As filed with the Securities and Exchange Commission on June 15, 2010

Registration No. 333-166825

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

NuPathe Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

227 Washington Street, Suite 200

Conshohocken, Pennsylvania 19428

(484) 567-0130

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Jane H. Hollingsworth

Chief Executive Officer

NuPathe Inc.

227 Washington Street, Suite 200

Conshohocken, Pennsylvania 19428

(484) 567-0130

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

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

 

(Do not check if a smaller reporting company)

 

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED JUNE 15, 2010

 

PROSPECTUS

 

Shares

 

 

Common Stock

 

 

 

 

NuPathe Inc. is offering    shares of common stock. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $   and $   per share.

 

We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “PATH.”

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 8.

 

 

 

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to    additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock on or about   , 2010.

 

 

 

 

 

 

 

The date of this prospectus is  , 2010.

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

 

Until           , 2010, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

PROSPECTUS SUMMARY

	•	Circumventing nausea and vomiting.  According to a survey of over 500 respondents conducted by the National Headache Foundation in 2008, 90% of migraineurs have experienced nausea with a migraine and 59% of migraineurs have experienced vomiting with a migraine. In this survey, 48% of respondents who ever experienced nausea or vomiting with a migraine reported that the nausea or vomiting had a moderate to major impact on when or how they take migraine medications. The American Academy of Neurology guidelines recommend non-oral therapies for migraineurs who experience nausea or vomiting as significant migraine symptoms. Because Zelrix is administered transdermally, we believe

		that it will be attractive to migraineurs suffering from nausea or vomiting who might otherwise delay or avoid taking medication.

	•	Increasing consistency of response.  According to a 2001 article by Dr. Michel Ferrari published in The Lancet, a peer-reviewed medical journal, clinical trials have demonstrated that at least 40% of migraineurs fail to respond consistently to oral triptans. We believe this results from a variety of causes, including low and inconsistent absorption of oral medication because of a compromised ability to digest, or decreased gastric motility. Because Zelrix does not depend on gastrointestinal absorption, we believe that it will provide more consistent relief than oral triptans.
	•	Minimizing triptan adverse events.  According to a 2003 article by Dr. R. Michael Gallagher published in Headache, a peer-reviewed medical journal, 67% of migraineurs who use prescription migraine medication reported that they had delayed or avoided taking a prescription migraine medication due to concerns about adverse events. In our clinical trials, treatment with Zelrix resulted in a low incidence of triptan adverse events while effectively treating migraine.

	•	We have not received, and we may not receive, marketing approval for, or commercial revenues from, Zelrix or any other product candidate;
	•	The commercial success of Zelrix and any other product candidate that we develop, if approved, will depend upon significant market acceptance among physicians and patients and the availability of adequate reimbursement from third party payors;
	•	If we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to perform these functions, we will not be able to commercialize Zelrix or any other product candidate that we develop, if approved;
	•	We have incurred significant operating losses since inception, which has raised substantial doubt regarding our ability to continue as a going concern; and
	•	We use third parties to manufacture all of our product candidates, including Zelrix, and the machinery to produce the commercial supply of Zelrix must be designed, built and validated.

Common stock offered by us		shares
Common stock to be outstanding after this offering		shares
Over-allotment option		We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to           additional shares of common stock to cover over-allotments.

Use of proceeds		We intend to use the net proceeds from this offering to complete the clinical development of, seek marketing approval for and, if approved, commercially launch Zelrix in the U.S., to continue preclinical and clinical development of NP201 and NP202 and for working capital and other general corporate purposes. See “Use of Proceeds” on page 34.

Proposed NASDAQ Global Market symbol		“PATH”
Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

	•	62,178,093 shares of common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock, including accrued dividends, upon the closing of this offering, assuming that the closing occurred on May 31, 2010; and

	•	shares of common stock issuable upon the automatic conversion of all principal and accrued interest outstanding under secured subordinated promissory notes that we issued and sold to investors in April 2010, or the April 2010 Convertible Notes, upon the closing of this offering, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurred on May 31, 2010.

	•	7,520,075 shares of common stock issuable upon the exercise of options outstanding as of May 31, 2010 at a weighted average exercise price of $0.23 per share;

	•	1,126,298 shares of common stock issuable upon the exercise of warrants outstanding as of May 31, 2010 at a weighted average exercise price of $0.93 per share; and

	•	846,020 additional shares of common stock available for future issuance as of May 31, 2010 under our 2005 Equity Compensation Plan, or our 2005 Plan.

	•	No exercise of the outstanding options or warrants described above;

	•	No exercise by the underwriters of their option to purchase up to           shares of common stock to cover over-allotments;

	•	The automatic conversion of all outstanding shares of our preferred stock, including accrued dividends, into an aggregate of 62,178,093 shares of common stock upon the closing of this offering, assuming that the closing occurred on May 31, 2010;

	•	The automatic conversion of all principal and accrued interest outstanding under the April 2010 Convertible Notes into an aggregate of           shares of common stock upon the closing of this

		offering, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurred on May 31, 2010;

	•	The warrants outstanding as of May 31, 2010 to purchase an aggregate of 1,126,298 shares of preferred stock have become, in accordance with their terms, warrants to purchase 1,126,298 shares of common stock at an exercise price of $0.93 per share of common stock upon the closing of this offering; and

	•	The restatement of our amended and restated certificate of incorporation and our bylaws upon the closing of this offering.

	•	The automatic conversion of all outstanding shares of our preferred stock, including accrued dividends, into an aggregate of 62,178,093 shares of common stock upon the closing of this offering, assuming that the closing occurred on May 31, 2010;

	•	The receipt in April 2010 of gross proceeds of $10,062,500 upon the issuance of the April 2010 Convertible Notes and the automatic conversion of all principal and accrued interest outstanding under the April 2010 Convertible Notes into an aggregate of           shares of common stock upon the closing of this offering, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurred on May 31, 2010;

	•	The receipt in May 2010 of gross proceeds of $5,000,000 upon entering into a secured term loan facility, or the May 2010 Loan Facility, the issuance of warrants to purchase 255,376 shares of Series B preferred stock, with an estimated fair value of $203,255, to the lenders under such facility and the repayment in full of the $555,208 outstanding as of March 31, 2010 under a term loan that we entered into in 2007; and

	•	The warrants outstanding as of May 31, 2010 to purchase an aggregate of 1,126,298 shares of our preferred stock becoming, in accordance with their terms, warrants to purchase 1,126,298 shares of common stock at an exercise price of $0.93 per share of common stock upon the closing of this offering and the reclassification of the warrant liability with respect to warrants outstanding as of March 31, 2010 to additional paid-in capital.

																						January 7, 2005
																						(inception)
														Three Months Ended								through
		Year Ended December 31,												March 31,								March 31,
		2007				2008				2009				2009				2010				2010
														(Unaudited)								(Unaudited)
		(In thousands, except share and per share data)
Statement of Operations Data:
Operating expenses:
Research and development		$	7,761			$	8,815			$	11,310			$	2,996			$	3,390			$	35,178
Acquired in-process research and development			—				5,500				—				—				—				5,500
General and administrative			1,884				3,075				3,142				796				873				10,700
Total operating expenses			(9,645	)			(17,390	)			(14,452	)			(3,792	)			(4,263	)			(51,378	)
Interest income (expense), net			(30	)			(121	)			(1,289	)			(37	)			(10	)			(2,106	)
Loss before tax benefit			(9,675	)			(17,511	)			(15,741	)			(3,829	)			(4,273	)			(53,484	)
Income tax benefit			—				—				151				151				320				471
Net loss			(9,675	)			(17,511	)			(15,590	)			(3,678	)			(3,953	)		$	(53,013	)
Accretion of redeemable convertible preferred stock			(1,126	)			(2,330	)			(3,617	)			(830	)			(1,033	)
Net loss applicable to common stockholders		$	(10,801	)		$	(19,841	)		$	(19,207	)		$	(4,508	)		$	(4,986	)
Basic and diluted net loss per common share		$	(3.67	)		$	(6.49	)		$	(6.28	)		$	(1.47	)		$	(1.63	)
Weighted average basic and diluted common shares outstanding			2,947,005				3,059,137				3,060,000				3,060,000				3,060,422
Unaudited pro forma net loss										$	(15,590	)						$	(3,953	)
Unaudited pro forma basic and diluted net loss per common share										$								$
Unaudited pro forma weighted average basic and diluted common shares outstanding

		As of March 31, 2010
										Pro Forma as
		Actual				Pro Forma				Adjusted
		(Unaudited)
		(In thousands)
Balance Sheet Data:
Cash and cash equivalents		$	592			$	15,100			$	—
Working capital			(2,372	)			12,691				—
Total assets			1,580				16,290				—
Long-term debt			—				5,000				—
Redeemable convertible preferred stock			56,572				—				—
Total stockholders’ equity (deficit)			(59,390	)			8,053				—

 

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Development and Commercialization of Our Product Candidates

 

We are heavily dependent on the success of Zelrix. If we fail to obtain marketing approval for and commercialize Zelrix, or experience delays in doing so, our business will be materially harmed.

