, which include
clarification of accounting guidance related to identification of performance
obligations and principal versus agent considerations. Refer to the revenue
recognition disclosure above.
Not Yet Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718):
Improvements to Nonemployee Share-based Payment Accounting. The standard expands
the scope of ASC 718 to include share-based payments granted to nonemployees in
exchange for goods and services. The provisions of this standard are effective for
annual periods beginning after December 15, 2018, and for interim periods within
those years. Early adoption is permitted. The Company will adopt the standard in
the first quarter of 2019 and expect the standard will have no material impact on
its financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard
requires lessees to recognize right-of-use assets and lease liabilities on the
balance sheet for most leases and provide enhanced disclosures. The provisions of
this standard are effective for annual periods beginning after December 15, 2018,
and for interim periods within those years. Early adoption is permitted. In July
2018, the FASB issued additional guidance for companies to elect transition using
either: (i) a modified retrospective approach for leases that exist on adoption and
in the comparative periods presented; or (ii) an optional approach to initially
apply the new lease guidance on the adoption date, without adjusting the
comparative periods presented. The Company plans to elect the optional approach and
will adopt the standard beginning in the first quarter of 2019. The Company has
completed its assessment of the standard and expects to record a right-of use asset
of approximately $16.8 million with a corresponding lease liability of $31.8
million as of January 1, 2019 for its 10-year operating lease agreement for its
corporate headquarters, which commenced October 30, 2017.
Inventory, Net
December 31,
2018
2017
Work in process
$
1,907
$
—
Finished goods
113
$
—
As of December 31, 2018, total inventory is recorded net of $0.8 million of
inventory reserves.
F - 10
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
December 31,
2018
2017
Lab equipment
$
9,047
$
7,812
2,282
Computer hardware
1,296
1,238
Software
733
619
Leasehold improvements
14,504
14,852
26,803
(2,235
)
Total property and equipment, net
$
22,267
$
24,568
Accrued Expenses
December 31,
2018
2017
Accrued interest expense
$
6,763
$
—
577
Accrued other
1,972
126
$
703
4. Company-wide Realignment
On October 18, 2018, the Company effected a Company-wide realignment to increase
its efficiency and focus on achieving its corporate goals. For the year ended
December 31, 2018, total expenses related to the Company-wide realignment were $4.0
million, with $1.6 million included in research and development expense and $2.4
million included in general and administrative expense. Total expenses were
comprised of $7.7 million for severance costs, offset by a $3.7 million reversal of
non-cash, stock-based compensation expense related to forfeited, unvested equity
awards. The Company expects to make the final payment resulting from the Company-
wide realignment in the first quarter of 2019. As of December 31, 2018, the Company
has paid $5.4 million of the $7.7 million cash charges, and the remaining $2.3
million of the cash charges were included in accrued payroll and related expenses.
5. Licensed Technology
In December 2014, the Company entered into a patent license agreement with the
George Washington University (GW), which the parties amended and restated on March
1, 2016. Pursuant to this license agreement, GW exclusively licensed to the Company
certain intellectual property rights relating to GIAPREZA, including the exclusive
rights to certain issued patents and patent applications covering GIAPREZA. Under
this license agreement, the Company is obligated to use commercially reasonable
efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a
one-time license initiation fee, annual maintenance fees, an amendment fee and
additional payments following the achievement of certain development and regulatory
milestones including FDA approval. The Company may be obligated to make additional
milestone payments of up to $0.5 million in the aggregate. Following the
commencement of commercial sales of GIAPREZA, the Company is obligated to pay
tiered royalties in the low- to mid- single digits on products covered by the
licensed rights. The patents and patent applications covered by the GW license
agreement expire between 2029 and 2038, and the obligation to pay royalties under
this agreement extend through the last-to-expire patent covering GIAPREZA.
F - 11
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
Inserm Transfert SA
In February 2014, the Company entered into a license agreement with Inserm
Transfert SA (Inserm). Pursuant to this license agreement, Inserm exclusively
licensed to the Company certain intellectual property rights relating to LJPC-401.
