A N N U A L R E P O R T
2 0 1 4
R e v o l u t i o n i z i n g
t h e t r e a t m e n t
o f c a n c e r.
2014-Rexahn-Annual-Report (FINAL).indd 1
4/8/15 5:05 PM
CEO�Letter�
�
�
Dear�Shareholders:�
�
We� have� been� hard� at� work� in� the� clinic� throughout� all� of� 2014,� continuing� our� efforts� to� develop�
oncology� therapies� with� the� potential� to� impact� the� way� cancer� patients� are� treated.� � It� has� truly�
been�a�busy�and�productive�year�for�Rexahn.�After�refocusing�the�Company�in�2013�to�concentrate�in�
the� oncology� space,� we� have� maintained� the� strategy� of� executing� on� the� research� and�
development� of� three� separate� oncology� programs:� Supinoxin™,� RX�3117,� and� Archexin®.� We�
initiated� early� stage� trials� in� each� of� these� programs� in� 2013� and� early� 2014,� and� we� continue� to�
enroll�patients�in�each�study�today.�We�believe�that�data�from�these�trials�will�be�available�in�2015.�
We�are�committed�to�the�development�of�our�diversified�pipeline�to�deliver�the�level�of�success�that�
both�patients�and�shareholders�seek.���
�
With�three�ongoing�clinical�trials�in�2014,�we�had�several�opportunities�to�provide�shareholders�with�
updates�on�data�throughout�the�year.��I’ve�outlined�the�current�status�of�each�of�these�trials�below.��
We�also�recently�received�Orphan�Drug�Designation�from�the�FDA�for�RX�3117�for�the�treatment�of�
pancreatic�cancer,�an�important�milestone�for�this�program.��Additionally,�we�presented�important�
preclinical� data� of� RX�3117� and� RX�21101� at� the� 2014� American� Association� for� Cancer� Research�
(AACR)�Annual�Meeting�in�April.��The�RX�3117�data�suggest�that�the�compound�is�effective�in�human�
cancer�cell�lines�resistant�to�gemcitabine,�a�chemotherapy�drug�used�in�the�treatment�of�pancreatic�
cancer,� as� well� as� ovarian,� breast,� and� non�small� cell� lung� cancer.� This� is� an� important� finding� as�
approximately� 25%� of� patients� treated� with� gemcitabine� become� resistant� after� one� cycle� of�
therapy.��The�preclinical�data�of�RX�21101�demonstrated�that�it�can�inhibit�tumor�growth,�increase�
tumor� regression,� and� decrease� the� toxicity� normally� associated� with� a� chemotherapeutic� drug.�
in� animal� models� with�
Additional� RX�3117� preclinical� data� demonstrated� potent� efficacy�
gemcitabine�resistance.���
�
On� the� corporate� side,� we�strengthened� our� Board� of� Directors� with� the� addition� of� Mark� Carthy,�
from�Orion�Equity�Partners,�and�Richard�Rodgers,�who�most�recently�was�CFO�at�TESARO.��We�are�
pleased�that�they�joined�our�Board�last�year,�as�they�have�each�brought�significant�experience�to�the�
table�as�we�continue�to�build�our�oncology�expertise.��In�addition,�we�completed�a�registered�direct�
offering� for� gross� proceeds� of� $20� million� in� January� 2014,� which� was� used� for� research� and�
development�throughout�the�year.���
�
As�mentioned�previously,�we�updated�shareholders�on�each�of�our�three�trials�throughout�the�year.��
At�the�end�of�2014,�the�status�of�each�program�was:��
Supinoxin™:� The� Phase� I� clinical� trial� in� cancer� patients� with� solid� tumors� was� initiated� in� August� 2013.�
Initial� data� from� this� ongoing� trial� demonstrated� dose�proportional� exposure� and� an� estimated� oral�
bioavailability�of�51%.��At�the�end�of�2014,�we�have�enrolled�patients�in�seven�dose�groups.���Depending�
upon�the�number�of�dose�groups�needed,�we�expect�to�complete�this�trial�in�the�first�half�of�2015.�
RX�3117:��A�Phase�Ib�clinical�trial�in�cancer�patients�with�solid�tumors�was�initiated�in�January�2014,�and�
we�are�currently�enrolling�patients�in�the�eighth�dose�group.��We�expect�to�complete�patient�enrollment�
in�the�first�half�of�2015.�
Archexin®:� � The� Phase� IIa� clinical� trial� in� cancer� patients� with� metastatic� renal� cell� carcinoma� is� also�
ongoing.� The� first� stage� of� this� study� is� dose� ranging,� to� determine� the� maximum� tolerated� dose� of�
Archexin�in�combination�with�everolimus,�an�FDA�approved�drug�for�the�treatment�of�RCC.�The�safety�
portion�of�the�trial�is�expected�to�be�completed�in�second�half�2015.�
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We� ha
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Rexah
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Since
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rely,�
�
D.�Suzdak,�Ph
Executive�Off
hn�Pharmaceu
h.D.�
ficer�
uticals,�Inc.�
Peter�
Chief�
Rexah
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Pipeline Overview
Rexahn’s diversified oncology portfolio includes three compounds in human clinical trials. Each
compound has shown to directly target cancer cells while sparing healthy tissues. Our clinical
trials are designed to evaluate the safety and efficacy associated with the specific targeting of
cancer cells. In preclinical studies, these compounds were effective against numerous drug-
resistant cancers and work synergistically with FDA-approved cancer treatments to increase
efficacy. We are also developing specific biomarkers to help identify patients whom will be most
responsive to our therapies, thereby enabling targeted, personalized medicine.