 

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidate, Zelrix. Zelrix is the only product candidate for which we have conducted clinical trials, and to date we have not marketed, distributed or sold any products. Our ability to generate revenues in the near term is substantially dependent on our ability to develop and commercialize Zelrix. In the fourth quarter of 2010, we plan to submit a new drug application, or NDA, seeking approval to commercialize Zelrix for treatment of acute migraine. We cannot commercialize Zelrix prior to obtaining FDA approval. Even though Zelrix has completed its pivotal Phase III clinical trial with positive results, Zelrix is still, nonetheless, susceptible to the risks of failure inherent at any stage of drug development, including the appearance of unexpected adverse events and the FDA’s determination Zelrix is not approvable. If we do not receive FDA approval for and commercialize Zelrix, we will not be able to generate product revenues in the foreseeable future, or at all.

 

As a company, we have never obtained marketing approval for or commercialized a drug. It is possible that the FDA may refuse to accept our NDA for substantive review or may review our data and conclude that our application is insufficient to obtain marketing approval of Zelrix. Before we submit our NDA, we must:

 

 

 

In addition, the FDA has requested that we provide data in our NDA regarding an in vitro analytical testing method for Zelrix. However, to date, for technical reasons we have not been able to develop an appropriate in vitro analytical testing method for Zelrix, and we are working with the FDA to develop acceptable alternatives. Any difficulties or delays we experience in obtaining the data from our pharmacokinetic and Phase III safety trials will delay the submission of our NDA and the FDA’s review of the NDA. In addition, delay or failure to develop an in vitro analytical testing method for Zelrix or reach agreement with the FDA on an alternative may delay marketing approval of Zelrix.

 

If, following submission, our NDA is not accepted for substantive review or approved, the FDA may require that we conduct additional clinical or preclinical trials, manufacture additional validation batches or develop additional analytical test methods before it will reconsider our application. If the FDA requires additional studies or data, we would incur increased costs and delays in the marketing approval process, which may require us to expend more resources than we have available. In addition, the FDA may not consider sufficient any additional required trials that we perform and complete.

 

Even if we believe that the data from our clinical trials and analytical testing methods support marketing approval of Zelrix in the U.S., the FDA may not agree with our analysis and approve our NDA. Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us from commercializing Zelrix, generating revenues and achieving profitability.

The commercial success of Zelrix and any other product candidates that we develop, if approved in the future, will depend upon significant market acceptance of these products among physicians, patients and third party payors.

 

As a company, we have never commercialized a product candidate for any indication. Even if any product candidate that we develop, including Zelrix, is approved by the appropriate regulatory authorities for marketing and sale, it may not gain acceptance among physicians, patients and third party payors. If our products for which we obtain marketing approval do not gain an adequate level of acceptance, we may not generate significant product revenues or become profitable. Market acceptance of Zelrix, and any other product candidates that we develop, by physicians, patients and third party payors will depend on a number of factors, some of which are beyond our control, including:

 

 

For example, even if the medical community accepts that Zelrix is safe and effective for its approved indications, physicians and patients may not immediately be receptive to Zelrix and may be slow to adopt it as an accepted treatment for acute migraine. In addition, even though we believe Zelrix has significant advantages, because no head-to-head trials comparing Zelrix to competing products have been conducted, it is unlikely that any labeling approved by the FDA will contain claims that Zelrix is safer or more effective than competitive products or will permit us to promote Zelrix as being superior to competing products. Further, the availability of numerous inexpensive generic forms of migraine therapy products may also limit acceptance of Zelrix among physicians, patients and third party payors. If Zelrix is approved but does not achieve an adequate level of acceptance among physicians, patients and third party payors, we may not generate meaningful revenues from Zelrix and we may not become profitable.

 

It will be difficult for us to profitably sell any of our product candidates that the FDA approves, including Zelrix, if reimbursement for such product candidate is limited.

 

Market acceptance and sales of Zelrix or any other product candidates that we develop will depend on reimbursement policies and may be affected by future healthcare reform measures. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for Zelrix or any other product candidates that we develop and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, our products for which we obtain marketing approval. Numerous generic products may be available at lower prices than branded therapy products, such as Zelrix, if it is approved, which may also reduce the likelihood and level of reimbursement for our product candidates, including Zelrix. If reimbursement is not available or is available only to limited levels, we may not be able to successfully commercialize Zelrix or any other product candidates that we develop.

If we are unable to establish effective marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates after they are approved, we may be unable to generate product revenues.

 

We currently do not have a commercial infrastructure for the marketing, sales and distribution of pharmaceutical products. In order to commercialize our products, we must build our marketing, sales and distribution capabilities or make arrangements with third parties to perform these services. If Zelrix is approved by the FDA, we plan to build a commercial infrastructure to launch Zelrix in the U.S., including a specialty sales force of approximately 100 people. We may seek to further penetrate the U.S. market in the future by expanding our sales force or through collaborations with other pharmaceutical or biotechnology companies. We may also seek to commercialize Zelrix outside the U.S., although we currently plan to do so only with a collaborator.

 

The establishment and development of our own sales force and related compliance plans to market any products we may develop will be expensive and time consuming and could delay any product launch, and we may not be able to successfully develop this capability. We, or our future collaborators, will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. In the event we are unable to develop a marketing and sales infrastructure, we would not be able to commercialize Zelrix or any other product candidates that we develop, which would limit our ability to generate product revenues.

 

Companies such as ours often expand their sales force and marketing capabilities for a product prior to it being approved by the FDA so that the drug can be commercialized upon approval. Although our current plan is to hire most of our sales and marketing personnel only if Zelrix is approved by the FDA, we will incur expenses prior to product launch in recruiting this sales force and developing a marketing and sales infrastructure. If the commercial launch of Zelrix is delayed as a result of FDA requirements or other reasons, we would incur these expenses prior to being able to realize any revenue from product sales. Even if we are able to effectively hire a sales force and develop a marketing and sales infrastructure, our sales force and marketing teams may not be successful in commercializing Zelrix or any other product candidates that we develop.

 

To the extent we rely on third parties to commercialize any products for which we obtain marketing approval, we may receive less revenues than if we commercialized these products ourselves. In addition, we would have less control over the sales efforts of any other third parties involved in our commercialization efforts. In the event we are unable to collaborate with a third party marketing and sales organization, our ability to generate product revenues may be limited either in the U.S. or internationally.

 

We face significant competition from other pharmaceutical and biotechnology companies. Our operating results will suffer if we fail to compete effectively.

 

The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our major competitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies and specialty pharmaceutical and generic drug companies. Many of our competitors have greater financial and other resources than we have, such as larger research and development staff and more extensive marketing and manufacturing organizations. As a result, these companies may obtain marketing approval more rapidly than we are able to and may be more effective in selling and marketing their products. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.

 

Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and drug products that are more effective or less costly than Zelrix or any other drug candidate that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive. We expect any products that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic competition and the availability of reimbursement from government and other third party payors. We also expect to face

competition in our efforts to identify appropriate collaborators or partners to help commercialize our product candidates in our target commercial markets.

 

The competition in the market for acute migraine medication is intense. The majority of marketed prescription products for treatment of acute migraine in the U.S. are in the triptan class in tablet, orally-disintegrating tablet, nasal spray and injectable therapies. The largest selling triptan is sumatriptan, with 2009 sales of approximately $800 million in the U.S., including approximately $200 million attributable to GlaxoSmithKline plc’s, or GlaxoSmithKline, branded sumatriptan, Imitrex. There are at least eight other branded triptan therapies being sold by pharmaceutical and biotechnology companies, including Maxalt from Merck & Co., Inc., or Merck, and Treximet from GlaxoSmithKline. In July 2009, the FDA approved Zogenix, Inc.’s Sumavel DosePro needle-free sumatriptan injection for the treatment of acute migraine and cluster headache.