Under this license agreement, the Company has paid a one-time license initiation
fee, annual maintenance fees and additional payments following the achievement of
certain development milestones. The Company may be obligated to make additional
payments of up to $3.7 million upon the achievement of certain development
milestones and regulatory approval on products covered by the licensed patent
rights. Following the commencement of commercial sales of a product covered by the
licensed intellectual property, the Company will be obligated to pay tiered
royalties in the low- to mid- single digits on products covered by the licensed
rights. The patents and patent applications covered by the Inserm license agreement
expire between 2022 and 2038, and the obligation to pay royalties under this
agreement extend through the last-to-expire patent covering a licensed product.
The Company continues to seek additional technology for potential new development
programs and, as a result, has entered into various licensing agreements for
intellectual property rights. The Company has incurred licensing and milestone fees
of $0.7 million, $1.6 million and $0.5 million recorded in research and development
expense in connection with its licensing agreements for the years ended December
31, 2018, 2017 and 2016, respectively. See Note 11 for future minimum licensing
payment commitments.
In 2015, the Company entered into a services agreement with a related party.
Pursuant to the services agreement, the Company provides certain services to this
related party, including, but not limited to, research and development and clinical
study design and management for projects undertaken. In exchange for providing such
services, the Company receives payments at a negotiated, arms-length rate. As a
result, the consideration received by the Company for its services is considered to
be no less favorable to the Company than comparable terms that the Company could
obtain from an unaffiliated third party in an arms-length transaction. The services
agreement may be canceled by either party upon 60-days’ written notice to the other
party.
The Company had no contract revenue during the years ended December 31, 2018 and
2017. During the year ended December 31, 2016, the Company recognized approximately
$0.6 million of contract revenue for services provided under the services
agreement.
In addition, the Company has a non-voting profit interest in the related party,
which provides the Company with the potential to receive a portion of the future
distributions of profits, if any. Investment funds affiliated with the Chairman of
the Company’s board of directors have a controlling interest in, and the Company’s
Chief Executive Officer (CEO) has a non-voting profit interest in, the related
party.
7. Shareholders’ Equity
Common Stock
In March 2017, the Company offered and sold an aggregate of 3,731,344 shares of
common stock in an underwritten public offering at a price of $33.50 per share for
gross proceeds of approximately $125.0 million. The Company received proceeds of
approximately $117.5 million, net of approximately $7.5 million in underwriting
commissions, discounts and other issuance costs.
F - 12
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
In March 2018, the Company offered and sold an aggregate of 3,910,000 shares of
common stock in an underwritten public offering at a price of $29.50 per share for
gross proceeds of approximately $115.3 million. The Company received proceeds of
approximately $109.8 million, net of approximately $5.5 million in underwriting
commissions, discounts and other issuance costs.
Preferred Stock
As of December 31, 2018 and 2017, there were 3,906 shares of Series C-12 Preferred
and 2,737 shares of Series F Preferred issued and outstanding. As such, as of
December 31, 2018 and 2017, the issued and outstanding Series C-12 Preferred and
Series F Preferred were convertible into 6,735,378 and 782,031 shares of common
stock, respectively. In January 2019, all of the Series F Preferred was converted
into 782,031 shares of common stock by the preferred holder.
The holders of preferred stock do not have voting rights, other than for general
protective rights required by the California General Corporation Law. The Series C-
12 Preferred and the Series F Preferred do not have dividends. The Series C-12
Preferred and the Series F Preferred have a liquidation preference in an amount
equal to $1,000 per share. As of December 31, 2018 and 2017, the aggregate
liquidation preference was approximately $3.9 million and $2.7 million on the
Series C-12 Preferred and Series F Preferred, respectively.