I.
Our three clinical development programs are:
Supinoxin™ (Phase I) is a potent, orally bioavailable, first-in-class small molecule that
inhibits the growth of cancer cells by targeting phosphorylated-p68, which is found only
in cancer cells.
RX-3117 (Phase Ib) is a next-generation, cancer cell specific nucleoside agent that
exhibits high oral bioavailability. It may have a superior safety profile compared to
gemcitabine, one of the most widely used chemotherapy drugs. In addition, RX-3117 has
shown activity against gemcitabine-resistant cancers in preclinical human and animal
studies.
Archexin® (Phase IIa) is a best-in-class agent that blocks the activated form of Akt-1, a
protein kinase that plays a central role in drug resistance and the uncontrolled growth of
cancer tumor cells.
Supinoxin™
Rexahn is developing Supinoxin as an orally-administered, first-in-class phosphorylated-p68 inhibitor
with great potential to be effective against solid tumors. Phosphorylated-p68 is a protein that plays a
key role in cancer growth, progression and metastasis in the most difficult cancers, representing the
fastest growing drug-treatable population. Over-expression of phosphorylated-p68 has been
observed in solid tumors, such as colon, breast, head and neck squamous cell carcinomas, prostate
and ovarian cancers and multiple myeloma. However, phosphorylated-p68 is not present in healthy,
non-cancerous tissue.
The Phase I clinical trial for patients with solid cancer tumors commenced in August of 2013, and we
expect to have results in the first half of 2015. Patients receive Supinoxin once weekly for 3 weeks
followed by 1 week without treatment, and have the ability to continue on the drug for up to eight
cycles of treatment. The decision to enroll the next group of patients and escalate the dose is made
after one cycle of treatment, based on safety and tolerability seen in the previous dosing group.
Patients are assessed for tumor progression by CT or MRI scan prior to the start of therapy and after
every two cycles of therapy. Rexahn expects to complete enrollment of patients in the first half of
2015, with data available soon after.
Initial results reported in March 2014, indicated that Supinoxin is safe and well-tolerated over the
dose range tested in cancer patients with solid tumors who have received multiple cycles of
treatment. In addition, the pharmacokinetic profile and oral bioavailability of Supinoxin is consistent
with preclinical studies.
The study is ongoing and the maximum tolerated dose has not yet been determined. Seven dosing
cycles have been completed (25, 50, 100, 150, 225, 300 and 425 mg) and no drug related adverse
events have been reported. Pharmacokinetic analysis has shown that Supinoxin displays dose-
proportional exposure and an estimated oral bioavailability of 51%.
RX-3117
RX-3117 is a next-generation, cancer cell specific nucleoside compound. RX-3117 inhibits DNA and
RNA synthesis and induces apoptotic cell death specifically in cancer cells by a mechanism distinct
from other DNA synthesis inhibitors. Preclinical studies have shown it to effectively inhibit the growth
of solid tumors in the pancreas, lung, colon, renal and other cancers. Additionally, the FDA has
granted Orphan Drug Designation to RX-3117 in the treatment of pancreatic cancer.
RX-3117 has shown efficacy in animal models and human cancer cell lines resistant to gemcitabine,
which is one of the most widely used chemotherapy drugs on the market today. Resistance to the
anti-cancer effects of gemcitabine represents a major clinical issue in the treatment of cancer
patients, as it has been estimated that up to 25% of cancer patients receiving one or more cycles of
gemcitabine rapidly become resistant to its anti-cancer activity.
In an exploratory Phase I clinical trial in cancer patients conducted in Europe in 2012, RX-3117
demonstrated oral bioavailability, and no adverse events were reported over the dose range tested.
Rexahn initiated a Phase Ib clinical trial in cancer patients with solid tumors in January 2014. The
Phase Ib trial is a multi-center, dose-escalation study which evaluates the safety, tolerability, dose-
limiting toxicities and maximum tolerated dose of RX-3117 in patients with solid tumors. Secondary
endpoints include characterizing the pharmacokinetic profile of RX-3117 and evaluating the
preliminary anti-tumor effects of RX-3117.
Patients enrolled in the Phase Ib trial receive RX-3117 three times a week for 3 weeks followed by 1
week without treatment, and have the ability to continue on the drug for up to eight cycles of
treatment. The decision to enroll the next group of patients and escalate the dose is made after one
cycle of treatment, based on safety and tolerability seen in the previous dosing group. Patients are
assessed for tumor progression by CT or MRI scan prior to the start of therapy and after every two
cycles of therapy. Rexahn expects to complete enrollment of patients in the first half of 2015, with
data available soon after.
Archexin®
Archexin specifically inhibits phosphorylated Akt-1 which is highly over expressed in cancer cells. The
overall safety profile of Archexin may be superior to existing cytotoxic compounds and
chemotherapeutic drugs which affect growth in both cancer and non-cancer cells. In two clinical
trials, Archexin has shown to have an excellent safety profile in cancer patients. Additionally, the FDA
has granted Orphan Drug Designation to Archexin in the treatment of five cancers: renal cell,
pancreatic, ovarian, stomach, and glioblastoma.