 

If approved, Zelrix will face competition from inexpensive generic versions of sumatriptan and generic versions of other branded products of competitors that have lost or will lose their patent exclusivity. For example, we expect Amerge, the branded version of naratriptan, to lose patent protection in July 2010. In addition, we expect other triptan patents to expire between 2012 and 2025. Many of these products are manufactured and marketed by large pharmaceutical companies and are well accepted by physicians, patients and third party payors. Because of the low cost, health insurers likely would require or encourage use of, and consumers likely would use, a generic triptan prior to trying Zelrix.

 

In addition to marketed migraine medications, if approved, Zelrix may face competition from migraine product candidates in various stages of clinical development by both large and small companies. These include Merck’s telcagepant, an orally administered calcitonin gene related peptide antagonist, and Levadex from MAP Pharmaceuticals, Inc., an inhaled formulation of dihydroergotamine, both for acute migraine, and Allergan, Inc.’s Botox for chronic migraine. Each of these has either completed or is in Phase III clinical development. Zelrix may also compete with other drug candidates that receive marketing approval before Zelrix. If we are unable to demonstrate the advantages of Zelrix over competing drugs and drug candidates, we will not be able to successfully commercialize Zelrix and our results of operations will suffer.

 

As with Zelrix, if approved, each of NP201 and NP202 will face competition from generic and branded products. Specifically, NP201, a biodegradable, subcutaneous, injectable polymer implant combined with ropinirole, will face competition from generic immediate release and extended release versions of ropinirole and the dopamine agonist pramiprexole, as well as from two continuous delivery medications, a levadopa gel and an injectable apomorphine. NP202, a biodegradable, subcutaneous, injectable polymer implant combined with an atypical antipsychotic medication, will face competition from a variety of branded and generic versions of antipsychotic medications, in addition to several other sustained delivery depot formulations of atypical antipsychotics.

 

As a result of all of these factors, our competitors may succeed in obtaining patent protection or FDA approval or discovering, developing and commercializing migraine and other therapies before we do.

 

Any failure or delay in preclinical studies or clinical trials for our product candidates may cause us to incur additional costs or delay or prevent the commercialization of our product candidates and could severely harm our business.

 

Before obtaining marketing approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests and then clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing, in particular, is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Even if preclinical studies and early phase clinical trials succeed, it is necessary to conduct additional clinical trials in larger numbers of subjects taking the medication for longer periods before seeking FDA approval to market and sell a medication in the U.S. Clinical data is often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in clinical trials have nonetheless failed to obtain FDA approval for their products. A failure of one or more of our clinical trials can occur at any stage of testing.

We may experience numerous unforeseen events during, or as a result of, the clinical trial process, which could delay or prevent us from receiving marketing approval or commercializing our product candidates, including the following:

 

 

A number of these risks remain applicable to our pharmacokinetic and Phase III safety trials required for our NDA submission for Zelrix.

 

Subject enrollment, which is a significant factor in the timing of clinical trials, is affected by a variety of factors, including the following:

 

 

Furthermore, we plan to rely on clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their actual performance. Any delays or unanticipated problems during clinical testing, such as enrollment in our clinical trials being slower than we anticipate or participants dropping out of our clinical trials at a higher rate than we anticipate, could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.

Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of our product candidates.

 

We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies or institutional review boards may at any time order the temporary or permanent discontinuation of our clinical trials or of investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial of any product candidates, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues from any of these product candidates, if at all, will be delayed or eliminated.

 

Clinical trials for our product candidates involve testing in large subject populations, which could reveal a high prevalence of adverse events. If these effects include undesirable serious adverse events or have unexpected characteristics, we may need to abandon our development of these product candidates. Alternatively, the identification of serious adverse events or other significant safety risks could result in the imposition of approval requirements, such as labeling or distribution and use restrictions that limit the available market for our product candidates.

 

Even if Zelrix receives FDA marketing approval, we may not be able to secure marketing exclusivity in the U.S.

 

Although we plan to seek three years marketing exclusivity in the U.S. if we receive FDA approval for Zelrix, we may not be entitled to such marketing exclusivity if the FDA determines that our clinical investigations were not essential to the approval of the Zelrix NDA. This three year marketing exclusivity period, if granted, would be coterminous with any patent coverage for Zelrix. We also intend to seek an additional period of six months pediatric exclusivity in the U.S., but may not be able to secure such exclusivity if the FDA does not request pediatric trials for Zelrix or we are unable to complete the trials that the FDA requests. The six month pediatric exclusivity period, if granted, would be in addition to the term of any existing regulatory exclusivity or listed patent term. If we are unable to secure marketing exclusivity and any patents that we are issued do not provide sufficient protection, our business and ability to generate revenues may be harmed significantly.

 

If we fail to acquire, develop and commercialize product candidates other than Zelrix, our prospects for future growth and our ability to sustain profitability may be limited.

 

A key element of our strategy is to develop and commercialize a portfolio of product candidates in addition to Zelrix. To do so, we plan to obtain additional product candidates or technologies primarily through acquisitions or licenses. We may not be successful in our efforts to identify and develop additional product candidates, and any product candidates we do identify may not produce commercially viable drugs that safely and effectively treat their indicated conditions. To date, our efforts have yielded two product candidates in addition to Zelrix, both of which are currently in preclinical development.

 

Our development programs may initially show promise in identifying potential product leads, yet fail to produce product candidates for clinical development. In addition, identifying new treatment needs and product candidates requires substantial technical, financial and human resources on our part. If we are unable to maintain or secure additional development program funding or continue to devote substantial technical and human resources to such programs, we may have to delay or abandon these programs. Any product candidate that we successfully identify may require substantial additional development efforts prior to commercial sale, including preclinical studies, extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are susceptible to the risks of failure that are inherent in pharmaceutical product development.

 

We may be unable to license or acquire suitable product candidates or technologies from third parties for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is competitive. A number of more established companies are also pursuing strategies to license or acquire products. These

established companies may have a competitive advantage over us due to their size, cash resources or greater clinical development and commercialization capabilities. In addition, we expect competition in acquiring product candidates to increase, which may lead to fewer suitable acquisition opportunities for us as well as higher acquisition prices.

 

Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following:

 

 

Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of any products that we may successfully develop.

 

The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. We will face an even greater risk if we commercially sell any products that we develop. If we cannot successfully defend ourselves against claims that our product candidates, or any products we may commercialize, cause injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, these lawsuits may:

 

 

Although we maintain general liability and product liability insurance with limits, subject to deductibles, of $2.0 million in the aggregate for general liability, $1.0 million in the aggregate for umbrella liability coverage for payments that exceed the general liability limits and $2.0 million in the aggregate for product liability, this insurance may not fully cover potential liabilities. The cost of any products liability litigation or other proceedings, even if resolved in our favor, could be substantial. In addition, inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, operating results and financial condition.

 

A variety of risks associated with our planned international business relationships could materially adversely affect our business.

 

We may enter into agreements with third parties for the development and commercialization of Zelrix and possibly other products in international markets. If we do so, we would be subject to additional risks related to entering into international business relationships, including:

 

 

 

These and other risks may materially adversely affect our ability to attain or sustain profitable operations.

 

Risks Related to Our Financial Condition and Capital Requirements

 

We have incurred significant operating losses since inception and anticipate that we will incur continued losses for the foreseeable future. We may never become profitable.

 

As of March 31, 2010, we had an accumulated deficit of approximately $59.4 million. We are a development stage specialty pharmaceutical company with no products approved for commercial sale and, to date, have not generated any revenues. We have funded our operations to date primarily with the proceeds of the sale of convertible preferred stock, convertible notes and borrowings under debt facilities. We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of Zelrix and our other product candidates. In addition, we will incur additional costs of operating as a public company and, if we obtain marketing approval for Zelrix, will incur significant sales, marketing and outsourced manufacturing expenses. As a result, we expect to continue to incur significant and increasing losses for the foreseeable future.

 

To achieve and maintain profitability, we need to generate significant revenues from future product sales. This will require us to be successful in a range of challenging activities, including:

 

 

Zelrix will require additional clinical trials and evaluation, marketing approval and investment in commercial capabilities, including manufacturing and sales and marketing efforts, before its product sales generate any revenues for us. Because of the numerous risks and uncertainties associated with drug development and commercialization, we are unable to predict the extent of any future losses. We may never successfully commercialize any products, generate significant future revenues or achieve and sustain profitability.

If we fail to obtain additional financing, we may not be able to complete development of and commercialize Zelrix or any other product candidates.