Stock Options
In September 2013, the Company adopted an equity compensation plan entitled the
2013 Equity Incentive Plan (2013 Equity Plan). The 2013 Equity Plan is an omnibus
equity compensation plan that permits the issuance of various types of equity-based
compensation awards, including stock options, restricted stock awards, stock
appreciation rights and restricted stock units, as well as cash awards, to
employees, directors and eligible consultants. The 2013 Equity Plan has a 10-year
term and permits the issuance of incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (IRC). The administrator under the plan
has broad discretion to establish the terms of awards, including the size, term,
exercise price and vesting conditions. Generally, grants to employees vest over
four years, with 25% vesting on the one-year anniversary and the remainder vesting
either quarterly or monthly thereafter; grants to non-employee directors generally
vest over one year on the one-year anniversary.
At the 2016 and 2017 Annual Meetings of Shareholders, the Company’s shareholders
approved and adopted an amendment to the 2013 Equity Plan to increase the number of
shares of common stock authorized for issuance up to a total of 4,600,000 and
8,100,000 shares, respectively.
As of December 31, 2018, there were 1,340,450 shares of common stock available for
future grants under the 2013 Equity Plan.
F - 13
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
The Company’s stock option activity under its option plans was comprised of the
following:
Shares
Underlying
Stock Options
Weighted-
average
Exercise Price
per Share
Weighted-
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2015
2,318,685
$
22.01
Granted
483,200
$
17.83
Exercised
(17,548
)
$
8.52
Forfeited
(156,875
)
$
26.35
$
21.07
Granted
3,704,725
$
25.94
Exercised
(174,628
)
$
15.42
Forfeited
(120,257
)
$
22.82
$
24.19
Granted
1,978,219
$
23.66
Exercised
(106,370
)
$
17.95
Forfeited
(1,442,937
)
$
28.07
$
23.26
7.65 years
$
200,279
$
23.26
7.65 years
$
200,279
$
22.61
6.33 years
$
200,279
The weighted-average grant date fair values of the stock options granted was
$20.52, $23.80 and $15.33 per underlying share for the years ended December 31,
2018, 2017 and 2016, respectively. As of December 31, 2018, $64.5 million of total
unrecognized share-based compensation expense related to unvested stock options
remains and is expected to be recognized over a weighted-average period of
approximately 2.8 years. During the years ended December 31, 2018, 2017 and 2016
stock options to purchase 106,370, 174,628 and 17,548 shares of common stock were
exercised with an intrinsic value of $1.4 million, $3.3 million and $0.1 million,
respectively. The total fair value of equity awards vested during the years ended
December 31, 2018, 2017 and 2016 was $38.0 million, $12.1 million and $14.5
million, respectively.
In July 2018, the Company’s board of directors approved the adoption of the 2018
Employee Stock Purchase Plan (ESPP), which was subsequently adopted and approved by
the Company’s shareholders at the 2018 Annual Meeting of Shareholders, in order to
provide a means for eligible employees to accumulate shares of the Company’s common
stock over time through regular payroll deductions. Under the ESPP, eligible
employees may purchase shares of the Company’s common stock twice per month at a
price equal to 85% of the closing price of shares of the Company’s common stock on
the date of each purchase. Eligible employees purchasing shares under the ESPP are
subject to an annual cap equal to the lesser of $25,000 or 10% of the employee’s
annual cash compensation. Shares purchased under the ESPP cannot be sold for a
period of one year following the purchase date (or such shorter period of time if
the participating employee’s employment terminates before this one-year
anniversary).
A total of 750,000 shares of common stock have been reserved for issuance under the
ESPP. As of December 31, 2018, 717,701 shares of common stock remained available
for future grants under the ESPP. During the year ended December 31, 2018, the
Company recorded $0.2 million of stock-based compensation related to the ESPP.