In a small Phase IIa trial, Archexin demonstrated safety and preliminary signs of efficacy in advanced
pancreatic cancer patients when used in combination with gemcitabine. Median survival for patients
dosed with Archexin plus gemcitabine was 9.1 months as compared to historical survival data of 5.7
months for gemcitabine alone.
Following consultation with thought leaders in oncology, Rexahn initiated a Phase IIa trial for
Archexin for metastatic renal cell carcinoma in January 2014. The combination of strong scientific
data, unmet clinical need, and the Orphan Drug Designation for renal cell carcinoma was the driving
factor for choosing this indication. In addition, resistance to the anti-cancer effects of mTOR
inhibitors such as everolimus (Afinitor®), a chemotherapy drug which is used as second line therapy in
renal cell carcinoma patients, has been attributed to an increase in Akt1 activity. Thus, treatment with
Archexin may inhibit the growth of renal cell carcinoma and overcome the resistance to mTOR
inhibitors, resulting in an increase in efficacy.
The on-going Phase IIa trial for metastatic renal cell carcinoma is a multi-center study designed to
evaluate the efficacy of Archexin in combination with everolimus to treat metastatic renal cell
carcinoma patients. This trial is being conducted in two stages. The first stage is a dose ranging
study, enrolling up to three different cohorts of three renal cell carcinoma patients to determine the
maximum tolerated dose in combination with everolimus. The decision to enroll the next group of
patients and escalate the dose is made upon completion of the first 21 day cycle of treatment. Based
on previous clinical data, the target dose of Archexin is anticipated to be no more than 250 mg/m2 per
day. Patient assessments include safety, pharmacokinetics, and laboratory and physical exams. Once
the maximum tolerated dose of Archexin in combination with everolimus has been determined, thirty
additional renal cell carcinoma patients will be enrolled. These patients will be randomized into two
arms and receive either Archexin in combination with everolimus or everolimus alone, in a ratio of 2:1.
The primary endpoint is the percentage of patients with progression-free survival following eight
cycles of therapy. Patients are scanned by CT or MRI after every two cycles of therapy for an
assessment of tumor progression. Secondary endpoints include pharmacokinetic profile, incidence of
adverse events, changes in clinical laboratory tests and vital signs over time, tumor response, duration
of response, time to response, and response rate. Exploratory endpoints include blood levels of Akt1
pathway biomarkers, tumor apoptosis biomarkers or other relevant biomarkers.
The safety portion of this Phase IIa trial is scheduled for completion in the second half of 2015.
II.
Proprietary nano-drug delivery platform for FDA-approved chemo drugs:
Rexahn’s Nano-Polymer-Drug Conjugate System
combines FDA-approved
chemotherapies with a proprietary polymer carrier that delivers the drug directly into the tumor
while bypassing healthy cells. This minimizes the level of freely-circulating drug in the body,
resulting in reducing side effects. It could also maximize the amount of drug in the tumor,
thereby increasing its effectiveness. This technology may be of interest to other companies with
chemotherapy drugs, which can be made more effective with Rexahn’s NPDCS, presenting a
potential partnering opportunity that could generate revenues and non-dilutive capital.
(NPDCS)
RX-21101: Nano-polymer Anticancer Drug
RX-21101 combines the nano-drug delivery system with docetaxel, a widely used, FDA-approved
chemotherapy drug. RX-21101 may bolster efficacy while lowering toxicity of docetaxel by specific
tumor targeting and increased stability in the body. Potential indications include breast, ovarian,
prostate and lung cancer.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:31) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE(cid:30)
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
(cid:29) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934(cid:30)
For the transition period from to
Commission File No.:001-34079
Rexahn Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-3516358
(I.R.S. Employer Identification Number)
15245 Shady Grove Road, Suite 455
Rockville, MD 20850
(Address of principal executive offices, including zip code)
Telephone: (240) 268-5300
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule-405 of the Securities
Act: Yes (cid:29) No(cid:31)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act
Yes (cid:29) No (cid:31)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
(cid:31) No (cid:29)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes (cid:31) No (cid:30)(cid:29)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein; and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:31)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
(cid:30) Accelerated Filer
(cid:30) Smaller reporting company
(cid:31)
(cid:31)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes (cid:30) No (cid:31)
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: As of June 30,
2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$147,704,168 based on the closing price reported on NYSE MKT.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date:
Class
Common Stock, $0.0001 par value per share
Outstanding as of March 16, 2015
179,210,246 shares
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement for its 2015 Annual Meeting of
Stockholders, which is expected to be filed with the U.S. Securities and Exchange Commission within 120 days
after the end of the registrant’s fiscal year ended December 31, 2014, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
Cautionary Statement Regarding Forward-Looking Statements.
This Annual Report on Form 10-K contains statements (including certain projections and
business trends) accompanied by such phrases as “believe,” “estimate,” “expect,” “anticipate,” “will,”
“intend” and other similar expressions, that are “forward-looking statements” as defined in the Private
Securities Litigation Reform Act of 1995. We caution that forward-looking statements are based largely
on our expectations and are subject to a number of known and unknown risks and uncertainties that are
subject to change based on factors which are, in many instances, beyond our control. Actual results,
performance or achievements may differ materially from those contemplated, expressed or implied by the
forward-looking statements.