 

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to:

 

 

We will need substantial additional funding and may be unable to raise capital when needed or on attractive terms, which would force us to significantly delay, scale back or discontinue the development or commercialization of Zelrix or our other product candidates.

 

We expect that the net proceeds from this offering and our existing cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next   months. We believe that these available funds will be sufficient to complete the development of Zelrix through FDA approval and to fund the expected commercial launch of Zelrix in the U.S. in the first half of 2012. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control.

 

Our future capital requirements will depend on many factors, including the following:

 

 

To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. The covenants under the May 2010 Loan Facility and the pledge of our assets as collateral limit our ability to obtain additional debt financing. We have no committed external sources of funds. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing acquisition, licensing, development and commercialization efforts and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.

 

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,

making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

 

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

 

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2009 with respect to this uncertainty. We have no current source of revenues to sustain our present activities, and we do not expect to generate revenues until, and unless, the FDA or other regulatory authorities approve Zelrix or our other product candidates and we successfully commercialize any such product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

 

Our indebtedness may limit cash flow available to invest in the ongoing needs of our business.

 

Upon closing of this offering, we will have $5.0 million principal amount of indebtedness outstanding under the May 2010 Loan Facility. We may incur additional indebtedness beyond this amount, including, subject to our satisfaction of specified conditions and approval by the lenders in their sole discretion, up to $6.0 million under the May 2010 Loan Facility. Our indebtedness combined with our other financial obligations and contractual commitments, including amounts due under an equipment funding agreement with LTS Lohmann Therapie-Systeme AG, or LTS, could have significant adverse consequences, including:

 

 

In addition, we are vulnerable to increases in the market rate of interest because amounts outstanding under the May 2010 Loan Facility bear interest at a variable rate. If the market rate of interest increases, we may have to pay additional interest on our outstanding debt, which would reduce cash available for our other business needs. Further, we are subject to fluctuations in exchange rates because amounts due under the equipment funding agreement with LTS are in Euros. If the U.S. dollar weakens against the Euro, our costs in U.S. dollars will increase, which would also reduce cash available for our other business needs.

 

We may need external sources of funds to repay our indebtedness as it matures. We may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under the May 2010 Loan Facility or any other borrowings. Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply with the covenants under the May 2010 Loan Facility or future indebtedness could result in an event of default. In the event of an acceleration of amounts due under our debt instruments as a result of an event of default or the occurrence of a mandatory prepayment event, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments, and the lenders could seek to enforce security interests in the collateral securing such indebtedness. Because of the covenants under our existing debt instruments and the pledge of our assets as collateral, we have a limited ability to obtain additional debt financing.

We have a limited operating history, which makes it difficult to evaluate our business and growth prospects.

 

We were incorporated in Delaware in January 2005. Our operations to date have been limited to organizing and staffing our company, conducting product development activities for Zelrix and performing preclinical development of our other product candidates. As a company, we have not yet demonstrated an ability to obtain marketing approval for or commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products as a company.

 

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

Risks Related to Our Dependence on Third Parties

 

We use third parties to manufacture all of our product candidates, including Zelrix, and the machinery to produce the commercial supply of Zelrix must be designed, built and validated. This may increase the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could result in clinical development and commercialization of our product candidates being delayed, prevented or impaired.

 

We do not own or operate, and have no plans to establish, any manufacturing facilities for our product candidates. We have limited personnel with experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale.

 

We currently outsource all manufacturing of our preclinical and clinical product candidates to third parties, including sumatriptan and key components of Zelrix, typically without any guarantee that there will be sufficient supplies to fulfill our requirements or that we may obtain such supplies on acceptable terms. Any delays in obtaining adequate supplies with respect to our preclinical and clinical product candidates may delay the development or commercialization of Zelrix or our other product candidates.

 

In addition, we do not currently have any agreements with third party manufacturers for the long-term commercial supply of our product candidates. We may be unable to enter agreements for commercial supply with third party manufacturers, or may be unable to do so on acceptable terms. Even if we enter into these agreements, the various manufacturers of each product candidate will likely be single source suppliers to us for a significant period of time.

 

In particular, LTS manufactures Zelrix using sumatriptan and components that we purchase from third parties. Although LTS has considerable experience in the manufacturer of passive transdermal drug patches, it does not have such experience in manufacturing active transdermal patches such as Zelrix. In order for LTS to produce our commercial supply of Zelrix, LTS must successfully complete the following:

 

 

The machinery that LTS will use to produce the commercial supply of Zelrix will be customized to the particular manufacturing specifications of Zelrix and does not exist currently. In June 2010, we entered into an equipment funding agreement with LTS, under which we agreed to fund the purchase by LTS of the manufacturing equipment for Zelrix. If LTS is unable to assemble and validate this equipment, or to validate the production process at its New Jersey facility, in each case in a timely manner, our ability to launch and commercialize Zelrix will be compromised significantly. If this customized equipment malfunctions at any

time during the production process, the time it may take LTS to secure replacement parts, to undertake repairs and to revalidate the equipment and process could limit our ability to meet the commercial demand for Zelrix.

 

Reliance on third party manufacturers subjects us to risks that would not affect us if we manufactured the product candidates ourselves, including:

 

 

Our product candidates may compete with other products and product candidates for access to manufacturing facilities. There are a limited number of manufacturers that operate under current good manufacturing practice, or cGMP, regulations and that are both capable of manufacturing for us and willing to do so. If our existing third party manufacturers, or the third parties that we engage in the future to manufacture a product for commercial sale or for our clinical trials, should cease to continue to do so for any reason, we likely would experience delays in obtaining sufficient quantities of our product candidates for us to meet commercial demand or to advance our clinical trials while we identify and qualify replacement suppliers. If for any reason we are unable to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

 

Our suppliers are subject to regulatory requirements, covering manufacturing, testing, quality control, manufacturing, and record keeping relating to our product candidates, and subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our manufacturing capacity while we seek to secure another supplier that meets all regulatory requirements.

 

We may rely on third parties to conduct aspects of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining or ultimately not be able to obtain marketing approval to commercialize Zelrix or any other product candidates.

 

We currently rely on contract research organizations, or CROs, for some aspects of our clinical trials, including data management, statistical analysis and electronic compilation of our NDA. We may enter into additional agreements with CROs to obtain additional resources and expertise in an attempt to accelerate our progress with regard to ongoing clinical and preclinical programs. Entering into relationships with CROs involves substantial cost and requires extensive management time and focus. In addition, typically there is a transition period when a CRO commences work. As a result, delays may occur, which may materially impact our ability to meet our desired clinical development timelines and ultimately have a material adverse impact on our operating results, financial condition or future prospects.

 

As CROs are not our employees, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs in which they are engaged to perform. If the CROs we engage 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 data they provide is compromised due to the failure to adhere to regulatory requirements, or for other reasons, our development programs may be extended, delayed or terminated, and we may not be able to obtain marketing approval for or successfully commercialize Zelrix or any other product candidates that we develop. As a result, our financial results and the commercial prospects for Zelrix and any other product candidates that we develop would be harmed, our costs could increase and our ability to generate revenues could be delayed.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our product candidates.

 

We may seek collaboration arrangements with pharmaceutical or biotechnology companies for the development or commercialization of our product candidates in the future. We may enter into such arrangements on a selective basis depending on the merits of retaining commercialization rights for ourselves as compared to entering into selective collaboration arrangements with leading pharmaceutical or biotechnology companies for each product candidate, both in the U.S. and internationally. We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so chose to enter into such arrangements. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

 

Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.

 

Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision making authority.

 

Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

 

Risks Related to Regulatory Matters

 

If we are unable to obtain marketing approval for Zelrix or our other product candidates, we will not be able to commercialize our product candidates and our business will be substantially harmed.

 

Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the U.S. and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. As a company, we have not received approval from the FDA or demonstrated our ability to obtain marketing approval for any drugs that we have developed or are developing. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our other product candidates may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.

 

The process of obtaining marketing approvals is expensive and often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved and the nature of the disease or condition to be treated. We intend to seek approval of Zelrix and likely other product candidates pursuant to Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or FDCA, in the U.S., which enables an NDA applicant to rely in part on findings of safety and efficacy of a product already approved by the FDA. We may fail to obtain marketing approval for Zelrix or any other product candidates for many reasons, including the following:

 

 

 

This lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain marketing approval to market Zelrix or any future product candidates, which would significantly harm our business, results of operations and prospects.

