Item 1.Business
Overview
We are a biopharmaceutical company that develops novel drugs. Our lead drug candidate, REMOXY, is an extended-release oral formulation of oxycodone for the management of moderate-to-severe pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time. We designed REMOXY to discourage common of tampering and misuse.
Pfizer’s development of REMOXY was being conducted pursuant to the Pfizer Agreements. References to Pfizer in this Part I, Item 2 and in Part 2, Item 1A
Item 1A.Risk Factors
Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline, and you could experience losses on your investment in our common stock.
Clinical and Regulatory Risks
If we or our collaborators fail to obtain the necessary regulatory approvals, or if such approvals are limited, we and our collaborators will not be allowed to commercialize our drug candidates, and we will not generate product revenues.
Satisfaction of all regulatory requirements for commercialization of a drug candidate typically takes many years, is dependent upon the type, complexity and novelty of the drug candidate, and requires the expenditure of substantial resources for research and development. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated additional non-clinical data was required to support the approval of REMOXY. Also, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In March 2009, King assumed sole responsibility for the regulatory approval of REMOXY. In December 2010, King resubmitted the NDA for REMOXY. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King’s resubmission of the REMOXY NDA. The FDA’s Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY. Certain drug lots showed inconsistent release performance during in vitro testing. Pfizer recently completed certain additional clinical trials designed to address the June 2011 Complete Response Letter. In connection with the election by Pfizer to terminate the Pfizer Agreement, Pfizer is obligated to transfer to us the data, records and information related to REMOXY. We will become responsible for the resubmission of an NDA for REMOXY. Because we have not received or had access to all data generated by Pfizer, we have not been able to determine whether such data supports an NDA resubmission for REMOXY or whether we will be required to conduct additional clinical trials or other development activities. We do not yet know when we will receive or otherwise obtain access to such data from the Pfizer. Further, there can be no assurance that the FDA will approve
			
		
an NDA for REMOXY or that the FDA will not require additional clinical or non-clinical data to be submitted. Obtaining data from such studies (even if completed) that is insufficient to support approval of REMOXY, or any adverse decisions by the FDA (including any decision by the FDA to require additional clinical or non-clinical data) may significantly delay or prevent the potential approval of REMOXY.
Our research and clinical approaches may not lead to drugs that the FDA considers safe for humans and effective for indicated uses we are studying. The FDA may require additional studies, in which case we or our collaborators would have to expend additional time and resources and would likely delay the date of potentially receiving regulatory approval. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals would:
•delay commercialization of, and product revenues from, our drug candidates; and
•diminish the competitive advantages that we may have otherwise enjoyed, which would have an adverse effect on our operating results and financial condition.
Even if we or our collaborators comply with all FDA regulatory requirements, our drug candidates may never obtain regulatory approval. If we or our collaborators fail to obtain regulatory approval for any of our drug candidates we will have fewer commercial products, if any, and corresponding lower product revenues, if any. Even if our drug candidates receive regulatory approval, such approval may involve limitations on the indications and conditions of use or marketing claims for our products. Further, later discovery of previously unknown problems or adverse events could result in additional regulatory restrictions, including withdrawal of products. The FDA may also require us or our collaborators to commit to perform lengthy Phase IV post-approval clinical efficacy or safety studies. Our expending additional resources on such trials would have an adverse effect on our operating results and financial condition.
In jurisdictions outside the United States, we or our collaborators must receive marketing authorizations from the appropriate regulatory authorities before commercializing our drugs. Regulatory approval processes outside the United States generally include all of the aforementioned requirements and risks associated with FDA approval.
If we or our collaborators are unable to design, conduct and complete preclinical and clinical trials successfully, our drug candidates will not be able to receive regulatory approval.
In order to obtain FDA approval for any of our drug candidates, we or our collaborators must submit to the FDA an NDA that demonstrates with substantive evidence that the drug candidate is both safe and effective in humans for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials.
Preclinical studies may not provide results we believe are sufficient to support the filing of an IND. Success in early preclinical studies does not ensure success in later preclinical or clinical studies. The FDA may disagree with the design of our preclinical studies or our interpretations of data from preclinical studies. The FDA may not accept an IND for our product candidate and may require additional preclinical studies to support the filing of an IND.
Success in preclinical studies and early clinical trials does not ensure that later clinical trials will be successful. Results from Phase I clinical programs may not support moving a drug candidate to Phase II or Phase III clinical trials. Phase III clinical trials may not demonstrate the safety or efficacy of our drug candidates. Results of later clinical trials may not replicate the results of prior clinical trials and preclinical studies. Even if the results of Phase III clinical trials are positive, we or our collaborators may have to commit substantial time and additional resources to conducting further preclinical studies and clinical trials before obtaining FDA approval for any of our drug candidates.
Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements. The clinical trial process also consumes a significant amount of time. Furthermore, if participating patients in clinical trials suffer drug-related adverse reactions during the course of such clinical trials, or if we, our collaborators or the FDA believe that participating patients are being exposed to unacceptable health risks, such clinical trials will have to be suspended or terminated. Failure can occur at any stage of the clinical trials, and we or our collaborators could encounter problems that cause abandonment or repetition of clinical trials.
Clinical trials with REMOXY and our potential future clinical trials for other drug candidates for treatment of pain measure clinical symptoms, such as pain and physical dependence, that are not biologically measurable. The success in these clinical trials depends on reaching statistically significant changes in patients’ symptoms based on clinician-rated scales. Due
			
		
in part to a lack of consensus on standardized processes for assessing clinical outcomes, these scores may or may not be reliable, useful or acceptable to regulatory agencies.
In addition, completion of clinical trials can be delayed by numerous factors, including:
•delays in identifying and agreeing on acceptable terms with prospective clinical trial sites;
•slower than expected rates of patient recruitment and enrollment;
•unanticipated patient dropout rates;
•increases in time required to complete monitoring of patients during or after participation in a clinical trial; and
•unexpected need for additional patient-related data.
Any of these delays could significantly impact the timing, approval and commercialization of our drug candidates and could significantly increase our overall costs of drug development.
Even if clinical trials are completed as planned, their results may not support expectations or intended marketing claims. The clinical trials process may fail to demonstrate that our drug candidates are safe and effective for indicated uses. Such failure would cause us to abandon a drug candidate and could delay development of other drug candidates.
Clinical trial designs that were discussed with authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.
We discuss with and obtain guidance from regulatory authorities on certain of our clinical development activities. With the exception of our Special Protocol Assessment, or SPA, such as the one we completed with the FDA with respect to the Phase III clinical trial for REMOXY, these discussions are not binding obligations on the part of regulatory authorities.
Regulatory authorities may revise previous guidance or decide to ignore previous guidance at any time during the course of our clinical activities or after the completion of our clinical trials. Even with successful clinical safety and efficacy data, including such data from a clinical trial conducted pursuant to an SPA, we or our collaborators may be required to conduct additional, expensive clinical trials to obtain regulatory approval.
Developments by competitors may establish standards of care that affect our ability to conduct our clinical trials as planned.
We have conducted clinical trials of our drug candidates comparing our drug candidates to both placebo and other approved drugs. Changes in standards related to clinical trial design could affect our ability to design and conduct clinical trials as planned. For example, regulatory authorities may not allow us to compare our drug candidates to placebo in a particular clinical indication where approved products are available. In that case, both the cost and the amount of time required to conduct a clinical trial could increase.
The DEA limits the availability of the active ingredients in certain of our current drug candidates and, as a result, quotas for these ingredients may not be sufficient to complete clinical trials, or to meet commercial demand or may result in clinical delays.
The U.S. Drug Enforcement Administration, or DEA, regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Certain active ingredients in our current drug candidates, such as oxycodone, are listed by the DEA as Schedule II under the Controlled Substances Act of 1970. Consequently, their manufacture, research, shipment, storage, sale and use are subject to a high degree of oversight and regulation. For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription. Furthermore, the amount of Schedule II substances that can be obtained for clinical trials and commercial distribution is limited by the DEA and quotas for these substances may not be sufficient to complete clinical trials or meet commercial demand. There is a risk that DEA regulations may interfere with the supply of the drugs used in clinical trials for our product candidates, and, in the future, the ability to produce and distribute our products in the volume needed to meet commercial demand.
Conducting clinical trials of our drug candidates or potential commercial sales of a drug candidate may expose us to expensive product liability claims and we may not be able to maintain product liability insurance on reasonable terms or at all.
			