Although we believe that the expectations reflected in our forward-looking statements are
reasonable as of the date we make them, actual results could differ materially from those currently
anticipated due to a number of factors, including risks relating to:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
our understandings and beliefs regarding the role of certain biological mechanisms and processes
in cancer;
our drug candidates being in early stages of development, including in pre-clinical development;
our ability to initially develop drug candidates for orphan indications to reduce the time-to-market
and take advantage of certain incentives provided by the U.S. Food and Drug Administration;
our ability to transition from our initial focus on developing drug candidates for orphan
indications to candidates for more highly prevalent indications;
our ability to successfully and timely complete clinical trials for our drug candidates in clinical
development;
uncertainties related to the timing, results and analyses related to our drug candidates in
pre-clinical development;
our ability to obtain the necessary U.S. and international regulatory approvals for our drug
candidates;
our reliance on third-party contract research organizations and other investigators and
collaborators for certain research and development services;
our ability to maintain or engage third-party manufacturers to manufacture, supply, store and
distribute supplies of our drug candidates for our clinical trials;
our ability to form strategic alliances and partnerships with pharmaceutical companies and other
partners for sales and marketing of certain of our product candidates;
demand for and market acceptance of our drug candidates;
the scope and validity of our intellectual property protection for our drug candidates and our
ability to develop our candidates without infringing the intellectual property rights of others;
(cid:31)
(cid:31)
our lack of profitability and the need for additional capital to operate our business; and
other risks and uncertainties, including those set forth herein under the caption “Risk Factors” and
those detailed from time to time in our filings with the Securities and Exchange Commission.
These forward-looking statements are made only as of the date hereof, and we undertake no obligation to
update or revise the forward-looking statements, whether as a result of new information, future events or
otherwise.
REXAHN PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I
Item 1 Description of business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Description of Property
Item 3
Item 4 Mine Safety Disclosures
Legal Proceedings
Selected Financial Data
PART II
Item 5 Market for Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Qualitative and Quantitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers, and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions; and Director Independence
Item 14 Principal Accounting Fees and Services
Item 15 Exhibits, Financial Statement Schedules
SIGNATURES
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Unless the context requires otherwise, any references in this Annual Report on Form 10-K to “we,” “us,”
“our,” the “Company” or “Rexahn” refers to Rexahn Pharmaceuticals, Inc.
PART I
Item 1. Description of Business
Overview
We are a clinical stage biopharmaceutical company dedicated to the discovery, development and
commercialization of innovative treatments for cancer and other medical needs. Our mission is to
discover and develop new medicines for diseases that plague patients and have no effective cures, in
particular high-mortality cancers. Our pipeline features one oncology candidate in Phase II clinical trials,
two oncology candidates in Phase I clinical trials, other candidates in preclinical development, and two
drug candidates that are not being actively developed. Our strategy is to continue building a significant
product pipeline of innovative drug candidates that we will commercialize alone or with partners. We
intend to initially develop drug candidates for cancers that are orphan indications and then expand into
more highly prevalent cancers.
Our three clinical stage drug candidates in active development are Archexin®, RX-3117 and
SupinoxinTM (RX-5902).
(cid:31) Archexin is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we
believe plays critical roles in cancer cell proliferation, survival, angiogenesis, metastasis and drug
resistance. Archexin has received “orphan drug” designation from the U.S. Food and Drug
Administration (the “FDA”) for renal cell carcinoma (“RCC”), glioblastoma, ovarian cancer,
stomach cancer and pancreatic cancer. Orphan drug designation provides tax incentives for
clinical research and a waiver from user fees. In addition, an orphan drug receives seven years of
exclusivity after approval, during which the FDA generally cannot approve another product with
the same active moiety for the same indication. We have completed a Phase IIa clinical trial for
Archexin for the treatment of pancreatic cancer, and in January 2014, we initiated a Phase IIa
proof-of-concept clinical trial to study Archexin’s safety and efficacy in patients with metastatic
RCC.
(cid:31) RX-3117 is a small molecule nucleoside compound with an anti-metabolite mechanism of action,
and we believe it has therapeutic potential in a broad range of cancers, including colon, lung and
pancreatic cancer. We completed an exploratory Phase I clinical study for RX-3117 in 2012 that
demonstrated the oral bioavailability of RX-3117 in humans with no adverse effects reported.
In January 2014, we initiated a Phase Ib clinical trial to study the safety and efficacy of RX-3117
in patients with solid tumors. RX-3117 has received orphan drug designation from the FDA for
pancreatic cancer.
(cid:31)
is a potential first-in-class small molecule
Supinoxin, or RX-5902,
the
phosphorylation of p68, a protein that we believe plays a key role in cancer growth, progression
and metastasis. In July 2012, we submitted an Investigational New Drug (“IND”) application to
the FDA for Supinoxin. We initiated a Phase I clinical in August 2013 to study Supinoxin’s
safety and efficacy in patients with solid tumors.
inhibits
that
drug
toxicity,
We also have two drug candidates in pre-clinical development: Archexin-Nano, which may
provide significant clinical benefits including targeted higher cellular intake, extended circulation time,
reduced
an
improved
(N-(2-Hydroxypropyl)methacrylamide(“HPMA”)-docetaxel-folate, which may bolster efficacy against
tumors while lowering toxicity by specific tumor targeting and increased stability in the body. In
addition to these drug candidates, we have two clinical stage drug candidates for indications other than
cancer: SerdaxinTM, for major depressive disorder; and Zoraxel, for sexual dysfunction. We are not
currently allocating resources to develop these candidates and are actively seeking partners to fund their
clinical development.