Restricted stock awards (RSAs) are grants that entitle the holder to acquire shares
of common stock for no cash consideration or at a fixed price, which is typically
nominal. The Company accounts for RSAs as issued and outstanding common stock, even
though: (a) shares covered by an RSA cannot be sold, pledged or otherwise disposed
of until the award
F - 14
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
vests; and (b) any unvested shares may be reacquired by the Company for the
original purchase price following the awardee’s termination of service. The
valuation of RSAs is based on the fair market value of the underlying shares on the
grant date.
In September 2013, the Company issued RSAs consisting of 1,327,048 shares to its
CEO, 79,622 shares to a director and an aggregate of 336,185 shares to three non-
officer employees. The RSA grants to the CEO, director and one of the employees
were for the replacement of canceled stock options and restricted stock units
granted in April 2012, which was done in order to complete the capital
restructuring that took place in September 2013. These RSAs were granted outside of
the 2013 Equity Plan, but are governed in all respects by the 2013 Equity Plan.
These RSAs were granted with a combination of performance-based and time-based
vesting components. As of December 31, 2017, all performance-based and time-based
vesting conditions had been satisfied. In July 2015, the vesting conditions for
1,042,680 shares of unvested and outstanding RSAs awarded to the CEO were amended
to provide that vesting and delivery of the shares were deferred until March 15,
2017, subject to the CEO’s continued service with the Company through such date. In
December 2016, vesting and delivery was accelerated for 500,000 shares of the RSAs
that had been deferred until March 15, 2017. As of December 31, 2017, the remaining
542,680 shares of the RSAs had vested and been delivered.
Number of
Shares
Weighted-
average Grant
Date Fair
Market Value
Unvested at December 31, 2015
1,072,899
$
13.00
Vested
(530,219
)
$
12.78
$
13.22
Vested
(542,680
)
$
13.22
There was no activity for the year ended December 31, 2018.
The fair value of each stock option award is estimated on the grant date using a
Black-Scholes option pricing model (Black-Scholes model), which uses the
assumptions noted in the following table. Expected volatility is based on
historical volatility of the Company’s common stock. In determining the expected
life of employee stock options, the Company uses the “simplified” method. The
expected life assumptions for non-employees’ options are based upon the contractual
term of the stock options. The risk-free interest rate is based on the U.S.
Treasury yield for a period consistent with the expected term of the stock options
in effect at the time of the grants. The dividend yield assumption is based on the
expectation of no future dividend payments by the Company.
The Company estimates the fair value of each stock option grant on the grant date
using the Black-Scholes model with the following weighted-average assumptions:
2018
2017
2016
Volatility
114
%
139
%
143
%
Expected life (years)
6.07
6.12
5.80
2.1
%
1.4
%
Dividend yield
—
F - 15
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
2018
2017
2016
Research and development
$
21,113
$
11,980
$
5,657
9,815
8,889
$
21,795
$
14,546
Share-based compensation expense recognized for the years ended December 31, 2018,
2017 and 2016 is reduced by actual forfeitures in the period that the forfeiture
occurs.
The Company initially estimates the fair value of stock options and warrants issued
to non-employees, other than non-employee directors, on the grant date using the
Black-Scholes model. Thereafter, the Company re-measures the fair value using the
Black-Scholes model as of each balance sheet date as the stock options and warrants
vest.
In December 2014, the Company granted warrants to purchase 51,000 shares of common
stock to two outside third parties at an exercise price equal to the fair market
value of the stock on the grant dates. One grant vests 25% on each anniversary date
over four years. The other grant vested 100% on the one-year anniversary of the
grant. In January 2016, the Company granted a warrant to purchase 17,000 shares of
common stock to an outside third party at an exercise price equal to the fair
market value of the stock on the date of each grant. The grant vested 100% on the
one-year anniversary of the grant. In January 2017, the Company granted a warrant
to purchase 25,013 shares of common stock to an outside third party at an exercise
price equal to the fair market value of the stock on the date of each grant. The
grant vests 100% on the one-year anniversary of the grant.