		
The risk of product liability is inherent in the testing of pharmaceutical products. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or terminate testing of one or more of our drug candidates. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of our drug candidates. We currently carry clinical trial insurance but do not carry product liability insurance. If we successfully commercialize one or more of our drug candidates, we may face product liability claims, regardless of FDA approval for commercial manufacturing and sale. We may not be able to obtain such insurance at a reasonable cost, if at all. Even if our agreements with any current or future corporate collaborators entitle us to indemnification against product liability losses, such indemnification may not be available or adequate should any claim arise.
If our drug candidates receive regulatory approval, we and our collaborators will be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we and our collaborators may also be subject to additional FDA post-marketing obligations or new regulations, all of which may result in significant expense and limit our and our collaborators’ ability to commercialize our potential drugs.
Any regulatory approvals that our drug candidates receive may also be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drug, including but not limited to adverse events of unanticipated severity or frequency, or the discovery that adverse events previously observed in preclinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.
The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. For example, on July 9, 2012, the FDA approved a risk management program, known as a Risk Evaluation and Mitigation Strategy, or REMS, for extended-release and long-acting opioid analgesics, or ER/LA opioid analgesics. This REMS will require companies affected by the REMS to make available training for health care professionals who prescribe ER/LA opioid analgesics on proper prescribing practices and also to distribute educational materials to prescribers and patients on the safe use of ER/LA opioid analgesics.
We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Any of these events could prevent us from marketing our drugs and our business could suffer.
We may not be able to successfully develop or commercialize FENROCK, a transdermal pain patch specifically designed to prevent recreational abuse of fentanyl.
We have no history of developing transdermal patches. We do not know whether any of our planned development activities for FENROCK will result in approval of such drug candidate by the FDA, or, if FENROCK is approved, it will be a commercially viable product.
Risks Relating to our Collaboration Agreements
If Pfizer does not transfer to us all data and documentation requested by us or as required by the Pfizer Agreements, does not transfer such data and documentation on a timely basis, or the quality of the data and documentation transferred is insufficient, our ability to resubmit an NDA for REMOXY will be negatively impacted and our business would suffer.
In connection with Pfizer’s election to termination of the Pfizer Agreements, Pfizer is required to transfer to us data, documentation and other materials related to REMOXY. If Pfizer does not meet its obligations to transfer such materials, if the transfer is not completed on a timely basis or the quality of the data and documentation transferred is insufficient, we would be significantly delayed in our ability to resubmit an NDA for REMOXY, and may need to conduct further development activities or clinical trials to prepare any potential resubmission. As a result, any further development, regulatory approval and product introduction for REMOXY would be delayed or prevented and our business would suffer.
			
		
If outside collaborators fail to devote sufficient time and resources to drug development programs related to our product candidates, or if their performance is substandard, regulatory submissions and introductions for our products may be delayed.
We rely on Durect as the sole source provider of certain components of REMOXY. Durect’s failure for any reason to provide these components could result in delays or failures in product testing or delivery, cost overruns or other problems that could materially harm our business.
We depend on independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These investigators and collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. They may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such activities ourselves. If these investigators or collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, the approval of our regulatory submissions and our introductions of new drugs will be delayed or prevented.
Our collaborators may also have relationships with other commercial entities, some of which may compete with us. If outside collaborators assist our competitors to our detriment, the approval of our regulatory submissions will be delayed and the sales from our products, if any are commercialized, will be less than expected.
If we fail to enter into or maintain collaboration agreements and licenses for REMOXY and other drugs designed to reduce potential risks of unintended use, we may have to reduce or delay our drug candidate development.
Our plan for developing, manufacturing and commercializing REMOXY currently requires us to successfully maintain our license from Durect. If we are unable to meet the obligations necessary to maintain our license with Durect for one or more potential products we may lose the rights to utilize Durect’s technology for such potential products, our potential future revenues may suffer and we may have to reduce or delay development of our other drug candidates. In addition, we expect to seek a new corporate collaborator with respect to REMOXY. If we do not enter into a new collaboration with respect to the continued development and potential commercialization of REMOXY, we will be required to undertake and fund such activities ourselves and may need to seek additional capital (which may not be available on acceptable terms, if at all), personnel or other resources, If we are not successful in such efforts, development and commercialization of REMOXY and our other drug candidates would be delayed or prevented, and our business would suffer.
We may not succeed at in-licensing drug candidates or technologies to expand our product pipeline.
We may not successfully in-license drug candidates or technologies to expand our product pipeline. The number of such candidates and technologies is limited. Competition among large pharmaceutical companies and biopharmaceutical companies for promising drug candidates and technologies is intense because such companies generally desire to expand their product pipelines through in-licensing. If we fail to carry out such in-licensing and expand our product pipeline, our potential future revenues may suffer.
Our collaborative agreements may not succeed or may give rise to disputes over intellectual property, disputes concerning the scope of collaboration activities or other issues.
Our collaborative agreements with third parties, such as the Pfizer Agreements and our license agreement with Durect are generally complex and contain provisions that could give rise to legal disputes, including potential disputes concerning ownership of intellectual property under collaborations or disputes concerning the scope of collaboration activities. Such disputes can delay or prevent the development of potential new drug products, or can lead to lengthy, expensive litigation or arbitration. Other factors relating to collaborative agreements may adversely affect our business, including:
•the development of parallel products by our collaborators or by a competitor;
•arrangements with collaborative partners that limit or preclude us from developing certain products or technologies;
•premature termination of a collaborative or license agreement; or
•failure by a collaborative partner to provide required funding, to devote sufficient resources to the development of or legal defense of our potential products or to provide data or other information to us as required by our collaborative agreements.
			
		
Risks Relating to Commercialization
If physicians and patients do not accept and use our drugs, we will not achieve sufficient product revenues and our business will suffer.
Even if the FDA approves our drugs, physicians and patients may not accept and use them. Acceptance and use of our drugs will depend on a number of factors including:
•perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drugs, and, in particular, the effectiveness of REMOXY in reducing potential risks of unintended use;
•perceptions by physicians regarding the cost benefit of REMOXY in reducing potential risks of unintended use;
•published studies demonstrating the cost-effectiveness of our drugs relative to competing products;
•availability of reimbursement for our products from government or healthcare payers;
•our or our collaborators’ ability to implement a risk management plan prior to the distribution of any Schedule II drug; and
•effectiveness of marketing and distribution efforts by us and other licensees and distributors.
Because we expect to rely on sales generated by our current lead drug candidates for substantially all of our revenues for the foreseeable future, the failure of any of these drugs to find market acceptance would harm our business and could require us to seek additional financing.
If we are unable to develop our own sales, marketing and distribution capabilities, or if we are not successful in contracting with third parties for these services on favorable terms, or at all, our product revenues could be disappointing.
We currently have no sales, marketing or distribution capabilities. In order to commercialize our products, if any are approved by the FDA, we will either have to develop such capabilities internally or collaborate with third parties who can perform these services for us. If we decide to commercialize any of our drugs ourselves, we may not be able to hire the necessary experienced personnel and build sales, marketing and distribution operations which are capable of successfully launching new drugs and generating sufficient product revenues. In addition, establishing such operations will take time and involve significant expense.
If we decide to enter into new co-promotion or other licensing arrangements with third parties, we may be unable to locate acceptable collaborators because the number of potential collaborators is limited and because of competition from others for similar alliances with potential collaborators. Even if we are able to identify one or more acceptable new collaborators, we may not be able to enter into any collaborative arrangements on favorable terms, or at all.
In addition, due to the nature of the market for our drug candidates, it may be necessary for us to license all or substantially all of our drug candidates to a single collaborator, thereby eliminating our opportunity to commercialize these other products independently. If we enter into any such new collaborative arrangements, our revenues are likely to be lower than if we marketed and sold our products ourselves.
In addition, any revenues we receive would depend upon our collaborators’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, change of strategic focus, business combinations or other factors outside of our control. Depending upon the terms of our collaboration, the remedies we have against an under-performing collaborator may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement collaborator on acceptable terms, or at all.
If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.
The market for our drug candidates is characterized by intense competition and rapid technological advances. If our drug candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If
			
		
our products are unable to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
We and our collaborators will compete for market share against fully integrated pharmaceutical companies or other companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have drugs already approved or drug candidates in development that will or may compete against our approved drug candidates. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:
•developing drugs;
•conducting preclinical testing and human clinical trials;
•obtaining FDA and other regulatory approvals of drugs;
•formulating and manufacturing drugs; and
•launching, marketing, distributing and selling drugs.
If we fail to obtain acceptable prices or an adequate level of reimbursement for our products from healthcare payers, our ability to generate product revenues will be diminished.
Our ability to commercialize drugs we (alone or with other collaborators) may develop will depend in part on the extent to which reimbursement can be obtained for such drugs from:
•government and health administration authorities;
•private health maintenance organizations and health insurers; and
•other healthcare payers.
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, health maintenance organizations and managed care organizations, are challenging the prices charged for medical products and services and/or are seeking pharmacoeconomic data to justify formulary acceptance and reimbursement practices. We currently have not generated pharmacoeconomic data on any of our drug candidates. Government and other healthcare payers increasingly are attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs, and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has or has not granted labeling approval. Adequate third-party insurance coverage may not be available to patients for any products we discover and develop, alone or with collaborators. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our products, market acceptance of our drug candidates could be limited.
Government agencies may establish and promulgate usage guidelines that could limit the use of our drug candidates.
Government agencies, professional and medical societies, and other groups may establish usage guidelines that apply to our drug candidates. These guidelines could address such matters as usage and dose, among other factors. Application of such guidelines could limit the clinical use or commercial appeal of our drug candidates.
Risks Relating to our Intellectual Property
Our ability to commercialize our drug candidates will depend on our ability to sell such products without infringing the patent or proprietary rights of third parties. If we are sued for infringing the intellectual property rights of third parties, such litigation will be costly and time consuming and an unfavorable outcome would have a significant adverse effect on our business.
Our ability to commercialize our drug candidates will depend on our ability to sell such products without infringing the patents or other proprietary rights of third parties. Intellectual property rights in the areas of controlled-release technology and pharmaceutical ingredients are complicated and are continuously evolving. Holders of patent rights in these areas may allege that the commercialization of REMOXY or our other drug candidates infringes such patent rights. While we believe that we would have valid defenses to any claim of infringement, there can be no assurance that these or other third-party patents will not limit our ability to commercialize REMOXY or our other drug candidates.
			