RX-21101,
efficacy;
and
and
1
In addition to our drug development, we are also working on proprietary research technologies,
including our multi-target aimed ligands platform and nano-based drug delivery systems. Our unique
ligand discovery platform, The Inhibitors of Multi-Expression Signals (“TIMES”), permits us to identify
potentially important targets that control multiple genes or signaling events in cancer cells. Our 3-D
Gateway of Ligand Discovery (“3-D GOLD”) integrates three-dimensional molecular modeling with
databases of chemicals and proteins and ligand filtering and generation, which helps us discover novel
lead compounds. Leveraging this system, we believe that we are able to effectively develop predictive
models, formulate and test hypotheses for optimizing efficacy and increase drug safety and bioavailability
early in the drug discovery process. Our nano-based drug delivery systems, such as those used in the
multiple nanoliposomal- and nanopolymer-based anticancer drugs that we are currently testing, may
increase the availability of a drug at the disease site, minimize adverse reactions and provide longer
duration of action.
Company Background
The Company traces its history as a biopharmaceutical company focusing on oncology drugs to
the March 2001 founding of Rexahn, Corp, a Maryland corporation, which in 2005 merged with and into
Rexahn Pharmaceuticals, Inc. (formerly Corporate Road Show.com Inc.). Dr. Peter Suzdak, our Chief
Executive Officer since February 2013, has extensive experience in drug development, particularly in the
field of oncology. Dr. Chang Ahn, our founding Chief Executive Officer, Chief Scientist and Chairman
of our Board of Directors, is a former FDA reviewer and National Cancer Institute (“NCI”) research
scientist. He guided our initial research and commercialization efforts in targeted oncology drugs.
Our common stock is currently listed on the NYSE MKT under the trading symbol “RNN.” Our
principal corporate office is located at 15245 Shady Grove Road, Suite 455, Rockville, Maryland 20850
in Maryland’s I-270 technology corridor. Our telephone number is (240) 268-5300.
Industry and Disease Markets
Market Overview
Our primary research and development focus is on oncology therapeutics. Our strategy is to
develop innovative drugs that are potential first-in-class or market-leading compounds for treatment of
cancer. According to the Center for Disease Control and Prevention, cancer claims the lives of more than
half a million Americans each year and is the second leading cause of death among Americans. In 2014,
the American Association for Cancer Research (“AACR”) estimated that the 13.3 million new cases of
cancer diagnosed worldwide in 2010 cost $290 billion, and the 21.5 million new cancer cases anticipated
to occur in 2030 are projected to cost $458 billion; and approximately 1.7 million new cancer cases in the
United States were estimated in 2014 by the American Cancer Society. In 2013, Evaluate Pharma
estimated that global annual sales of cancer drugs were predicted to grow to $114 billion by 2018.
Current Cancer Treatments
Traditional cancer treatments involve surgery, radiation therapy and chemotherapy. Surgery is
widely used to treat cancer, but may result in related or significant complications and may be ineffective
if metastasis has occurred. Radiation therapy, or radiotherapy, can be highly effective in treating certain
types of cancer. In radiation therapy, ionizing radiation deposits energy that injures or destroys cells in
the area being treated by damaging their genetic material, making it impossible for these cells to continue
to grow. Although radiation damages both cancer cells and normal cells, the normal cells are generally
able to repair themselves and function properly. Chemotherapy involves the use of cytotoxic cancer
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drugs to destroy cancer cells by interfering with various stages of the cell division process. For certain
cancers and in certain patients, these drugs have limited efficacy and debilitating adverse side effects.
Cytotoxic cancer drugs may also result in the development of multiple drug, or multi-drug, resistance,
which is a condition that results when certain tumor cells that have survived treatment with cytotoxic
drugs are no longer susceptible to treatment by those and other drugs.
Unmet Needs in Cancer
Despite significant advances in cancer research and treatments, many unmet needs still remain
including:
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Long-term management of cancers: Surgery, radiation therapy or chemotherapy may not
result in long-term remission, although surgery and radiation therapies are considered
effective methods for some cancers. There is a need for more effective drugs and adjuvant
therapies to treat relapsed and refractory cancers.
(cid:31) Multi-drug resistance: Multi-drug resistance is a major obstacle to effectively treating
various cancers with chemotherapy.
(cid:31) Debilitating toxicity by chemotherapy: Chemotherapy as a mainstay of cancer treatment
induces severe adverse reactions and toxicities, affecting quality of life or life itself.
Market Opportunity
There are several factors favorable for commercializing new cancer drugs that may be
first-in-class or market leaders, including:
(cid:31) Expedited Regulatory or Commercialization Pathways. Drugs for life-threatening diseases such
as cancer are often candidates for fast track designation, breakthrough therapy designation,
priority review and accelerated approval, each of which can lead to approval sooner than would
otherwise be the case.