 

Even if we obtain marketing approval for Zelrix or any of our other product candidates, we will continue to face extensive regulatory requirements and our products may face future development and regulatory difficulties.

 

Even if marketing approval in the U.S. is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, including risk evaluation and mitigation strategies, or impose ongoing requirements, including with respect to:

 

 

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. The distribution, sale and marketing of our products are subject to a number of additional requirements, including:

 

 

 

All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

 

If we or any third parties involved in our commercialization efforts fail to comply with applicable regulatory requirements, a regulatory agency may:

 

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenues.

 

Even if we obtain marketing approval for Zelrix or any of our other product candidates, adverse effects discovered after approval could limit the commercial profile of any approved product.

 

If we obtain marketing approval for Zelrix or any other product candidate that we develop, we or others may later discover, after use in a larger number of subjects for longer periods of time than in clinical trials, that our products could have adverse effect profiles that limit their usefulness or require their withdrawal. This discovery could have a number of potentially significant negative consequences, including:

 

 

 

Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

 

We will need FDA approval of our proposed trade name, Zelrix, and any failure or delay associated with such approval may delay the commercialization of Zelrix.

 

Any trade name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or USPTO. The FDA typically conducts a rigorous review of proposed trade names, including an evaluation of potential for confusion with other trade names and medical error. The FDA may also object to a trade name if it believes the name inappropriately implies medical claims. We intend to submit the proposed trade name Zelrix to the FDA for approval. If the FDA objects to our proposed trade name, we may be required to adopt an alternative name for our product candidate. Even after approval, the FDA may request that we adopt an alternative name for the product if adverse event reports indicate a potential for confusion with other trade names and medical error. If we are required to adopt an alternative name, the commercialization of Zelrix could be delayed or interrupted, which would limit our ability to commercialize Zelrix and generate revenues.

 

If the FDA does not approve the manufacturing facilities of LTS or any future third party manufacturers for commercial production, we may not be able to commercialize Zelrix or any of our other product candidates.

 

The facilities used by LTS and any of our future manufacturers to manufacture Zelrix must be approved by the FDA after we submit our NDA to the FDA and before approval of Zelrix. We do not control the manufacturing process of Zelrix and are completely dependent on third party manufacturers for compliance with the FDA’s requirements for manufacture of Zelrix. If our manufacturers cannot successfully manufacture material components and finished products that conform to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure FDA approval for their manufacturing facilities. If the FDA does not approve these facilities for the commercial manufacture of Zelrix, or the facilities of any of our other product candidates, we may need to find alternative manufacturing facilities, which would result in significant delays of up to several years in obtaining FDA approval for Zelrix, or any of our other product candidates. We would incur substantial additional costs as a result of any such delays, including with respect to finding alternative manufacturing facilities.

 

Even if our product candidates receive marketing approval in the U.S., we may never receive marketing approval or commercialize our products outside the U.S.

 

In order to market Zelrix or any other product candidate outside the U.S., we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our product candidates. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. The marketing approval process in other countries may include all of the risks associated with obtaining FDA approval in the U.S., as well as other risks. For example, legislation analogous to Section 505(b)(2) of the FDCA in the U.S., which relates to the ability of an NDA applicant to use published data not developed by such applicant, does not exist in other countries. In territories where data is not freely available, we may not have the ability to commercialize our products without negotiating rights from third parties to refer to their clinical data in our regulatory applications, which could require the expenditure of significant additional funds. Further, we may be unable to obtain rights to the necessary clinical data and may be required to develop our own proprietary safety and

effectiveness dossiers. In addition, in many countries outside the U.S., it is required that a product receives pricing and reimbursement approval before the product can be commercialized. This can result in substantial delays in such countries.

 

Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. In addition, we may be subject to fines, suspension or withdrawal of marketing approvals, product recalls, seizure of products, operating restrictions and criminal prosecution if we fail to comply with applicable foreign regulatory requirements. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

 

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

 

Healthcare providers, physicians and others play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with third party payors and customers will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

 

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities conducted by our sales team in the sale of Zelrix, are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize 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 our products for which we obtain marketing approval.

 

In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from private payors.

 

More recently, in March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states once the provision is effective. Further, beginning in 2011, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with health care practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

Risks Related to Intellectual Property

 

We may not be able to rely on our intellectual property to protect our products in the marketplace.

 

Our success depends, in large part, on our ability to protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. The patent positions of pharmaceutical and biotechnology companies, including our company, are uncertain and involve complex questions of law and fact for which important legal issues remain unresolved or may change. As a result of recent court decisions, the requirements for patentability of inventions in the U.S. have become more stringent, including stricter requirements that inventions be non-obvious and that patent applications provide an adequate written description of the invention. These court decisions may have the effect of narrowing the types of medical treatments that are patentable.

 

The patent we have licensed and patents that may be licensed by or issued to us in the future may not provide us with any competitive advantage. Our patents may be challenged by third parties in patent litigation, or in patent reexamination or opposition proceedings, which are becoming widespread in the pharmaceutical industry. In particular, it is not uncommon for potential competitors to challenge the validity of patents protecting new pharmaceutical products shortly after the products receive FDA approval. Alternatively, it is possible that third parties with products that are very similar to ours will circumvent our issued patents by purposely developing products or processes that avoid our patent claims. Our patent protection may be limited because of any of the following:

 

 

We do not currently own any issued U.S. or foreign patents covering any of our product candidates or technology. We have licensed one issued U.S. patent that relates to an iontophoresis drug delivery system. We and our licensors have filed and are actively pursuing applications for patents in the U.S. and in foreign jurisdictions. However, pending patent applications may not result in the issuance of patents or the scope of patent protection that we have requested, and we may not develop additional proprietary products which are patentable. Further, if we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.

 

Because the composition of matter patent covering the active pharmaceutical ingredient of Zelrix has expired, competitors will be able to offer and sell products with the same active pharmaceutical ingredient as Zelrix so long as these competitors do not infringe any other patents that may be issued to or licensed by us, including any product, formulation and method of use patents, or violate any marketing exclusivity period that may be granted. Similarly, the composition of matter patents covering the active ingredients of our NP201 and NP202 product candidates have expired, and competitors will be able to offer and sell products with the same active pharmaceutical ingredients as these product candidates products so long as these competitors do not infringe any other patents that we hold or may obtain in the future, including any product, formulation and method of use patents, or violate any marketing exclusivity period that may be granted.

Patents covering new products or formulations incorporating a generic active pharmaceutical ingredient cannot prevent competitors from commercializing the original products and formulations. In addition, method of use patents, in particular, are more difficult to enforce than composition of matter patents because of the risk of off label sale or use of the subject compounds. Physicians are permitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off label prescriptions may infringe our method of use patents, if issued, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. Off label sales would limit our ability to generate revenue from the sale of our product candidates, if approved for commercial sale. In addition, if a third party were able to design around any issued product, method, formulation or other patent and create a different product not covered by our patents, if issued, we would likely be unable to prevent that third party from manufacturing and marketing its product.

 

We rely on third parties to protect the intellectual property we license, including trade secrets, patents, and know-how, and we may not have any input or control over the filing, prosecution or enforcement of such intellectual property rights. Any resulting patents may be invalid or unenforceable. Any enforcement of intellectual property rights, or defense of any claims asserting the invalidity thereof, may be subject to the cooperation of the third parties.

 

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

 

We are a party to a number of license agreements and may enter into additional licenses in the future. If we fail to comply with the obligations under a license agreement or otherwise breach the license agreement, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by any previously licensed patents.

 

For example, we are party to a license agreement with the University of Pennsylvania, or Penn, pursuant to which we license from Penn patent applications and other intellectual property related to the LAD technology to develop and commercialize licensed products, including NP201 and NP202, and a license agreement with SurModics Pharmaceuticals, Inc., or SurModics, pursuant to which we license from SurModics intellectual property to make, have made, use, sell, import and export NP201. We are obligated to pay milestone and royalty payments under each agreement in addition to other obligations. The triggering of milestone payments to Penn or SurModics depends on factors relating to the clinical and regulatory development and commercialization of NP201 and NP202, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek additional capital to meet these obligations on terms unfavorable to us.

 

Our failure to comply with the requirements of these license agreements, including our milestone payment obligations, could result in the termination of such agreements, in which case we might not be able to develop or market any product that is covered by the license. Even if we contest any such termination and are ultimately successful, our results of operations and stock price could suffer.

 

Our ability to pursue the development and commercialization of Zelrix is significantly dependent upon obtaining a license of LTS’s intellectual property.