In March 2018, the Company issued 43,056 shares of common stock in a cashless
exercise of 83,013 warrants to a third-party warrant holder. As of December 31,
2018, the Company had outstanding warrants to purchase 10,000 shares of common
stock. For the year ended December 31, 2018, the Company did not recognize stock-
based compensation expense for these warrant grants. For the years ended December
31, 2017 and 2016, the Company recognized compensation expense for these warrant
grants of approximately $0.6 million and $0.2 million, respectively.
In August and November 2015, the Company granted stock options to purchase 50,000
shares of common stock to two consultants at exercise prices equal to the fair
market value of the Company’s common stock on the grant dates. These grants were
made from the 2013 Equity Plan. The vesting of these stock options was contingent
on the achievement of a performance milestone by the end of 2016, at which time any
unvested shares underlying the options would be canceled. The milestone was
achieved in the fourth quarter of 2016 at a 75% achievement level, with 25% of the
options canceling. For the years ended December 31, 2018 and 2017, the Company did
not recognize stock-based compensation expense for these stock option grants. For
the year ended December 31, 2016, the Company recognized stock-based compensation
benefit for these stock option grants of approximately $0.1 million.
In September 2016, the Company granted a stock option to purchase 35,000 shares of
common stock to a consultant at an exercise price equal to the fair market value of
the Company’s common stock on the grant date. This grant was made from the 2013
Equity Plan. The stock option will vest with respect to 25% of the underlying
shares on the one-year anniversary of the grant, with the remainder to vest monthly
over the next three years, subject to continued service during that time. In
January 2017, this consultant became an employee of the Company.
In February 2017, the Company granted stock options to purchase 42,000 shares of
common stock to three consultants at exercise prices equal to the fair market value
of the Company’s common stock on the grant dates. These grants were made from the
2013 Equity Plan. Two of the stock options will vest with respect to 25% of the
underlying shares on the one-year anniversary of the grant, with the remainder to
vest monthly over the next three years, subject to continued service during that
time. The other stock option will vest with respect to 25% of the underlying shares
on the one-year anniversary of the grant, with the remainder to vest monthly over
the next two years, subject to continued service during that time. In addition, an
F - 16
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
employee converted to a consultant during April 2017. Two of his options were
modified and are continuing to vest over the next two years. The Company recognized
third-party compensation expense for these stock option grants of approximately
$0.3 million and $0.4 million for the years ended December 31, 2018 and 2017,
respectively.
On May 10, 2018, the Company closed a $125.0 million royalty financing agreement
(the Royalty Agreement) with HealthCare Royalty Partners (HCR). Under the terms of
the Royalty Agreement, the Company received $125.0 million in exchange for tiered
royalty payments on worldwide net product sales of GIAPREZA. HCR is entitled to
receive quarterly royalties on worldwide net product sales of GIAPREZA beginning
April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a
maximum royalty rate, with step-downs based on the achievement of annual net
product sales thresholds. Through December 31, 2021, the royalty rate will be a
maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by
4% if an agreed-upon, cumulative sales threshold has not been met, and, starting
January 1, 2024, the maximum royalty rate may increase by an additional 4% if a
different agreed-upon, cumulative sales threshold has not been met. The Royalty
Agreement is subject to maximum aggregate royalty payments to HCR of 180% of the
$125.0 million to be received by the Company, at which time the payment obligations
under the Royalty Agreement would expire. The Royalty Agreement was entered into by
the Company’s wholly-owned subsidiary, La Jolla Pharma, LLC, and HCR has no
recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any
assets other than GIAPREZA.
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred
royalty obligation of $125.0 million, net of issuance costs of $0.7 million. During
the year ended December 31, 2018, the Company recognized interest expense,
including amortization of the obligation discount, of $7.3 million. The carrying
value of the deferred royalty obligation as of December 31, 2018 was $124.3
million, net of an unamortized obligation discount of $0.7 million, and was
classified as non-current. Accrued interest expense of $6.8 million is included in
accrued expenses in the consolidated balance sheet as of December 31, 2018. For the
year ended December 31, 2018, the Company made royalty payments to HCR of $0.5
million, and, as of December 31, 2018, the Company recorded royalty obligations
payable of $0.4 million in accrued expenses.