(cid:31) Favorable Environment for Formulary Access and Reimbursement. We believe that cancer
drugs with proven efficacy would gain rapid market uptake, formulary listing and third-party
payor reimbursement. Drugs with orphan designations are generally reimbursed by third-party
payors because there are few, if any, alternatives.
(cid:31) Focus on Specialty Markets. The marketing of new drugs to specialty physicians can be
accomplished with a specialty sales force that requires fewer personnel and lower related costs
than a typical sales force that markets widely to primary care physicians and general practitioners.
Our Strategy
Our strategy is to continue building a significant product pipeline of innovative drug candidates
that we will commercialize alone or with partners. This strategy has several key components.
Develop Innovative Therapeutics with the Potential to be First-in-Class or Market Leaders
We plan to focus our research and development pipeline on potential first-in-class or
market-leading compounds for the treatment of cancer. By expanding the breadth and depth of our
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oncology pipeline, we aim to develop an industry-leading oncology therapeutics franchise. Our pipeline
spans several major classes of cancer drugs, including molecular targeted therapies, signal transduction
and multi-kinase inhibitors, nano-medicines for target delivery of compounds and small molecule
cytotoxic compounds. Differentiated target product profiles and proprietary discovery and research
technology platforms further support these strategic efforts.
Clinically Develop Drug Candidates as Orphan Drugs
We intend to initially develop drug candidates for cancers that are orphan indications. Under the
Orphan Drug Act, the FDA may grant orphan drug designation to new drugs that treat diseases affecting
less than 200,000 patients. Incentives associated with orphan drug designation include tax incentives for
research and development and an exemption from user fees. Although the standards for orphan drug
approval are not different than for non-orphan products, the path to approval may be faster because
clinical trials may be smaller due to the smaller patient population. Additionally, drugs intended to treat
rare diseases or conditions may qualify for fast track designation, breakthrough therapy designation,
accelerated approval or priority review, all of which can speed the approval process. Further, a drug that
is approved for its orphan-designated indication receives seven years of orphan drug exclusivity during
which the FDA generally may not approve any other application for a product containing the same active
moiety and proposed for the same indication. We plan to develop drug candidates for cancers that are
orphan indications in order to reduce the time-to-market and to take advantage of the benefits of orphan
drug designation during development and the exclusivity available under the Orphan Drug Act for
approved products.
Target Signal Transduction Molecules with Multiple Drug Candidates
We plan to expand our research and development pipeline to introduce new signal inhibitor drugs
into clinical trials in the future. By identifying and characterizing the genes and proteins that control the
signaling pathways and gene expression of cancer cells, we seek to develop DNA/RNA-based and
small-molecule drugs to treat a broad range of diseases caused by abnormal expression or functions of
those genes and proteins.
Establish Partnerships with Large Pharmaceutical Companies
We seek to establish strategic alliances and partnerships with large pharmaceutical companies for
the development of our drug candidates.
In-License Unique Technology
We continually review opportunities to in-license and advance compounds in oncology that have
value creating potential and will strengthen our clinical development pipeline.
Capitalize on Our Management Team’s Expertise for Drug Development
Our management team possesses clinical development experience in oncology and several other
therapeutic areas that facilitates strategic approaches to and competitive advantages in, the design, risk
assessment and implementation of drug development programs. Our management team also has prior
experience in pharmaceutical alliances, product launches and marketing.
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Our Pipeline Drug Candidates
Clinical Stage Pipeline
Archexin: Potential Best-in-class Anticancer Akt-1 Inhibitor
Archexin is a potential best-in-class, potent inhibitor of the protein kinase Akt-1, which we
believe plays critical roles in cancer cell proliferation, survival, angiogenesis, metastasis and drug
resistance. Archexin has received “orphan drug” designation from the FDA for RCC, glioblastoma,
ovarian cancer, stomach cancer and pancreatic cancer. We believe Archexin is differentiated from other
Akt-1 inhibitors by its ability to inhibit both activated and inactivated forms of Akt-1 and in that it is not
expected to lead to drug resistance observed with other protein kinase inhibitors. Other targeted drugs
may only inhibit inactivated Akt-1 and may also cause drug resistance. Akt-1 is over-activated in
patients with many cancers, including breast, colorectal, gastric, pancreatic, prostate and melanoma
cancers. Akt-1 activity may be inhibited by signaling molecules upstream of Akt-1 in cancer cells
through the use of vascular endothelial growth factor and epidermal growth factor receptor inhibitors, but
this treatment only affects indirectly the activity of native Akt-1. Because signal transmission for cancer
progression and resistance occurs when Akt-1 is activated, we believe it is also important to inhibit
activated Akt-1. We believe that Archexin inhibits both activated and native Akt-1.
Archexin is an antisense oligonucleotide compound that is complementary to Akt-1 mRNA and
highly selective for inhibiting mRNA expression and leading to reduced production of Akt-1 protein.
Archexin has preliminarily demonstrated safety, tolerability and minimal side effects in a Phase I study in
patients with advanced cancers, where Grade 3 fatigue was the only dose-limiting toxicity and no
significant hematological abnormalities were observed. The main objectives of the Phase I study were to
determine maximum tolerated dose, dose limiting toxicity and pharmacokinetic parameters for Archexin
monotherapy. The Archexin Phase I study design was an open label, single arm ascending dose, safety
and tolerability study.