 

Our development and license agreement with LTS provides that if we enter into a commercial manufacturing agreement with LTS, LTS will have the exclusive right to manufacture Zelrix and LTS will grant us an exclusive, worldwide, royalty-free license under LTS’s intellectual property to use, import, sell, market and distribute Zelrix. We may not enter into a commercial manufacturing agreement with LTS on commercially reasonable terms, if at all. If we do not enter into a commercial manufacturing agreement with LTS, we may not have access to LTS’s proprietary technology and know-how to manufacturer Zelrix. In this situation, we would need to develop equivalent or alternative intellectual property, which will significantly delay our commercialization of Zelrix and entail significant additional cost.

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.

 

Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. There could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.

 

Third parties may assert that we are employing their proprietary technology without authorization. If a court held that any third party patents cover our products, the holders of any such patents may be able to block our ability to commercialize our products unless we obtained a license under the applicable patent or patents, or until such patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us.

 

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be significantly diminished.

 

In addition to patents, we rely on trade secrets and proprietary know-how to protect our intellectual property. We generally require our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements also typically provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed during employment are our exclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically contain similar assignment of invention provisions.

 

These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. Involuntary disclosure or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position. In addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain access to our trade secrets.

 

Risks Related to Employee Matters and Managing Growth

 

If we are not successful in attracting and retaining highly qualified personnel, including our current senior executive team, we may not be able to successfully implement our business strategy.

 

Our ability to compete in the highly competitive pharmaceutical and biotechnology industries depends in large part upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. Competition for skilled personnel in our market is very intense because of the numerous pharmaceutical and biotechnology companies that seek similar personnel. These companies may have greater financial and other resources, offer a greater opportunity for career advancement and have a longer history in the industry than we do. We also experience competition for the hiring of our scientific and clinical personnel from universities and research institutions.

 

We are highly dependent on Jane H. Hollingsworth, our Chief Executive Officer, and Terri B. Sebree, our President. Despite our efforts to retain valuable employees, members of our management, scientific and medical teams may terminate their employment with us on short notice. We have formal employment agreements with Ms. Hollingsworth and Ms. Sebree that each include reasonable notice periods for terminations of such individual’s employment. Besides these agreements, all other employees’ employment is at-will, which means that any of these employees could leave our employment at any time. We maintain “key person” insurance for each of Ms. Hollingsworth and Ms. Sebree. The total death benefit under each policy is $2.0 million and we are the only named beneficiary and owner of the policies. The policies have an initial term of ten years and are subject to renewal annually thereafter. We do not maintain “key person” insurance for any of our other employees. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition.

 

We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

 

As of May 31, 2010, we employed 21 full-time employees. We expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the anticipated commercialization of Zelrix or development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate or increase our revenues could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize Zelrix and our other product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has not been a public market for our common stock. If an active trading market for our common stock does not develop following this offering, you may not be able to sell your shares quickly or at the market price. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the subsequent trading market.

 

The trading price of our common stock is likely to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

 

 

 

In addition, the stock market in general, and the market for small pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

Upon closing of this offering, our executive officers, directors and 5% stockholders and their affiliates will beneficially own approximately      % of our outstanding voting stock. As a result, these stockholders will have significant influence and may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This concentration of ownership could delay or prevent any acquisition of our company on terms that other stockholders may desire.

 

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $      per share, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus. Further, investors purchasing common stock in this offering will contribute approximately      % of the total amount invested by stockholders since our inception, but will own only approximately      % of the shares of our common stock outstanding.

 

This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering, and the exercise of stock options granted to our employees. In addition, as of May 31, 2010, options to purchase 7,520,075 shares of our common stock at a weighted average exercise price of $0.23 per share and warrants exercisable for up to 1,126,298 shares of our preferred stock at an exercise price of $0.93 per share were outstanding. The exercise of any of these options or warrants would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of a liquidation or sale of our company.

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

 

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise adequate capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

 

Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for at least 180 days from the date of this prospectus, subject to certain exceptions. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. Subject to certain limitations, approximately            shares will become eligible for sale upon expiration of the lock-up period. In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the market price of our common stock.

 

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

 

Our management will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering and our stockholders will not have the opportunity as part of their investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing instruments and U.S. government securities. These investments may not yield a favorable return to our stockholders.

 

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

 

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. We believe that, with our initial public offering, our most recent private placement and other transactions that have occurred over the past three years, we may have triggered an ownership change limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we generate taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could result in increased future tax liability to us.

 

Because we do not intend to pay dividends on our common stock, your returns will be limited to any increase in the value of our stock.

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business and do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

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

 

Provisions in our restated certificate of incorporation and our bylaws that will become effective following the closing of this offering, as well as provisions of the Delaware General Corporation Law, or DGCL, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:

 

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

 

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

The forward-looking statements in this prospectus include, among other things, statements about:

 

 

We may not actually achieve the plans, intentions or expectations described in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations described in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. We do not assume any obligation to update any forward-looking statements.

 

We estimate that the net proceeds from our issuance and sale of            shares of common stock in this offering will be approximately $      million, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds from this offering will be approximately $      million.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease the net proceeds to us from this offering by approximately $      million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We anticipate using the net proceeds from this offering as follows:

 

 

 

This anticipated use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including: the timing of our NDA submission to the FDA for Zelrix; the extent to which the FDA may require us to perform additional clinical trials for Zelrix; the costs of our commercialization activities for Zelrix, if it is approved by the FDA; the cost, timing and outcome of the development of our other product candidates; the extent to which we acquire or invest in products, businesses and technologies; the extent to which we establish collaboration or other similar agreements; the cost of preparing and prosecuting patent applications and enforcing and defending intellectual property claims; and any unforeseen or underestimated cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. In addition, our anticipated use of proceeds does not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make. We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products, businesses or technologies.

 

Following this offering, we believe that our available funds will be sufficient to complete the development of Zelrix through FDA approval and to fund the expected commercial launch of Zelrix in the U.S. in the first half of 2012. It is possible that we will not achieve the progress that we expect with respect to Zelrix because the actual costs and timing of development and marketing approval are difficult to predict and are subject to substantial risks and delays. We have no committed external sources of funds. To the extent that the net proceeds from this offering and our other capital resources are insufficient to complete clinical development of, obtain marketing approval for and, if approved, commercially launch Zelrix, we will need to finance our cash needs through public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future.

 

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2010:

 

 

 

 

 

 

 

The pro forma as adjusted information set forth below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus and our financial statements and the related notes appearing at the end of this prospectus.

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $           per share would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $      million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The table above does not include:

 

 

 

 

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the public offering price per share of common stock and the pro forma net tangible book value per share of common stock after this offering.

 

Our historical net tangible book value of common stock as of March 31, 2010 was $(2.8) million, or $(0.90) per share of common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding.

 

After giving effect, upon the closing of this offering, to the automatic conversion of all outstanding shares of our preferred stock, including accrued dividends, into an aggregate of 62,178,093 shares of common stock and the automatic conversion of all principal and accrued interest outstanding under the April 2010 Convertible Notes into an aggregate of           shares of common stock, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and that the closing occurred on May 31, 2010, our pro forma net tangible book value as of March 31, 2010 would have been $           million, or $      per share of common stock.

 

After giving effect to our issuance and sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2010 would have been $      million, or $      per share of common stock. This represents an immediate increase in pro forma net tangible book value of $      per share to our existing stockholders and an immediate dilution of $           in pro forma net tangible book value per share to new investors purchasing shares of common stock in this offering.

 

Dilution per share to new investors purchasing shares of common stock in this offering is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease our pro forma as adjusted net tangible book value by approximately $          , our pro forma as adjusted net tangible book value per share by $           and dilution per share to new investors purchasing shares of common stock in this offering by $          , assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $      per share and the dilution in pro forma as adjusted net tangible book value per share to new investors would be $      per share.

 

The following table summarizes, on a pro forma basis as described above as of March 31, 2010, the differences between the number of shares of common stock purchased from us, the total effective cash consideration paid and the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $           per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease the total consideration paid by new investors by $      million and increase or decrease the percentage of total consideration paid by new investors purchasing shares of common stock in this offering by approximately     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

If the underwriters exercise their over-allotment option in full, our existing stockholders would own          % and new investors would own     % of the total number of shares of common stock outstanding after this offering.

 

The tables and calculations set forth above are based on the number of shares of common stock outstanding after the closing of this offering and assumes no exercise of any outstanding options or warrants. To the extent that options or warrants are exercised, there will be further dilution to new investors.