In the event of certain material breaches of the Royalty Agreement, HCR would have
the right to terminate the Royalty Agreement and demand payment of an amount equal
to either $125.0 million, minus aggregate royalties paid to HCR, or $225.0 million,
minus aggregate royalties paid to HCR, depending on the type of breach. The Company
concluded that certain of these contract provisions that could result in an
acceleration of amounts due under the Royalty Agreement are embedded derivatives
that require bifurcation from the deferred royalty obligation and fair value
recognition. The Company determined the fair value of each derivative by assessing
the probability of each event occurring, as well as the potential repayment amounts
and timing of such repayments that would result under various scenarios. As a
result of this assessment, the Company determined that the fair value of the
embedded derivatives is immaterial as of December 31, 2018. Each reporting period,
the Company estimates the fair value of the embedded derivatives until the features
lapse and/or the termination of the Royalty Agreement. Any change in the fair value
of the embedded derivatives will be recorded as either a gain or loss on the
consolidated statements of operations.
The Company has a defined contribution plan (401(k) Plan) covering substantially
all of the Company’s employees. The 401(k) Plan is a tax-qualified retirement
saving plan, pursuant to which all employees are able to contribute the lesser of
50% of their annual compensation (as defined) or the limit prescribed by the
Internal Revenue Service to the 401(k) Plan on a before-tax basis. The Company
matches employee contributions to the 401(k) Plan based on each participant’s
contribution during the plan year, up to 3.5% of each participant’s annual
compensation.
During the years ended December 31, 2018, 2017 and 2016, the Company made matching
contributions to the 401(k) Plan of $1.4 million, $0.7 million and $0.4 million,
respectively.
The Company did not record a provision for income taxes for the years ended
December 2018, 2017 and 2016 due to a full valuation allowance against its deferred
tax assets.
On December 22, 2017, the Tax Cuts and Jobs Act (2017 Tax Act) was enacted. The
2017 Tax Act included a number of changes to existing U.S. tax laws that impacted
the Company, most notably a reduction of the U.S. corporate tax rate from 34% to
21%, for tax years beginning after December 31, 2017. The 2017 Tax Act also
provided for the implementation of a
F - 17
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
territorial tax system, a one-time transition tax on certain foreign earnings, the
acceleration of depreciation for certain assets placed into service after September
27, 2017 and other prospective changes beginning in 2018, including repeal of the
domestic manufacturing deduction, acceleration of tax revenue recognition,
capitalization of research and development expenditures, additional limitations on
executive compensation and limitations on the deductibility of interest.
Pursuant to the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting
Implications of the Tax Cuts and Jobs Act, the Company had not finalized its
accounting for the income tax effects of the 2017 Act for the year ended December
31, 2017, but included a provisional amount related to the re-measurement of
deferred tax assets based on the rates at which they were expected to reverse in
the future, which is generally 21% plus the applicable state tax rate, with a
corresponding change to the valuation allowance as of December 31, 2017. The
Company finalized its accounting for the income tax effects of the 2017 Act during
the year ended December 31, 2018 and, as such, the Company’s financial results
reflect the income tax effects of the 2017 Tax Act.
Significant components of the Company’s deferred tax assets are as follows (in
thousands):
December 31,
2018
2017
Deferred tax assets:
$
—
Stock-based compensation
11,904
6,744
511
Other
1,004
124
7,379
Valuation allowance
(45,878
)
(7,379
)
Net deferred tax assets
$
—
$
—
The difference between the provision for income taxes and income taxes computed
using the effective U.S. federal statutory rate is as follows (in thousands):
2018
2017
2016
Federal statutory rate
$
(41,888
)
$
(39,033
)
$
(26,583
)
State tax benefit
(14,449
)
(2,691
)
(1,240
)
Foreign rate differential
(58
)
1,249
(35,246
)
25,091
Stock-based compensation
4,041
2,253
2,228
(5
)
Impact of the 2017 Tax Act
—
71,199
41
2,737
$
—
$
—
As of December 31, 2018 and 2017, the Company established a full valuation
allowance against its federal and state deferred tax assets due to the uncertainty
surrounding the realization of such assets.