In August 2012, we announced top-line results of an open label 2-stage Phase IIa clinical trial for
Archexin that was designed to assess the safety and efficacy of Archexin in combination with gemcitabine.
Gemcitabine is used to treat pancreatic, breast, ovarian, and lung cancers, and may be used for other cancers
as well. Gemcitabine is a member of a group of chemotherapy drugs known as anti-metabolites, which
prevent cells from making DNA and RNA, which stops cell growth and causes cells to die. Stage 1 was
the dose-finding portion of the study, and Stage 2 was the dose-expansion portion of the study using the
dose identified in Stage 1 administered together with gemcitabine. The study enrolled 31 subjects aged 18
to 65 with metastatic pancreatic cancer at nine centers in the United States and India. The primary
endpoint was overall survival following four cycles of therapy with a six month follow-up. For those
evaluable patients, the study demonstrated that treatment with Archexin in combination with gemcitabine
provided a median survival rate of 9.1 months compared to the historical survival data of 5.65 months for
standard single agent gemcitabine therapy. The most frequently reported adverse events were
constipation, nausea, abdominal pain and pyrexia, regardless of relatedness.
We initiated a Phase IIa clinical proof-of-concept clinical trial of Archexin in January 2014 to study
its safety and efficacy in patients with metastatic RCC. In the trial, Archexin will be administered in
combination with Afinitor® (everolimus) tablets. The trial will be conducted in two stages. The first
stage will be the dose ranging portion of the study, with up to three dose groups with three RCC patients
each, to determine its maximal tolerated dose (“MTD”) in combination with everolimus. Once the MTD
has been determined, thirty RCC patients will be randomized to either Archexin in combination with
everolimus or everolimus alone, in a ratio of 2:1. We plan to complete the initial safety component of this
study in the second half of 2015.
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The Company has been issued a U.S. patent for Archexin that covers composition of matter and
broad claims for the nucleotide sequences of the antisense compounds that target and inhibit the
expression of Akt-1 in human tissues or cells, and the method of using the compounds to induce
cytotoxicity in cancer cells.
RX-3117: Small Molecule Nucleoside
RX-3117 is a small molecule nucleoside compound with an anti-metabolite mechanism of action,
and we believe it has therapeutic potential in a broad range of cancers, including colon, lung and
pancreatic cancer. We completed an exploratory Phase I clinical study of RX-3117 in 2012 that
demonstrated the oral bioavailability of RX-3117 in humans with no adverse effects reported in the study.
In January 2014, we initiated a Phase Ib clinical trial to study the safety, tolerability,
dose-limiting toxicities and MTD of RX-3117 in patients with solid tumors. Secondary endpoints will
include characterizing the pharmacokinetic profile of RX-3117 and evaluating the preliminary anti-tumor
effects of RX-3117. Patient enrollment has been completed in eight dose groups (30mg, 60mg, 100mg,
150mg, 200mg, 500mg, 1,000mg and 1,500mg) and the MTD of RX-3117 has not yet been achieved. We
expect to complete patient enrollment in the first half of 2015.
Supinoxin: Potential First-in-Class p68 RNA Inhibitor
Supinoxin is a potential first-in-class small molecule that inhibits the phosphorylation of p68, a
protein that we believe plays a key role in cancer growth, progression and metastasis. Phosphorylated p68,
which is highly expressed in cancer cells, but not in normal cells, results in up-regulation of
cancer-related genes and a subsequent proliferation or tumor growth of cancer cells. Supinoxin
selectively blocks phosphorylated p68, thereby decreasing the proliferation or growth of cancer cells. In
pre-clinical tissue culture models and in-vivo xenograft models, Supinoxin has demonstrated synergism
with cytotoxic agents and activity against drug resistant cancer cells. In July 2012, we submitted an IND
application to the FDA for Supinoxin.
We initiated a Phase I clinical trial in August 2013 to study Supinoxin’s safety and efficacy in
patients with solid tumors. Patients in seven dose groups (25mg, 50mg, 100mg, 150mg, 225mg, 300mg
and 425mg) have been enrolled and the MTD of Supinoxin has not yet been reached. Depending on the
number of dose groups needed to determine the MTD, we expect to complete this trial in the first half of
2015. Based on the progress of the Supinoxin clinical development program and the level of interest
expressed from a number of oncology-focused pharmaceutical companies, Rexahn is continuing its
discussions with multiple companies to explore collaborative business structures in an effort to maximize
the potential upside value of the program.
Non-Oncology Candidates
We have two candidates for indications other than oncology: Serdaxin, for major depressive
disorder, and Zoraxel, for sexual dysfunction. In January, 2013, we determined to cease allocating
resources to develop these candidates. We are seeking partners to fund their clinical development.
Pre-Clinical Pipeline
Archexin-Nano: Nanoliposomal anticancer Akt-1 inhibitor
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Archexin is a potential first-in-class, potent inhibitor of Akt-1, and Archexin-Nano is a
nanoliposomal product of Archexin with high incorporation efficiency and good stability. We believe that
Archexin-Nano may provide significant clinical benefits including targeted higher cellular intake,
extended circulation time, reduced drug toxicity, and improved efficacy.
RX-21101: Nano-polymer Anticancer Drug
RX-21101 is an investigational anticancer nano-polymer drug that we believe can mitigate some
of the limitations of cytotoxic compounds, such as poor solubility and severe adverse reactions.