		
In addition, because patent applications are published some time after filing, and because applications can take several years to issue, there may be currently pending third-party patent applications that are unknown to us, which may later result in issued patents. If a third-party claims that we infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:
•infringement claims that, with or without merit, can be costly and time consuming to litigate, can delay the regulatory approval process and can divert management’s attention from our core business strategy;
•substantial damages for past infringement which we may have to pay if a court determines that our products or technologies infringe upon a competitor’s patent or other proprietary rights;
•a court order prohibiting us from commercializing our products or technologies unless the holder licenses the patent or other proprietary rights to us, which such holder is not required to do;
•if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights; and
•redesigning our process so that it does not infringe the third-party intellectual property rights, which may not be possible, or which may require substantial time and expense including delays in bringing our own products to market. Such actions could harm our competitive position and our ability to generate revenue and could result in increased costs.
If we are unable to protect our intellectual property, our competitors could develop and market products with similar features that may reduce demand for our drug candidates.
Our success, competitive position and potential future revenues will depend in part on our ability to protect our intellectual property. If we or our collaborators fail to file, prosecute, obtain or maintain certain patents, our competitors could market products that contain features and clinical benefits similar to those of our products, and demand for our products could decline as a result.
We and our collaborators have filed patent applications in the United States and select international jurisdictions to protect our intellectual property. The coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Consequently, we do not know whether any of our pending applications will result in the issuance of patents, or if any existing or future patents will provide significant protection or commercial advantage or will be circumvented by others. There can be no assurance that patents will issue from our pending or future patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid. Thus, if these patent applications do not result in issued patents or result in a patent that is challenged by others, the duration or scope of our patent rights may be limited and our future revenues could be lower as a result.
We may be involved in challenges to our intellectual property. An adverse outcome of a challenge to our intellectual property could result in loss of claims of patents or other intellectual property rights that pertain to certain drugs we currently have under development and could have a material adverse impact on our future revenues.
We intend to file additional patent applications relating to our technology, products and processes. We may direct our collaborators to file additional patent applications relating to the licensed technology or we may do so ourselves. However, our competitors may challenge, invalidate or circumvent any of our current or future patents. These patents may also fail to provide us with meaningful competitive advantages.
We may become involved in expensive litigation or other legal proceedings related to our existing intellectual property rights, including patents.
We expect that we will rely upon patents, trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information or be issued patents that may prevent the sale of our products or know-how or require us to license such information and pay significant fees or royalties in order to produce our products.
Our technology could infringe upon claims of patents owned by others. If we were found to be infringing on a patent held by another, we might have to seek a license to use the patented technology. In that case, we might not be able to obtain such a license on terms acceptable to us, or at all. If a legal action were to be brought against us or our licensors, we could incur substantial defense costs, and any such action might not be resolved in our favor. If such a dispute were to be resolved against
			
		
us, we could have to pay the other party large sums of money and our use of our technology and the testing, manufacture, marketing or sale of one or more of our proposed products could be restricted or prohibited.
Risks Relating to our Business and Strategy
If we are not successful in attracting and retaining qualified personnel, we could experience delays in completing necessary clinical trials, in the regulatory approval process or in formulating, manufacturing, marketing and selling our potential products.
We depend on the services of our key personnel, including Remi Barbier, our Chairman, President and Chief Executive Officer. The loss of key personnel, including members of executive management as well as key bioengineering, product development, and technical personnel, could disrupt our operations and have an adverse effect on our business. We will need to hire additional qualified personnel with expertise in clinical research, preclinical testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is intense, and our search for such personnel may not be successful. Attracting and retaining qualified personnel is critical to our success.
We have employees whose equity ownership in the Company could result in a substantial increase in personal wealth if the fair value of our common stock increases. Over time, this increase in personal wealth may make it more challenging to retain these employees.
If third-party manufacturers of our drug candidates fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may be higher than expected.
We have no manufacturing facilities and have limited experience in drug product development and commercial manufacturing. We lack the resources and expertise to formulate, manufacture or test the technical performance of our drug candidates. We rely on and expect to continue to rely on a limited number of experienced personnel and a small number of contract manufacturers and other vendors to formulate, test, supply, store and distribute drug supplies for our preclinical studies and clinical trials. Our reliance on a limited number of vendors exposes us to the following risks, any of which could delay our clinical trials, and, consequently, FDA approval of our drug candidates and commercialization of our products, result in higher costs, or deprive us of potential product revenues:
•Contract commercial manufacturers, their sub-contractors or other third parties we rely on and expect to rely on, may encounter difficulties in achieving the volume of production needed to satisfy preclinical and clinical needs or commercial demand, may experience technical issues that impact quality or compliance with applicable and strictly enforced regulations governing the manufacture of pharmaceutical products, and may experience shortages of qualified personnel to adequately staff production operations.
•Our contract manufacturers could default on their agreements with us to provide supplies or meet our requirements for commercialization of our products.
•For certain of our drug candidates, the use of alternate manufacturers may be difficult because the number of potential manufacturers that have the necessary governmental licenses to produce narcotic products is limited. Additionally, the FDA and the DEA must approve any alternative manufacturer of our products before we may use the alternative manufacturer to produce our supplies.
•It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all. Our contract manufacturers and vendors may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our products.
•If any contract manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to such innovation.
We may not be able to successfully develop or commercialize potential drug candidates for indications other than pain.
Our research and development activities include development of potential drug candidates for indications other than pain. We have no history of developing such drug candidates. We do not know whether any of our planned development activities will result in marketable products. We do not anticipate that our drug candidates in these areas will reach the market for at least several years, if at all.
			
		
Our employees and consultants are generally subject to confidentiality or other agreements with their former employers and they may inadvertently or otherwise violate those agreements.
Many of our employees and consultants were previously employed at universities or biotechnology or pharmaceutical companies. While we require our employees and consultants to honor any agreements they may have entered into prior to working with us, we may be subject to claims that we inadvertently or otherwise used or disclosed trade secrets or other confidential information belonging to former employers. Failure to defend such claims could result in loss of valuable rights or personnel, which in turn could harm or prevent commercialization of our drug candidates. Successful defense against such claims can be expensive and might distract us from executing our strategies.
Law enforcement concerns over diversion of opioids and social issues around abuse of opioids may make the regulatory approval process and commercialization of our drug candidates very difficult.
Law enforcement agencies or regulatory agencies may apply policies that seek to limit the availability of opioids. Such efforts may adversely affect the regulatory approval and commercialization of our drug candidates.
Developments by competitors may render our products or technologies obsolete or non-competitive.
Alternative technologies and products are being developed to improve or replace the use of opioids for pain management, several of which are in clinical trials or are awaiting approval from the FDA. In addition, the active ingredients in nearly all opioid drugs are available in generic form. Drug companies that sell generic opioid drugs represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. Our competitors may market less expensive or more effective drugs that would compete with our drug candidates or reach market with competing drugs before we are able to reach market with our drug candidates. These organizations also compete with us to attract qualified personnel and partners for acquisitions, joint ventures or other collaborations.
Business interruptions could limit our ability to operate our business.
Our operations as well as those of our collaborators on which we depend are vulnerable to damage or interruption from computer viruses, human error, natural disasters, electrical and telecommunication failures, international acts of terror and similar events. We have not established a formal disaster recovery plan and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses we may suffer. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.
Unfavorable media coverage of opioid pharmaceuticals could negatively affect our business.
Opioid drug abuse receives a high degree of media coverage. Unfavorable publicity regarding, for example, the use or misuse of oxycodone or other opioid drugs, the limitations of abuse-resistant formulations, public inquiries and investigations into prescription drug abuse, litigation or regulatory activity could adversely affect our reputation. Such negative publicity could have an adverse effect on the potential size of the market for our drug candidates and decrease revenues and royalties, which would adversely affect our business and financial results.
Risks Relating to Manufacturing
We rely on third-party commercial drug manufacturers for drug supply.
Approved third-party commercial drug manufacturers may subsequently be stopped from producing, storing, shipping or testing our drug products due to their non-compliance with federal, state or local regulations. Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the DEA, and corresponding state and foreign government agencies to ensure strict compliance with GMP and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
In addition, even if we enter into long-term supply arrangements with third-party suppliers, we cannot control changes in strategy by third-party suppliers that affect their ability or willingness to continue to supply our drug products on acceptable terms.
If our drug supply for one of our drug candidates was interrupted, our operations could be negatively affected.
			