 

The above information excludes:

 

 

 

 

You should read the following selected financial data together with the “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our financial statements and the related notes appearing at the end of this prospectus. We have derived the statement of operations data for the years ended December 31, 2007, 2008 and 2009 and the balance sheet data as of December 31, 2008 and 2009 from our audited financial statements appearing at the end of this prospectus. We have derived the statement of operations data for the period from January 7, 2005 (inception) through December 31, 2005 and year ended December 31, 2006 and the balance sheet data as of December 2005, 2006 and 2007 from our audited financial statements not included in this prospectus. We have derived the statement of operations data for the three months ended March 31, 2009 and 2010 and the balance sheet data as of March 31, 2010 from our unaudited financial statements appearing at the end of this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period and our interim period results are not necessarily indicative of results for a full year.

 

See note 3(j) to our financial statements appearing at the end of this prospectus for information regarding computation of basic and diluted net loss per common share, unaudited pro forma basic and diluted net loss per common share and the unaudited pro forma weighted average basic and diluted common shares outstanding used in computing pro forma basic and diluted net loss per common share.

 

 

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing at the end of prospectus. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated or implied in these forward-looking statements as a result of important factors described in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section.

 

Overview

 

We are a specialty pharmaceutical company focused on the development and commercialization of branded therapeutics for diseases of the central nervous system, including neurological and psychiatric disorders. Our most advanced product candidate, Zelrix, is an active, single-use transdermal sumatriptan patch that we are developing for the treatment of acute migraine. Zelrix uses our proprietary SmartRelief technology. We successfully completed a pivotal Phase III clinical trial for Zelrix in July 2009 and expect to submit an NDA to the FDA in the fourth quarter of 2010. Before we submit our NDA, we must complete two ongoing pharmacokinetic trials in healthy subjects and obtain interim data from two Phase III safety trials. Subject to the approval of our NDA, we plan to build our own specialty sales force in the U.S. to launch Zelrix. We have two other proprietary product candidates in preclinical development that address large market opportunities, NP201 for the continuous symptomatic treatment of Parkinson’s disease and NP202 for the long-term treatment of schizophrenia and bipolar disorder.

 

We were incorporated in the State of Delaware in January 2005 and are a development stage company. Since our inception, we have invested a significant portion of our efforts and financial resources in the development of Zelrix. Zelrix is the only product candidate for which we have conducted clinical trials, and to date we have not marketed, distributed or sold any products. As a result, we have generated no revenue and have never been profitable. Our net loss was $4.0 million in the three months ended March 31, 2010, $15.6 million for the year ended December 31, 2009 and $17.5 million for the year ended December 31, 2008. As of March 31, 2010, we had an accumulated deficit of $59.4 million.

 

We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of Zelrix and our other products candidates. If we obtain marketing approval for Zelrix, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as a public company following the closing of this offering. Our results may vary depending on many factors, including the progress and results of our preclinical studies and clinical trials, our ability to obtain marketing approval of Zelrix and our other product candidates and, if approved, our ability to commercialize these products and achieve market acceptance of these products among physicians, patients and third party payors.

 

We have funded our operations to date primarily with the proceeds of the sale of convertible preferred stock, convertible notes and borrowings under debt facilities. From inception through March 31, 2010, we have received net proceeds of $48.0 million from the sale of convertible preferred stock and convertible notes. As of March 31, 2010, we had $0.6 million of debt outstanding under a term loan that we entered into in 2007.

 

In April 2010, we received gross proceeds of $10.1 million from the sale of the April 2010 Convertible Notes. Further, in May 2010, we entered into the May 2010 Loan Facility under which $5.0 million was advanced on the closing date. We used a portion of the proceeds that we received on the closing date of the

May 2010 Loan Facility to repay all outstanding amounts under the term loan that we entered into in 2007. The April 2010 Convertible Notes and the May 2010 Loan Facility are described in more detail under “— Liquidity and Capital Resources.”

 

Our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph regarding this uncertainty in its report on our financial statements as of and for the year ended December 31, 2009. We have no current source of revenues to sustain our present activities, and we do not expect to generate revenues until, and unless, the FDA or other regulatory agencies approve Zelrix or any other of our product candidates and we successfully commercialize any such product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations.

 

Financial Overview

 

Research and Development Expenses

 

Our research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including:

 

 

We expense all research and development costs as incurred. Preclinical development expenses and clinical trial expenses for our product candidates are a significant component of our current research and development expenses. Product candidates in later stage clinical development, such as Zelrix, generally have higher research and development expenses than those in earlier stages of development, primarily due to the increased size and duration of the clinical trials. We track and record information regarding external research and development expenses for each study or trial that we conduct. From time to time, we use third party contract research organizations, contractor laboratories and independent contractors in preclinical studies. We recognize the expenses associated with third parties performing these services for us in our preclinical studies based on the percentage of each study completed at the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.

 

From our inception in January 2005 through March 31, 2010, we incurred research and development expenses of $35.2 million, of which $24.9 million related to the development of Zelrix. We incurred research and development expenses associated with the development of Zelrix of $2.5 million in the three months ended March 31, 2010, $8.2 million in 2009 and $5.6 million in 2008. Additionally, in 2008 we incurred $5.5 million of acquired in-process research and development expenses in connection with our acquisition of a patent application utilized in Zelrix. In addition, pursuant to this transaction, we obtained a perpetual, worldwide, exclusive, royalty-free license, with the right to grant sublicenses, including issued U.S. Patent No. 6,745,071, as described in more detail under “Business — Intellectual Property and Exclusivity.” Salaries and related expenses included in research and development expenses were $0.7 million in the three months

ended March 31, 2010, $2.4 million in 2009 and $6.7 million since our inception. We do not allocate salaries and related expenses to individual projects, trials or studies or to specific product candidates.

 

We expect that our research and development expenses in 2010 will be higher than in 2009 as a result of the full enrollment of the Phase III safety trials for Zelrix and the increased regulatory work related to the NDA that we expect to submit for Zelrix during the fourth quarter of 2010. We also expect to incur additional research and development expenses in 2010 as we accelerate the development of NP201 and NP202. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of our preclinical development and clinical trials may take several years or more and the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

 

Neither Zelrix nor any of our other product candidates has received FDA approval. In order for the FDA to approve a product candidate, the FDA must conclude that clinical data establishes the safety and efficacy of such product candidate. We currently anticipate submitting an NDA for Zelrix in the fourth quarter of 2010. We expect to incur research and development costs of approximately $11 million to $13 million through the end of 2011 to complete development of Zelrix. As discussed above, due to the numerous risks and uncertainties associated with timing and costs to completion of clinical trials, we cannot determine these future expenses with certainty and the actual range may vary significantly from our forecast.

 

Additionally, we expect to incur costs of approximately €5.4 million, or approximately $6.6 million based on exchange rates in effect as of May 31, 2010, relating to the funding of commercial manufacturing equipment for Zelrix, as described in more detail under “Business — License, Development and Commercial Agreements — LTS Lohmann Therapie Systeme AG.” We also expect to incur additional costs relating to post-marketing studies to gather additional information regarding Zelrix’s risks, benefits and optimal use.

 

We currently anticipate submitting an IND for NP201 in the first half of 2011 and NP202 in 2012. Due to their early stages of development, we are unable to determine the duration and completion costs of our NP201 and NP202 development projects. As a result of the difficulties forecasting NP201 and NP202 development costs, as well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenues from the commercialization and sale of an approved product candidate.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, accounting, legal, market research and human resource functions. Our general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal, including patent-related expenses, consulting, tax and accounting services, insurance, depreciation and general corporate expenses. We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates.

 

We expect that our general and administrative expenses in 2010 will be higher than in 2009 as a result of greater expenses relating to our operations as a public company, including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional regulations, corporate governance, internal control and similar requirements applicable to

public companies, as well as increased costs for insurance. Additionally, we plan to increase spending related to building a commercial infrastructure for the anticipated launch of Zelrix in the U.S. in the first half of 2012. However, in an effort to control our spending related to commercialization efforts, we currently plan to hire most of our sales and marketing personnel only if Zelrix is approved by the FDA.

 

Interest Income and Interest Expense

 

Interest income consists of interest earned on our cash and cash equivalents. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. Additionally, in connection with some of our debt financings, we issued warrants, the fair value of which we recorded as deferred financing costs. We amortize these deferred financing costs over the lives of the loans as interest expense in our statement of operations. Excluding the impact of non-cash interest costs, we expect interest expense to increase in 2010 compared with 2009 as a result of the April 2010 Convertible Notes and the May 2010 Loan Facility.