Pursuant to Section 382 and 383 of the IRC, utilization of the Company’s federal
net operating loss carryforwards and research and development credit carryforwards
may be subject to annual limitations in the event of any significant future changes
in its ownership structure. These annual limitations may result in the expiration
of net operating loss and research and development credit carryforwards prior to
utilization. The Company has not completed an IRC Section 382 and 383 analysis
regarding the limitation of net operating loss and research and development credit
carryforwards.
As of December 31, 2018, the Company has estimated federal and state net operating
loss carryforwards of approximately $560.2 million and $341.0 million,
respectively. The difference between the federal and state tax net operating
F - 18
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
There were no unrecognized tax benefits as of the December 31, 2018 and 2017. The
Company does not anticipate there will be a significant change in unrecognized tax
benefits within the next 12 months.
The Company had no accrual for interest or penalties on the Company’s consolidated
balance sheets as of December 31, 2018 or December 31, 2017, and has not recognized
interest and/or penalties in the consolidated statements of operations for the
years ended December 31, 2018, 2017 and 2016.
The Company is subject to taxation in the U.S. and various state jurisdictions. The
Company’s tax returns since inception are subject to examination by the U.S. and
various state tax authorities. The Company is not currently undergoing a tax audit
in any federal or state jurisdiction.
Leases
On December 29, 2016, the Company entered into an agreement with BMR-Axiom LP to
lease office and laboratory space as its new corporate headquarters located at 4550
Towne Centre Court, San Diego, California (Lease) for a period of 10 years
commencing on October 30, 2017.
The Lease provides an option to extend the Lease for an additional 5.0 years at the
end of the initial term. The Company provided a standby letter of credit for $0.9
million in lieu of a security deposit. This amount will decrease to $0.6 million
after year two of the lease and decrease to $0.3 million after year 5 of the lease
term. As of December 31, 2018, $0.9 million was pledged as collateral for such
letter of credit and recorded as restricted cash. The Lease provided an allowance
for tenant improvements of $13.7 million, which was classified as deferred rent on
the Company’s consolidated balance sheet and is being amortized as an offset to
rent expense with a corresponding charge to depreciation expense on a straight-line
basis over the term of the lease. The annual rent under the Lease is subject to
escalation during the term. In addition to rent, the Lease requires the Company to
pay certain taxes, insurance and operating costs relating to the leased premises.
The Lease contains customary default provisions, representations, warranties and
covenants.
Annual future minimum payments under operating leases as of December 31, 2018 are
as follows (in thousands):
2019
$
3,951
2020
4,070
2021
4,192
2022
4,318
2023
4,447
Thereafter
18,308
Rent expense was $2.8 million, $1.7 million and $1.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
F - 19
La Jolla Pharmaceutical Company
Notes to Consolidated Financial Statements
Licensing Agreements
In the normal course of business, the Company enters into licensing agreements
under which the Company commits to certain annual maintenance payments. Annual
future minimum licensing payments under the Company’s agreements as of December 31,
2018 are as follows (in thousands):
2019
$
120
2020
120
2021
120
2022
120
2023
120
Supply Agreements
In the normal course of business, the Company enters into agreements for the
manufacturing and supply of its clinical and commercial products. In 2017, the
Company entered into agreements arranging for the manufacture and supply of
GIAPREZA through 2022. During this time, the Company is obligated to make certain
minimum purchases. Annual future minimum payments for manufacturing and supply
agreements as of December 31, 2018 are as follows (in thousands):
2019
$
2,759
2020
2,759
2021
2,759
F - 20