		
If we cannot formulate and scale-up a wide range of dosage forms of REMOXY, we might determine that the commercial opportunity for REMOXY in certain dosage forms is too limited to warrant further investment in clinical testing and development.
We plan to formulate and scale-up a wide range of dosage forms of REMOXY. We may not be able to successfully complete our formulation or scale-up activities or we may determine that the commercial opportunity for REMOXY in certain dosage forms is too limited to warrant further investment. If we are unsuccessful in our formulation or scale-up activities with REMOXY, our future revenue may be less than expected and our operations may suffer.
We rely solely on Durect to provide us with certain components drug candidates designed to reduce potential risks of unintended use and will continue to rely on Durect to produce commercial supplies of these components.
We rely on Durect as the sole source provider of certain components of drug candidates designed to reduce the potential risks of unintended use, and will rely solely on Durect to produce commercial supplies of these components. Durect’s failure for any reason to provide these components or to achieve and maintain satisfactory manufacturing standards could result in product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could materially harm our business.
Durect may encounter manufacturing difficulties involving production yields, quality control and quality assurance. Durect is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with government regulations and corresponding foreign standards. We cannot control Durect’s compliance with these regulations and standards.
If we receive marketing approval for and commercially launches REMOXY, Durect may need to materially expand its manufacturing capacity. Durect may not be able to increase its manufacturing capacity for REMOXY in a timely or economic manner, or at all. Moreover, significant scale up of manufacturing will require additional validation studies, which are subject to FDA review and approval. If Durect is unable to successfully increase the manufacturing capacity for such components of REMOXY, at an acceptable cost or otherwise, and we are unable to establish alternative manufacturing capabilities, commercialization of REMOXY may be delayed, prevented or impaired or there may be a shortage in supply, which would harm our future revenues and cause our business to suffer.
Risks Relating to our Financial Position and Need for Financing
Our operating history may make it difficult for you to evaluate our business to date and to assess its future viability.
Our operations from our inception to date have been limited to organizing and staffing our company, acquiring, developing and securing our technology, undertaking preclinical studies and clinical trials of our drug candidates and forming collaborations. We have not yet demonstrated our ability to obtain regulatory approval, formulate and manufacture our drug candidates on a commercial scale or conduct sales and marketing activities. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
We have a history of losses and expect to incur substantial losses and negative operating cash flows for the foreseeable future.
Although we were profitable in some years in the past based on payments received pursuant to the Pfizer Agreements and interest income, we have yet to generate any revenues from product sales. We have an accumulated deficit of $116.5 million at December 31, 2014. Even if we succeed in developing and commercializing one or more of our drug candidates, we expect to continue to use significant cash resources in our operations for the foreseeable future. We anticipate that our expenses will increase substantially in the foreseeable future as we:
•continue to conduct preclinical studies and clinical trials for our drug candidates, including drug development activities related to FENROCK;
•seek regulatory approvals for our drug candidates;
•develop, formulate, manufacture and commercialize our drug candidates;
•implement additional internal systems and develop new infrastructure;
			
		
•acquire or in-license additional products or technologies, or expand the use of our technology;
•maintain, defend and expand the scope of our intellectual property; and
•hire additional personnel.
We will need to generate significant revenues to achieve and maintain profitability. If we or our collaborators cannot successfully develop, obtain regulatory approval for and commercialize our drug candidates, we will not be able to generate such revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would have a material adverse impact on the market price of our common stock.
If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials of any or some of our drug candidates or to pursue attractive business opportunities.
We have funded all of our operations and capital expenditures with the proceeds from our public and private stock offerings, payments received under the Pfizer Agreements and interest earned on our investments. We expect that our current cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. However, we may elect to raise additional funds within such twelve-month period or need to raise additional funds thereafter and additional financing may not be available on favorable terms, if at all. Even if we succeed in selling additional securities to raise funds, our existing stockholders’ ownership percentage would be reduced and new investors may demand rights, preferences or privileges senior to those of existing stockholders. If we raise additional capital through debt financing, if available, such financings may involve covenants that restrict our business activities. If we raise additional capital through strategic alliance and license arrangements, we may have to trade our rights to our technology, intellectual property or drug candidates to others in such arrangements on terms that may not be favorable to us.
If we determine that we need to raise additional funds and we are not successful in doing so, we may be unable to complete the clinical development of some or all of our drug candidates or to seek or obtain FDA approval of our drug candidates. We then could be forced to discontinue product development, enter into a relationship with an additional strategic partner earlier than currently intended, reduce sales and marketing efforts or forego attractive business opportunities.
Risks Relating to an Investment in our Common Stock
Our stock price has been volatile and could experience a sudden decline in value.
Our common stock has experienced significant price and volume fluctuations and may continue to experience volatility in the future. You may not be able to sell your shares quickly or at the latest market price if trading in our stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock:
•the status of our collaboration agreements, including the recent election by Pfizer to terminate the Pfizer Agreements, and the timing and sufficiency of any activities associated with the return to us of REMOXY;
•results of or delays in efforts to seek regulatory approval for REMOXY, and in preclinical studies and clinical trials for our other drug candidates;
•publicity regarding products under development by us or others, including with respect to actual or potential medical results relating to such matters;
•announcements of technological innovations or new commercial products by us or others;
•developments in patent or other proprietary rights by us or others;
•comments or opinions by securities analysts or major stockholders;
•adverse media coverage related to opioid pharmaceuticals;
•future sales of our common stock by existing stockholders;
•developments with respect to potential merger and acquisition activity of companies with whom we have strategic alliances or other agreements;
•regulatory developments or changes in regulatory guidance enacted by applicable governmental or other authorities;
			
		
•litigation, including with respect to the lawsuit currently filed against us and our officers, or threats of litigation;
•economic and other external factors or other disaster or crises;
•the departure of any of our officers, directors or key employees;
•period-to-period fluctuations in financial results; and
•limited daily trading volume.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act of 2010, SEC regulations and the rules of The NASDAQ Stock Market LLC, create uncertainty for public companies. If we were unable to continue to comply with these requirements, we could be delisted from trading on the NASDAQ Global Select Market, or Nasdaq, and thereafter trading in our common stock, if any, may be conducted through the over-the-counter or other market. As a consequence of such delisting, an investor would likely find it more difficult to dispose of, or to obtain quotations as to the price of, our common stock. Delisting of our common stock could also result in lower prices per share of our common stock than would otherwise prevail.
We are involved in a class action filed against us and our officers that is expensive and time consuming, and, in the event of an adverse outcome, could harm our business, financial condition or results of operations.
On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011.
As with any litigation proceeding, we cannot predict with certainty the eventual outcome of any outstanding legal actions. We have incurred expenses in connection with the defense of this lawsuit, and we may have to pay damages or settlement costs in connection with any resolution thereof. Any such expenses, damages or settlement costs may be substantial. In addition, because of the number of shareholders involved, plaintiffs in class action lawsuits may claim enormous monetary damages even if the alleged claim is small on a per-shareholder basis. Any such expenses, damages or settlement costs may be substantial. Although we have insurance coverage against which we may claim recovery against some of these expenses and costs, the amount of coverage may not be adequate to cover the full amount or certain expenses and costs may be outside the scope the policies we maintain. In the event of an adverse outcome or outcomes, our business could be materially harmed from depletion of cash resources, negative impact on our reputation, or restrictions or changes to our governance or other processes that may result from any final disposition of the lawsuit. Moreover, responding to and defending pending litigation significantly diverts management’s attention from our operations.
Anti-takeover provisions in our charter documents, our Stockholder Rights Plan and Delaware law may prevent or delay removal of incumbent management or a change of control.
Anti-takeover provisions of our amended and restated certificate of incorporation and amended and restated bylaws, our Stockholder Rights Plan and Delaware law may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. The provisions of our charter documents include:
•a classified board so that only one of the three classes of directors on our board of directors is elected each year;
•elimination of cumulative voting in the election of directors;
•procedures for advance notification of stockholder nominations and proposals;
•the ability of our board of directors to amend our bylaws without stockholder approval; and
•the ability of our board of directors to issue up to 10,000,000 shares of preferred stock without stockholder approval upon the terms and conditions and with the rights, privileges and preferences as our board of directors may determine.
The rights issued pursuant to our Stockholder Rights Plan will become exercisable, subject to certain exceptions, the tenth business day after a person or group announces acquisition of 15% or more of our common stock or announces commencement
			