 

Net Operating Losses and Tax Loss Carryforwards

 

Our net loss was $4.0 million for the three months ended March 31, 2010 and $15.6 million for the year ended December 31, 2009. We have incurred cumulative net losses of $53.0 million from inception through March 31, 2010. As of December 31, 2009, we had approximately $43.4 million of federal net operating loss carryforwards and state research and development credits available to offset future taxable income. These federal and state net operating loss carryforwards will begin to expire in 2024. Due to the uncertainty of our ability to realize the benefit of any net operating loss carryforwards and credits, the deferred tax asset related to these carryforwards has been fully offset by a valuation allowance at December 31, 2009.

 

The closing of this offering, together with private placements and other transactions that have occurred since our inception, may trigger, or may have already triggered, an “ownership change” pursuant to Section 382 of the Code. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards. In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could result in increased future tax liability to us.

 

Critical Accounting Policies and Use of Estimates

 

We have based our management’s discussion and analysis of our financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully discussed in note 3 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. We have reviewed these critical accounting policies and estimates with the audit committee of our board of directors.

 

Research and Development Expenses

 

Although we manage the conduct of our own clinical trials, we rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, we compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we consider in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our

vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we record net prepaid or accrued expenses related to these costs. We calculate expenses incurred for the manufacture of our clinical supplies using our estimate of costs and capitalize these expenses on our balance sheet to the extent we hold clinical supply materials on hand to be distributed for use in our clinical trials. We expense these costs as the supplies are consumed in the trials.

 

Stock-Based Compensation

 

We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of stock options and stock price volatility. As a private company, we do not have sufficient history to estimate the expected life of our options or the volatility of our common stock price. We use the “simplified method,” as allowed under the Securities and Exchange Commission’s, or SEC, accounting guidance, to determine the expected life, which is the midpoint between an option’s vesting date and contractual term. We use comparable public companies as a basis for our expected volatility to calculate the fair value of our option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The risk-free interest rate is based on U.S. Treasury instruments with a remaining term equal to the expected term of the option. The assumptions used in calculating the fair value of stock options represent our best estimate and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, stock-based compensation could be materially different in the future.

 

The fair value of our common stock underlying grants of common stock options and restricted stock was determined by our board of directors or compensation committee pursuant to authority delegated by our board of directors and represents the most important factor in determining the value of our stock-based compensation. In the absence of a public trading market for our common stock, our board of directors or compensation committee was required to estimate the fair value of our common stock at the grant date of our stock-based awards.

 

Prior to December 2006, our board of directors or our compensation committee estimated the fair value of our common stock considering the following factors:

 

 

Beginning in December 2006, our compensation committee obtained independent third party valuations to assist it in estimating the fair value of our common stock. These valuations took into account clinical and other notable milestones with respect to Zelrix. The first independent third party valuation of our common stock took place following the sale of Series A preferred stock in August 2006 when we engaged an independent third party valuation firm to assist our compensation committee in determining the fair value of our common stock as of December 31, 2006. In connection with the sale of Series B preferred stock in July 2008, and in anticipation of the grant of a significant number of stock options covering our common stock in the third quarter of 2008, we again engaged an independent third party valuation firm to assist our compensation committee in determining the fair value of our common stock as of July 8, 2008.

 

The following table summarizes the proceeds from the issuance of our preferred stock through May 31, 2010:

 

 

Although we sold all of the shares of Series A and Series B preferred stock at a price of $0.93 per share, our compensation committee did not believe that the value placed on these shares of preferred stock provided a direct indication of the fair value of our common stock because the preferred stock is entitled to preferences, rights and protections that are not applicable to our common stock. As of May 31, 2010, because of these preferences, the holders of the Series A and Series B preferred stock were entitled to receive a liquidation preference of $57.8 million and to participate with the common stockholders on an as-converted basis in the remaining value of our company.

 

In order to estimate the fair value of our common stock, we estimated the aggregate fair value of our common stock and preferred stock, which we refer to as our aggregate equity value, and then allocated this value between our preferred stock and common stock using a Black-Scholes call option method, as described in more detail below. In addition, we applied an illiquidity discount to our estimate of the fair value of our common stock to account for the heightened level of risk of our shares compared to shares of comparable, publicly traded companies.

 

In estimating our aggregate equity value, we used methodologies and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The primary methodologies that we considered to determine our aggregate equity value were a market-based approach and an asset-based approach.

 

 

 

 

 

 

The aggregate equity values for the market and asset-based approaches were similar. However, we ultimately derived the aggregate equity value in our December 31, 2006 and July 8, 2008 valuations from the market-based approach. We then allocated the aggregate equity value between the common stock and the preferred stock using a Black-Scholes call option pricing method. Under this method, we estimated the fair value of our common stock as the net value of a series of call options, representing the present value of the expected future returns to the common stockholders. We considered the rights of the common stockholders to be equivalent to a call option on our future value in excess of the aggregate liquidation preferences payable on Series A and Series B preferred stock, with adjustments to account for the rights retained by the preferred stockholders related to any value in excess of the applicable liquidation preferences. Using this method, we valued the common stock by estimating the value of a share of common stock in each of these call option rights.

 

As discussed above, we then reduced the value of the common stock using this approach by applying an illiquidity discount to account for the heightened level of risk associated with our shares compared to that of comparable, publicly traded companies.

 

The December 31, 2006 valuation of our common stock was based on an aggregate equity value of $8.5 million. The value allocated to the common stock after applying the call option allocation methodology and a 35% illiquidity discount was $0.18 per share. Our compensation committee believed the increase in the estimated fair value of common stock from $0.12 per share prior to December 2006 to $0.18 per share was appropriate in light of the continued progress of Zelrix in its preclinical development program as of December 2006, coupled with the initial sale of Series A preferred stock in August 2006 at $0.93 per share.

 

The July 8, 2008 valuation of our common stock was based on an aggregate equity value of $30.2 million. The value allocated to the common stock after applying the call option allocation methodology and a 35% illiquidity discount was $0.24 per share. The increase in the aggregate equity value compared to the December 31, 2006 valuation reflected our sale of additional Series A preferred stock in October 2007, the initial sale of Series B preferred stock in July 2008 and the continued investment in, and advancement of, our product candidates. In particular, in the first quarter of 2008, we successfully completed a Phase I proof of concept study for Zelrix that provided encouraging pharmacokinetic data that was a predicate for continued development.

 

On each grant date subsequent to December 31, 2006, our compensation committee considered the most current independent valuation that had been completed and the continued validity of that valuation given the progress, if any, that we had made in the development of Zelrix and our other product candidates, external market factors and other conditions, as discussed above. The following table summarizes our stock-based

awards issued since our inception to December 31, 2009. We have not issued any stock-based awards since December 31, 2009.

 

 

 

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2009 and 2010

 

Research and Development Expenses

 

Research and development expenses for the three months ended March 31, 2009 and 2010 were comprised of the following:

 

 

Research and development expenses increased by $0.4 million, or 13%, to $3.4 million in the three months ended March 31, 2010 from $3.0 million in the three months ended March 31, 2009. This increase resulted primarily from a $0.3 million increase in manufacturing costs related to production of Phase III clinical supplies of Zelrix and a $0.4 million increase due to our continued Phase III clinical program for Zelrix, offset by a $0.4 million decrease in preclinical expenses, reflecting the completion in 2009 of a substantial portion of our preclinical studies for Zelrix and our increased focus on our Phase III clinical program for Zelrix. Research and development headcount remained consistent for the three months ended March 31, 2009 as compared to the three months ended March 31, 2010, with the minimal increase in compensation and related expenses resulting from annual increases in salary, bonus and benefit premiums.

 

Research and development expenses by program for the three months ended March 31, 2009 and 2010 are presented below:

 

 

The increase in spending on Zelrix in the three months ended March 31, 2010 was primarily due to the continuation of our Phase III clinical program and the related manufacture of Phase III clinical supplies, offset by lower preclinical spending due to the completion of many of our preclinical studies in 2009. Spending on NP201 remained consistent for the three months ended March 31, 2009 as compared to the three months ended March 31, 2010. The spending in the first quarter of 2009 was for NP201 preclinical studies and the spending in the first quarter of 2010 was for consulting expenses for NP201. Personnel related expenses, including salaries and benefits, are included in the table above as general development expenses as we do not allocate these expenses to specific programs.

 

General and Administrative Expenses