		
of a tender or exchange offer the consummation of which would result in ownership by the person or group of 15% or more of our common stock.
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203.
These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
Our share ownership is concentrated, and our officers, directors and principal stockholders can exert significant control over matters requiring stockholder approval.
Due to their combined stock holdings, our officers, directors and principal stockholders (stockholders holding greater than 5% of our common stock) acting collectively may have the ability to exercise significant influence over matters requiring stockholder approval including the election of directors and approval of significant corporate transactions. In particular, Remi Barbier, our founder, Chairman of the Board of Directors, President and Chief Executive Officer, owns or controls a significant amount of the voting power of our outstanding capital stock. This concentration of ownership may delay or prevent a change in control of the Company and may make some transactions, including but not limited to any merger, consolidation, or sale of substantially all of our assets, more difficult or impossible to complete without the support of key stockholders.
Publicly available information regarding stockholders’ ownership may not be comprehensive because the SEC does not require certain large stockholders to publicly disclose their stock ownership positions.
If the fair value of our stock increases and outstanding Performance Awards vest, we expect to use substantial amounts of cash to fund employee tax liabilities.
We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. If these Performance Awards vest, we expect to issue the employees shares of our common stock net of statutory employment taxes. This net issuance results in fewer shares issued and uses our cash to fund these taxes. The use of cash could be substantially higher, depending on the fair value of our common stock on the date the Performance Awards vest. If our use of cash to fund these taxes is substantial, our stock price could decline.
We may in the future seek to fund the cash used for Performance Awards through the sale of our common stock. However, we may not be successful in selling shares of our common stock to fund the cash used for Performance Awards. If the number of shares we sell to fund the cash used for Performance awards is significant, our stock price could decline.
Volatility in the stock prices of other companies may contribute to volatility in our stock price.
The stock market in general, Nasdaq and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of early stage life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.
Our operating results may fluctuate from quarter to quarter and this fluctuation may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. Factors contributing to these fluctuations include, among other items, the timing and amounts of collaboration revenue recognized under the Pfizer Agreements, the timing and enrollment rates of clinical trials for our drug candidates, our need for clinical supplies and the valuation of stock-based compensation. Thus, quarter-to-quarter comparisons of our operating results may not be not indicative of what we might expect in the future. As a result, in some future quarters our clinical, financial or operating results may not meet the expectations of securities analysts and investors that could result in a decline in the price of our stock.
			
		
If securities or industry analysts publish inaccurate or unfavorable research about our business or product candidates, our stock price could decline.
Securities or industry analysts publish research and reports about our business or product candidates. An analyst’s conclusions regarding prospects for product candidates in the biopharmaceutical industry can include judgments based on the limited publicly-available data. If one or more analysts issues unfavorable research about our business or our product candidates, including a downgrade of our common stock, the price of our stock may decline.
There may not be an active, liquid trading market for our common stock.
There is no guarantee that an active trading market for our common stock will be maintained on Nasdaq. Investors may not be able to sell their shares quickly or at the latest market price if trading in our stock is not active.
Item 1B.
Item 1B.Unresolved Staff Comments
None.
Item 2.
Item 2.Properties
We lease approximately 6,000 square feet of office space pursuant to a non-cancelable operating lease in Austin, TX that expires in 2017. We believe that our facilities are adequate and suitable for our current needs.
Item 3.
Item 3.Legal Proceedings
KB Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy.
On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011.
Item 4.
Item 4.Mine Safety Disclosures
Not applicable.
			
		
PART II
Item 5.
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the NASDAQ Global Select Market, or Nasdaq, under the symbol "PTIE." The following table sets forth the high and low sales prices per share of our common stock as reported on Nasdaq for the periods indicated.
We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and, notwithstanding our special nondividend distributions in December 2012 (of $0.75 per share of common stock totaling $34.0 million) and December 2010 (of $2.00 per share of common stock totaling $85.7 million), we have not paid and do not anticipate paying any cash dividends in the foreseeable future. As of January 9, 2015, there were approximately 55 holders of record of our common stock.
			
		
Performance Graph
The following line graph compares the percentage change in the cumulative return to the stockholders of our common stock with the cumulative return of the NASDAQ Composite Index and the NASDAQ Pharmaceutical Index for the period commencing December 31, 2009.
The graph assumes that $100 was invested on December 31, 2009 in our common stock or an index, and that all dividends were reinvested. Notwithstanding our special nondividend distributions completed in 2012 and 2010, we have not declared or paid any dividends on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
			
		
Item 6.
Item 6.Selected Financial Data (in thousands except per share data)
The following selected financial data should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this report. The selected balance sheet data at December 31, 2014 and 2013 and the selected statement of operations data for 2014, 2013 and 2012 have been derived from our audited financial statements that are included elsewhere in this report. The selected balance sheet data at December 31, 2012, 2011 and 2010 and the statements of operations for 2011 and 2010 have been derived from our audited financial statements not included in this report. Historical results are not necessarily indicative of the results to be expected in the future.
			
		
Item 7.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.
Overview
We are a biopharmaceutical company that develops novel drugs. Our lead drug candidate, REMOXY, is an extended-release oral formulation of oxycodone for the management of moderate-to-severe pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time. We designed REMOXY to discourage common methods of tampering and misuse.
Pfizer conducted development of REMOXY pursuant to the Pfizer Agreements. References to Pfizer in this Part I, Item 2 and in Part 2, Item 1A include references to its subsidiary King.
On October 26, 2014, Pfizer provided us with written notice of termination, or the Termination Notice, of our Collaboration Agreement with Pfizer. Pursuant to the terms of the Termination Notice and the Collaboration Agreement, the effective date of termination of the Collaboration Agreement is six months from October 26, 2014. Our License Agreement with Pfizer terminates automatically upon termination of the Collaboration Agreement. In connection with such termination, and under the terms of the Collaboration Agreement, Pfizer is obligated to carry out certain activities to facilitate transfer of documents, regulatory filings, materials, data, agreements and other information related to REMOXY to us in connection with the return to us of the development program related to REMOXY and is obligated to bear all non-cancelable costs in connection with such development program, and otherwise to bear certain specified costs associated with such return for six months after termination.
In mid-2008, the FDA accepted the NDA for REMOXY with Priority Review. In December 2008, we received from the FDA a Complete Response Letter for the NDA for REMOXY. In this Complete Response Letter, the FDA indicated additional non-clinical data was required to support the approval of REMOXY. Also, the FDA did not request or recommend additional clinical efficacy studies prior to approval. In 2009, King assumed sole responsibility for the regulatory approval of REMOXY. In December 2010, King resubmitted the REMOXY NDA. In January 2011, we announced that the FDA had accepted the resubmission of the REMOXY NDA. In June 2011, we and Pfizer announced that King received a Complete Response Letter from the FDA in response to King’s resubmission of the REMOXY NDA. The FDA's Complete Response Letter raised concerns related to, among other matters, the Chemistry, Manufacturing, and Controls section of the NDA for REMOXY.
Pfizer has informed us that they completed certain clinical studies and other actions designed to address the June 2011 Complete Response Letter. We have not received or reviewed all of Pfizer’s data associated with REMOXY. We expect to gain access to such data in the course of the return to us of REMOXY pursuant to the termination of the Pfizer Agreements.
We have received the following program fee and milestone payments under the Pfizer Agreements:
We own all commercial rights to the abuse-resistant formulations of hydrocodone, hydromorphone and oxymorphone. Investigational New Drug, or IND, applications for all three of these drug candidates are in place with FDA.
We have yet to generate any revenues from product sales. We have an accumulated deficit of $116.5 million at December 31, 2014. These losses have resulted principally from costs incurred in connection with research and development activities,
			
		
salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.
We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:
·
conduct preclinical and clinical trials for our drug candidates;
·
seek regulatory approvals for our drug candidates;
·
develop, formulate, manufacture and commercialize our drug candidates;
·
implement additional internal systems and develop new infrastructure;
·
acquire or in-license additional products or technologies, or expand the use of our technology;
·
maintain, defend and expand the scope of our intellectual property; and
·
hire additional personnel.
Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. If our development efforts result in regulatory approval and successful commercialization of our drug candidates, we will generate revenue from direct sales of our drugs and/or, if we license our drugs to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.
We focus substantially all our research and development efforts on research and development in the areas of neurology. The following table summarizes expenses by category for research and development efforts (in thousands):
Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. Our contractor fees and supplies expenses in 2014 were related to programs outside of the Pfizer Agreements.
Our technology has been applied across certain of our portfolio of drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing.
Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change.
On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court
			
		
certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011.
Critical Accounting Policies
The preparation of our financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:
·
Stock-based compensation. We recognize expense for the fair value of all share-based payments to employees and directors, including grants of employee stock options and other share based awards, in the Statements of Operations. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-line attribution method. Using this approach, the compensation cost is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years.
We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance conditions. We estimate an implicit service period for achieving these performance conditions. Performance Awards vest and common stock is issued on achieving performance conditions. We recognize stock-based compensation expense for Performance Awards when we conclude that achieving a performance condition is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance conditions.
·
Revenue recognition. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured. Program fee revenue in 2013 was derived from upfront payments under the Pfizer Agreements. Through the end of 2013, these payments were recognized from receipt over our estimate of the development period for product candidates under the Pfizer Agreements. In October 2013, we and Pfizer amended the Pfizer Agreements to focus on REMOXY and, as a result of the amendment, we recognized all then-remaining deferred program fee revenue as program fee revenue.
·
Income Taxes. We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any. We are uncertain as to the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance. We may in the future determine that our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest recognized in connection with our tax positions as interest expense, when appropriate.
			
		
Results of Operations
Years Ended December 31, 2014 and 2013
Revenue - Program fee revenue
We received a $150.0 million upfront fee in 2005 in connection with the closing of the Pfizer Agreements and $5.0 million in July 2010 in connection with an amendment to the Pfizer Agreements. As a result of the October 2013 amendment to the Pfizer Agreements, we recognized the balance of current and non-current portions of deferred program fee revenue as program fee revenue during the fourth quarter of 2013. Related program fee revenue was $41.1 million in 2013.
Research and Development Expense
Research and development expense consists primarily of costs of development work associated with our drug candidates. Research and development expenses increased to $7.3 million in 2014 from $4.9 million in 2013, primarily due to increased third-party spending on our research and development candidates. Research and development expenses included $1.6 million in non-cash stock related compensation expense in 2014 and $1.3 million in non-cash stock related compensation expense in 2013.
We expect research and development expense to fluctuate over the next several years as we continue our development efforts. We expect our development efforts to result in our drug candidates progressing through various stages of clinical trials. Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and preclinical studies.
General and Administrative Expense
General and administrative expense consists primarily of compensation and other general corporate expenses. General and administrative expense increased to $5.1 million in 2014 from $4.8 million in 2013, primarily due to higher cash non-cash stock related compensation and general corporate activities. General and administrative expenses included $2.1 million in non-cash stock related compensation expense in 2014 and $1.8 million in non-cash stock related compensation expense in 2013.
We expect other general and administrative expense to increase over the next several years in connection with support of precommercialization and commercialization activities for our drug candidates. The increase may fluctuate from period to period due to the timing and scope of these activities and the results of clinical trials and preclinical studies.
Interest Income
Interest and other income, net, was $0.1 million in both 2014 and 2013. We expect our interest income to decrease in the future as we use cash to fund our operations.
Provision for Income Taxes
In 2013, we recognized a benefit from income taxes related to unrecognized tax benefits for use of certain research and development tax credits in 2006. We did not provide for federal income taxes in 2014 or 2013 because we had a tax loss for both 2014 and 2013.
Years Ended December 31, 2013 and 2012
Revenue - Program fee revenue
We received a $150.0 million upfront fee in 2005 in connection with the closing of the Pfizer Agreements and $5.0 million in July 2010 in connection with an amendment to the Pfizer Agreements. As a result of the October 2013 Amendment to the Pfizer Agreements, we recognized the balance of current and non-current portions of deferred program fee revenue as program
			
		
fee revenue during the fourth quarter of 2013. Related program fee revenue were $41.1 million in 2013 and $10.6 million in 2012.
Revenue - Collaboration revenue
Collaboration revenues were $0.2 million in 2012. These revenues related to reimbursement of our development expenses incurred pursuant to the Pfizer Agreements.
Research and Development Expense
Research and development expense consists primarily of costs of development work associated with our drug candidates. Research and development expenses decreased to $4.9 million in 2013 from $7.6 million in 2012, primarily due to lower cash compensation and non-cash stock related compensation. Research and development expenses included $1.3 million in non-cash stock related compensation expense in 2013 and $3.2 million in non-cash stock related compensation expense in 2012.
General and Administrative Expense
General and administrative expenses consist primarily of compensation and other general corporate expenses. General and administrative expenses decreased to $4.8 million in 2013 from $7.2 million in 2012, primarily due to lower lower cash compensation and non-cash stock related compensation. General and administrative expenses included $1.8 million in non-cash stock related compensation expense in 2013 and $3.4 million in non-cash stock related compensation expense in 2012.
Interest and Other Income, Net
Interest and other income, net, decreased to $0.1 million in 2013 from $0.5 million in 2012.
Provision for Income Taxes
In 2013, we recognized a benefit from income taxes related to unrecognized tax benefits for use of certain research and development tax credits in 2006. We did not provide for federal income taxes in 2013 or 2012 because we had a tax loss for both 2013 and 2012.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through public and private stock offerings, payments received under the Pfizer Agreements and interest earned on our investments. We intend to continue to use our capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of December 31, 2014, cash, cash equivalents and marketable securities were $40.6 million.
Net cash used in operating activities increased to $9.5 million for 2014 from $6.9 million for 2013 primarily due to increased cash used for operating expenses.
Net cash provided by investing activities was $1.2 million for 2014 compared to $5.7 million for 2013. Investing activities for both years consisted primarily of the purchase and maturities of marketable securities.
Net cash provided by financing activities was $0.4 in 2014 and $0.5 million in 2013 and consisted primarily of cash from stock option exercises.
Realization of our deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.
We lease approximately 6,000 square feet of office space pursuant to a non-cancelable operating lease in Austin, TX that expires in 2017. Future minimum lease payments by year are as follows (in thousands):
			
		
We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. Our license agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. All of these potential future payments are cancelable as of December 31, 2014. Our formulation agreement with Durect Corporation obligates us to make certain milestone payments upon achieving clinical milestones and regulatory milestones.
We have an accumulated deficit of $116.5 million at December 31, 2014. We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates and the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products. We believe that our current resources should be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us.
Off-balance Sheet Arrangements
As of December 31, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the interest rate later rises, the principal amount of our investment will probably decline. A hypothetical 50 basis point increase in interest rates reduces the fair value of our available-for-sale securities at December 31, 2014 by $3,190. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debt securities and/or money market funds that invest in such securities. We have no holdings of derivative financial or commodity instruments. As of December 31, 2014, our investments consisted of investments in commercial paper, corporate notes and obligations or in money market accounts and checking funds with variable market rates of interest. We believe our credit risk is immaterial.
			
		
Item 8.
Item 8.Financial Statements and Supplementary Data
						
Page
Report of Independent Registered Public Accounting Firm.................................................................................
Balance Sheets.............................................................................................................................................
Statements of Operations...............................................................................................................................
Statements of Comprehensive Income (Loss)...................................................................................................
Statements of Stockholders' Equity ...............................................................................................................
Statements of Cash Flows.............................................................................................................................
Notes to Financial Statements.........................................................................................................................
			
		
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pain Therapeutics, Inc.
We have audited the accompanying balance sheets of Pain Therapeutics, Inc. as of December 31, 2014 and 2013, and the related statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pain Therapeutics, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pain Therapeutics, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (1992 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
February 17, 2015
			
		
See accompanying notes to financial statements.
			
		
See accompanying notes to financial statements.
			
		
						
						
						
						
						
						
						
						
See accompanying notes to financial statements.
			 		
			
		
See accompanying notes to financial statements.
			 		
See accompanying notes to financial statements.
PAIN THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. General
We are a biopharmaceutical company that develops novel drugs. Our lead drug candidate, REMOXY, is an extended-release oral formulation of oxycodone for the management of moderate-to-severe pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time. We designed REMOXY to discourage common methods of tampering and misuse.
In the course of our development activities, we have sustained cumulative operating losses. There are no assurances that additional financing will be available on favorable terms, or at all.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. Actual results could differ from those estimates.
Revenue Recognition and Deferred Program Fee Revenue
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collection is reasonably assured.
We have recognized program fee revenue, collaboration revenue and milestone revenue under the Collaboration Agreement and License Agreement with Pfizer, or the Pfizer Agreements. Program fee revenue was derived from upfront payments from Pfizer. Through the end of the third quarter of 2013, these payments were recognized from receipt ratably over our estimate of the development period under the Pfizer Agreements. In October 2013, we and Pfizer amended the Pfizer Agreements, we no longer had any substantive responsibilities for development activities under the Pfizer Agreements and, during the fourth quarter of 2013, we recognized all remaining deferred program fee revenue as program fee revenue.
Collaboration revenues from reimbursement of development expenses was generally recognized when Pfizer completed its review of the expenses invoiced to them.
We recognized milestone payments from Pfizer as revenue when we achieved the underlying developmental milestone as the milestone payments were not dependent upon any other future activities or achievement of any other future milestones and the achievement of each of the developmental milestones were substantively at risk and contingent at the effective date of the collaboration. Substantial effort was involved in achieving each of the developmental milestones. These milestones represented the culmination of discrete earnings processes and the amount of each milestone payment was reasonable in relation with the level of effort associated with the achievement of the milestone. Each milestone payment was non-refundable and non-creditable when made. Research and development services provided under the Pfizer Agreements were priced at fair value based upon the reimbursement of expenses incurred pursuant to the Pfizer Agreements.
Cash, Cash Equivalents and Concentration of Credit Risk
We consider all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are maintained at two financial institutions and in money market funds. We believe the financial risks associated with these instruments are minimal. We have not incurred material losses from our
			
		
investments in these securities.
Marketable Securities and Fair Value Measurements
We invest in interest-bearing marketable securities, generally consisting of corporate and government securities. We may elect to sell these investments before they mature. Therefore, we hold these investments as “available for sale” and include these investments in our balance sheets as current assets, even though the contractual maturity of a particular investment may be beyond one year. We report our marketable securities at fair value, which may include unrealized gains and losses. Our unrealized gains and losses on investments are recorded as a separate component of stockholders’ equity as accumulated other comprehensive income or loss. We recognize all realized gains and losses on our available-for-sale securities in interest income in the accompanying statement of operations on a specific identification basis. Our marketable securities are maintained at one financial institution and are governed by our investment policy as approved by our Board of Directors.
To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value. We would recognize an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than our amortized cost, any adverse changes in the investees’ financial condition and our intent to sell or whether it is more likely than not that we would be required to sell the marketable security before its anticipated recovery.
We measure our cash equivalents and marketable securities at fair value on a recurring basis and have significant observable inputs where there are identical or comparable assets in the market to use in establishing our fair value measurements. We use significant observable inputs that include but are not limited to benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We consider these inputs to be Level 2 inputs. Generally, the types of instruments we invest in are not traded on a market such as the NASDAQ Global Market, which we would consider to be Level 1 inputs. We do not have any investments that would require inputs considered to be Level 3. We use the bid price to establish fair value.
Business Segments
We report segment information based on how we internally evaluate the operating performance of our business units, or segments. Our operations are confined to one business segment: the development of novel drugs.
Stock-based Compensation
We recognize non-cash expense in the statement of operations for the fair value of all share-based payments, including grants of employee stock options and other share based awards. For stock options, we use the Black-Scholes option valuation model and the single-option award approach and straight-line attribution method. Using this approach, the compensation expense is amortized on a straight-line basis over the vesting period of each respective stock option, generally four years.
We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. The value of these awards is the product of the number of shares of our common stock to be issued under the award multiplied by the fair market value of a share of our common stock on the date of grant. These awards include future performance conditions. We estimate an implicit service period for achieving these performance conditions. Performance Awards vest and common stock is issued on achieving performance conditions. We recognize non-cash stock-based compensation expense for Performance Awards when we conclude that achieving a performance condition is probable. We periodically review and update as appropriate our estimates of the implicit service periods and the likelihood of achieving the performance conditions.
Net Loss per Share
Basic net loss per share is computed on the basis of the weighted-average number of common shares outstanding for the reporting period. Diluted net loss per share is computed on the basis of the weighted-average number of common
			
		
shares outstanding plus dilutive potential common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding stock options and warrants. The numerators and denominators in the calculation of basic and diluted net loss per share were as follows (in thousands):
We excluded weighted options outstanding to purchase common stock of 10.6 million for 2014, 13.5 million for 2013 and 13.2 million for 2012 from the calculation of diluted net loss per share because the effect of including these shares in this calculation would be anti-dilutive.
Income Taxes
We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year. We have accumulated significant deferred tax assets. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance. We may in the future determine that our deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our statement of operations in that period. We classify interest and penalties recognized related to uncertain tax positions as interest expense.
Recent Accounting Pronouncements
We reviewed recently issued accounting pronouncements and plan to adopt those that are applicable to us. We do not expect the adoption of these pronouncements to have a material impact on our financial position, results of operations or cash flows.
3. Collaboration Agreements
Pfizer, Inc.
Pfizer conducted development of REMOXY pursuant to the Pfizer Agreements. We received a $150.0 million upfront fee in connection with the closing of the Pfizer Agreements and $5.0 million in July 2010 in connection with an amendment to the Pfizer Agreements. As of December 31, 2013, all of these payments had been recognized as program fee revenue, including $41.1 million in 2013 and $10.6 million in 2012. In addition, Pfizer funded development expenses incurred by us pursuant to the Pfizer Agreements, of which we recorded as collaboration revenue $0.2 million in 2012.
On October 26, 2014, Pfizer provided us with written notice of termination of our Collaboration Agreement with Pfizer. Pursuant to the terms of the Collaboration Agreement, the effective date of termination of the Collaboration Agreement is six months from October 26, 2014. The terms of our License Agreement with Pfizer provide that such agreement terminates automatically upon termination of the Collaboration Agreement.
			
		
Durect Corporation
We have an exclusive, worldwide licensing agreement with Durect Corporation to use a patented technology that forms the basis for certain drug candidates, including REMOXY. Under the agreement with Durect, we control all of the preclinical, clinical, commercial manufacturing and sales/marketing activities for REMOXY and other abuse-resistant opioid painkillers. We reimburse Durect for formulation and related work, and will make milestone payments based on the achievement of certain technical, clinical or regulatory milestones. We also are responsible to pay Durect royalties on any related drug sales.
4. Cash and Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities held as available-for-sale consisted of the following (in thousands):
To date we have not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.
			
		
Our assets measured at fair value were (in thousands):
5. Property and Equipment
Property and equipment includes furniture and equipment with a purchase value of $0.7 million at December 31, 2014 and $0.6 million at December 31, 2013. Depreciation is recognized using the straight-line method over the expected life of the property and equipment. Accumulated depreciation was $0.6 million at December 31, 2014 and 2013. Depreciation and amortization expense was immaterial in 2014 and 2013 and $0.1 million in 2012.
6. Stockholders' Equity and Stock-Based Compensation
Preferred Stock
Our Board of Directors has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges, restrictions and the number of shares constituting any series or the designation of the series.
We have a stockholder rights plan, or the Rights Plan, designed to guard against partial tender offers and other coercive tactics to gain control of the Company without offering a fair and adequate price and terms to all of the Company’s stockholders. Pursuant to the Rights Plan, our Board of Directors declared and paid a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common stock. Each of these rights entitles the registered holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $40.00, subject to adjustment at any time.
2008 Equity Incentive Plan
Under our 2008 Equity Incentive Plan, or 2008 Equity Plan, our employees, directors and consultants may receive share-based awards, including grants of stock options and Performance Awards. Our Board of Directors or a designated Committee of the Board is responsible for administration of the 2008 Equity Plan and determines the terms and conditions of each option granted, consistent with the terms of the plan.
Stock options generally expire ten years from the date of grant. Cancelled share-based awards become available for reissuance. Shares reserved for issuance and available for grant under the 2008 Equity Incentive Plan were 4.1 million as of December 31, 2014. The 2008 Equity Plan terminates in 2018.
The 2008 Equity Plan provides for the automatic grant of options to purchase shares of common stock to outside directors. On the date of each annual stockholders’ meeting, each outside director is automatically granted an option to purchase 50,000 shares of common stock. These options have a ten-year life, have an exercise price of 100% of the fair market value of the stock on the date of grant, and become exercisable as to 25% of the shares on the anniversary of its date of grant provided the optionee continues to serve as a director on such dates.
When stock options or Performance Awards are exercised net of the exercise price and taxes, the number of shares of stock issued is reduced by the number of shares equal to the amount of taxes owed by the award recipient and that
			
		
number of shares are cancelled and returned to the 2008 Equity Plan. We then use our cash to pay tax authorities the amount of statutory taxes owed by and on behalf of the award recipient.
Stock Options
The following summarizes information about stock option activity during 2014:
The pre-tax intrinsic value of options exercised, calculated by multiplying options exercised by the difference between our stock price on the date of exercise and the exercise price of the options, was approximately $0.9 million in 2014, $0.2 million in 2013 and immaterial in 2012.
The following summarizes information about stock options outstanding at December 31, 2014 by a range of exercise prices:
We use Black-Scholes to estimate the fair value of options granted. Black-Scholes considers a number of factors, including the market price of our common stock. For options granted to employees and directors, we used certain factors to value each stock option granted, which resulted in a weighted average fair value of options granted during 2014, 2013 and 2012, as follows:
Volatility is based on reviews of the historical volatility of our common stock. Risk-free interest rates are based on yields of U.S. treasury notes in effect at the date of grant. Expected life of option is based on actual historical option exercises. Dividend yield is zero because we do not anticipate paying cash dividends in the foreseeable future. We estimate forfeitures and adjust this estimate periodically based in part on the extent to which actual forfeitures differ from our estimates.
			
		
For options granted to non-employees, we estimate the fair value of stock options granted using factors similar to those used for stock options granted to employees and directors and appropriate for the terms underlying the stock options granted to non-employees. We re-measure the compensation expense for options granted to non-employees each reporting period.
As of December 31, 2014, we expect to recognize compensation expense of $10.3 million related to non-vested options over the weighted average remaining recognition period of 3.0 years.
Performance Awards
The following summarizes information about Performance Award activity during 2014:
No outstanding Performance Awards are vested. If and when outstanding Performance Awards vest, we would recognize $5.3 million in non-cash stock-based compensation expense. These Performance Awards expire between in 2022 and 2024.
2000 Employee Stock Purchase Plan
Prior to 2014, certain employees purchased common stock under our amended and restated 2000 Employee Stock Purchase Plan, or the Purchase Plan, within the statutory limits under Internal Revenue Service regulations. The purchase price of the stock purchased under the Purchase Plan was 85% of the lower of the fair market value of the common stock at the beginning of the offering period or at the end of the purchase period. We use Black-Scholes to estimate the fair value of rights granted under the Purchase Plan, using assumptions similar to those used in determining the fair value of options. No stock was purchased under the Purchase Plan in 2014. Stock-based compensation expense related to the Purchase Plan was immaterial in 2014.
Stock-Based Compensation Expense
The following summarizes information about non-cash stock-based compensation expense, in thousands:
7. Employee 401(k) Benefit Plan
We have a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. Employees are eligible to participate in the plan the first day of the month after hire and may contribute up to the current statutory limits under Internal Revenue Service regulations. The 401(k) plan permits us to make additional matching contributions on behalf of all employees. Through December 31, 2014, we have not made any matching contributions to the 401(k) plan.
			
		
8. Income Taxes
We did not provide for income taxes in 2014 and 2012 because we had a net operating loss for tax purposes in those years and the tax benefit that would have resulted from the statutory rate was fully offset by the valuation allowance. We recorded a non-cash benefit from income taxes in 2013 related to previously unrecognized tax benefits for use of certain research and development tax credits in 2006. Other than this benefit, we did not provide for income taxes in 2013 because we had a net operating loss for tax purposes in 2013. A reconciliation between the amount computed by multiplying our income before benefit from income taxes for 2013 by the U.S. statutory tax rate and our benefit from income taxes follows (in thousands):
Deferred tax assets and valuation allowance
Deferred tax assets reflect the tax effects of net operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):
We are uncertain about the timing and amount of any future profits. Accordingly, we offset our deferred tax assets by a valuation allowance. The valuation allowance increased by $3.2 million in 2014 and decreased by $14.6 in 2013.
Our pre-tax net operating loss carryforwards of $43.0 million are federal and expire between 2029 and 2034. Our deferred tax assets exclude certain federal tax deductions associated with stock option transactions over and above the stock related compensation expenses in our financial statements by approximately $2.5 million. If and when we are able to reduce our income taxes payable with these tax deductions, we will credit additional paid-in capital.
As of December 31, 2014, we had federal research and development tax credits of approximately $9.7 million, which expire in the years 2023 through 2034.
			
		
Unrecognized tax benefits
We have unrecognized tax benefits related primarily to tax credits. In 2013, we reduced our unrecognized tax benefits for the lapse of applicable statute of limitations for tax credits used in prior years. A reconciliation of the beginning and ending unrecognized tax benefits recorded for 2014, 2013 and 2012 follows (in thousands):
9. Leases and Commitments
We lease approximately 6,000 square feet of office space pursuant to a non-cancelable operating lease in Austin, TX that expires in 2017. Future minimum lease payments are as follows for the years ended December 31, (in thousands):
We believe that our facilities are adequate and suitable for our current needs. Rent expense was $0.1 million in 2014, 2013 and 2012.
We conduct our product research and development programs through a combination of internal and collaborative programs that include, among others, arrangements with universities, contract research organizations and clinical research sites. We have contractual arrangements with these organizations, however these contracts are cancelable on thirty days’ notice and our obligations under these contracts are largely based on services performed.
10. Legal proceedings
K B Partners I, L.P., Individually and On Behalf of All Others Similarly Situated v. Pain Therapeutics, Inc., Remi Barbier, Nadav Friedmann and Peter S. Roddy.
On December 2, 2011, a purported class action was filed against us and our executive officers in the U.S. District Court for the Western District of Texas. This complaint alleges, among other things, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of allegedly untrue or misleading statements of material facts made by us regarding REMOXY’s development and regulatory status during the purported class period, February 3, 2011 through June 23, 2011. The complaint states that monetary damages are being sought, but no amounts are specified. On June 3, 2013, the Court certified a class consisting of all purchasers of our common stock and a class period of December 27, 2010 through June 26, 2011.
			
		
11. Selected Quarterly Financial Data (Unaudited) (in thousands, except per share data)
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.Controls and Procedures
Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s annual report on internal control over financial reporting. We are responsible for establishing and maintaining adequate internal control over our financial reporting. We have assessed the effectiveness of internal control over financial reporting as of December 31, 2014. Our assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control-Integrated Framework (1992 Framework).
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and
(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
			
		
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on using the COSO criteria, we believe our internal control over financial reporting as of December 31, 2014 was effective.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting. The attestation report of Ernst & Young LLP is included below.
			
		
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pain Therapeutics, Inc.
We have audited Pain Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Pain Therapeutic, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pain Therapeutics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Pain Therapeutics, Inc. as of December 31, 2014 and 2013, and the related statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 of Pain Therapeutics, Inc. and our report dated February 17, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Austin, Texas
February 17, 2015
			
		
Item 9B.
Item 9B.Other Information
None
PART III
Item 10.
Item 10.Directors and Executive Officers and Corporate Governance
The information regarding our directors, executive officers, director nomination process and the audit committee of our board of directors is incorporated by reference from "Directors and Executive Officers" in our Proxy Statement for our 2014 Annual Meeting of Stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended requires our executive officers and directors and persons who own more than ten percent (10%) of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission, or SEC. Executive officers, directors and greater than ten percent (10%) stockholders are required by Commission regulation to furnish us with copies of all Section 16(a) forms they file. We believe all of our executive officers and directors complied with all applicable filing requirements during 2014.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. We publicize the Code of Ethics through posting the policy on our website, http://www.paintrials.com. We will disclose on our website any waivers of, or amendments to, our Code of Ethics.
Item 11.
Item 11.Executive Compensation
The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading "Executive Compensation and Other Matters."
Item 12.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading "Security Ownership of Certain Beneficial Owners and Management."
The following table summarizes the securities authorized for issuance under our equity compensation plans as of December 31, 2014:
Item 13.
Item 13.Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to
			
		
in Item 10 above where it appears under the heading "Certain Relationships and Related Transactions."
Item 14.
Item 14.Principal Accountant Fees and Services
The information required by this Item is incorporated by reference from our definitive Proxy Statement referred to in Item 10 above where it appears under the heading “Principal Accountant Fees and Services.”
PART IV
Item 15.
Item 15.Exhibits and Financial Statement Schedules
(a)The following documents are filed as part of this Form 10-K:
(1)Financial Statements (included in Part II of this report):
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Comprehensive Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2)Financial Statement Schedules:
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
(3)Management Contracts, Compensatory Plans and Arrangements.
Management contracts, compensatory plans and arrangements are indicated by the symbol “*” in the applicable exhibits listed in Item 15(b), below.
(b)Exhibits
The exhibits listed below are filed as part of this Form 10-K other than Exhibit 32.1, which shall be deemed furnished.
			
		
						
The exhibits listed under Item 15(a)(3) hereof are filed as part of this Form 10-K other than Exhibit 32.1, which shall be deemed furnished.
(c)Financial Statement Schedules
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
			
		
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAIN THERAPEUTICS, INC.
By:/s/ REMI BARBIER
Remi Barbier
President, Chief Executive Officer and Chairman of the Board of Directors
Dated: February 18, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Remi Barbier and Peter S. Roddy, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
						
						
						
						
						
						
						
						
Signature
						
Title
						
Date
						
						
						
						
/s/ REMI BARBIER
						
President, Chief Executive Officer and
						
February 18, 2015
Remi Barbier
						
Chairman of the Board of Directors
						
						
						
(Principal Executive Officer)
						
						
						
						
						
						
/s/ PETER S. RODDY
						
Vice President and Chief Financial
						
February 18, 2015
Peter S. Roddy
						
Officer (Principal Financial and Accounting Officer)
						
						
						
						
						
						
/s/ NADAV FRIEDMANN, PH.D., M.D.
						
Chief Operating and Medical Officer
						
February 18, 2015
Nadav Friedmann, Ph.D., M.D.
						
and Director
						
						
						
						
						
						
/s/ ROBERT Z. GUSSIN, PH.D.
						
Director
						
February 18, 2015
Robert Z. Gussin, Ph.D.
						
						
						
						
						
						
						
						
/s/ MICHAEL J. O'DONNELL, ESQ.
						
Director and Secretary
						
February 18, 2015
Michael J. O'Donnell, Esq.
						
						
						
						
						
						
						
						
/s/ SAIRA RAMASASTRY
						
Director
						
February 18, 2015
Saira Ramasastry
						
						
						
						
						
						
						
						
/s/ SANFORD R. ROBERTSON
						
Director
						
February 18, 2015
Sanford R. Robertson
						
						
						
						
						
						
						
						
/s/ PATRICK SCANNON, M.D, PH.D.
						
Director
						
February 18, 2015
Patrick Scannon, M.D., Ph.D.
						
						
						
						
						
						
						
						
			
		
			 		
			 		
EXHIBIT INDEX