Conjugating water-soluble and non-toxic HPMA to conventional anticancer compounds may bolster
efficacy while lowering toxicity by specific tumor targeting and increased stability in the body.
Research and Development Process
We have engaged third-party contract research organizations and other investigators and
collaborators, such as universities and medical institutions, to conduct our pre-clinical studies, toxicology
studies and clinical trials. Engaging third-party contract research organizations is typical practice in our
industry. However, relying on such organizations means that the clinical trials and other studies described
above are being conducted at external locations and that the completion of these trials and studies is not
within our direct control. Trials and studies may be delayed due to circumstances outside our control, and
such delays may result in additional expenses for us.
Competition
We compete against fully integrated pharmaceutical companies and smaller companies that are
collaborating with larger pharmaceutical companies, as well as academic institutions, government
agencies and other public and private research organizations. Many of these competitors, either alone or
together with their collaborative partners, operate larger research and development programs or have
substantially greater financial resources than we do, as well as more experience in:
(cid:31)
(cid:31)
(cid:31)
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developing drugs;
undertaking pre-clinical testing and human clinical trials;
obtaining FDA and other regulatory approvals of drugs;
formulating and manufacturing drugs; and
launching, marketing and selling drugs.
Large pharmaceutical companies currently sell both generic and proprietary compounds for the
treatment of cancer. In addition, companies pursuing different but related fields represent substantial
competition. Many of these organizations have substantially greater capital resources, larger research and
development staff and facilities, longer drug development history in obtaining regulatory approvals and
greater manufacturing and marketing capabilities than we do. These organizations also compete with us to
attract qualified personnel, parties for acquisitions, joint ventures or other collaborations.
We are aware of products under development by our competitors that target the same indications
as our clinical stage drug candidates. If approved, Archexin could compete with other Akt-1 inhibitors,
such as MK-2206 and GSK-2141795, which are under development by Merck & Company, Inc. and
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GlaxoSmithKline, respectively. If approved, RX-3117 could compete with other compounds with an
anti-metabolite mechanism of action in cancers, such as Sapacitabine which is under development by
Cyclacel. We are not currently aware of known inhibitors of phosphorylated p68 that would compete
with Supinoxin if Supinoxin were approved. Our competitors may succeed in developing products that
are more safe and/or effective than ours, which could render our product candidates less competitive prior
to recovery by us of expenses incurred with respect to their development.
Government Regulation
Regulation by governmental authorities in the United States and in other countries is a significant
consideration in our product development, manufacturing and marketing strategies. We expect that all
of our drug candidates will require regulatory approval by the FDA and by similar regulatory authorities
in foreign countries prior to commercialization and will be subjected to rigorous pre-clinical, clinical, and
post-approval testing to demonstrate safety and effectiveness, as well as other significant regulatory
requirements and restrictions in each jurisdiction in which we would seek to market our products.
U.S. federal regulations control the testing, development, manufacture, quality control, safety,
effectiveness, approval, storage, labeling, record keeping, reporting, distribution, import, export and
marketing of all biopharmaceutical products intended for therapeutic purposes. We believe that we and
the third parties that work with us are in compliance in all material respects with currently applicable
rules and regulations. Those rules and regulations are subject to change, however, and in any event, a
failure to comply could have a material negative impact on our ability to successfully develop and
commercialize our products, and therefore on our financial performance.
Obtaining governmental approvals and maintaining ongoing compliance with applicable
regulations are expected to require the expenditure of significant financial and human resources not
currently at our disposal. We plan to fulfill our short-term needs through consulting agreements and
joint ventures with academic or corporate partners while developing our own internal infrastructure for
long-term corporate growth.
Development and Approval
The process to approve biopharmaceutical compounds for therapeutic use for commercialization
in the United States and many other countries is lengthy, complex and expensive, and the outcome is far
from certain. Although foreign requirements for conducting clinical trials and obtaining approval may
be different than in the United States, they often are equally rigorous and the outcome cannot be predicted
with confidence. A key component of any submission for approval in any jurisdiction is pre-clinical and
clinical data demonstrating the product’s safety and effectiveness.
Pre-clinical Testing. Before testing any compound in humans in the United States, a company
must develop pre-clinical data, generally including laboratory evaluation of product chemistry and
formulation, as well as toxicological and pharmacological studies in animal species to assess safety and
quality. Animal studies must be conducted in compliance with the FDA’s Good Laboratory Practice
(“GLP”) regulations and the Animal Welfare Act, which is enforced by the Department of Agriculture.
IND Application. In the United States, FDA regulations require that the person or entity
sponsoring or conducting a clinical study for the purpose of investigating a potential drug product’s safety
and effectiveness submit to the FDA an IND application, which contains pre-clinical testing results and
provides a basis for the FDA to conclude that there is an adequate basis for testing the drug in humans.
If the FDA does not object to the IND application within 30 days of submission, the clinical testing
proposed in the IND may begin. Even after the IND has gone into effect and clinical testing has begun,
8
the FDA may put the clinical trials on “clinical hold,” suspending (or in some cases, ending) them
because of safety concerns or for other reasons.
Clinical Trials. Clinical trials involve administering a drug to human volunteers or patients,
under the supervision of a qualified clinical investigator. Clinical trials are subject to extensive
regulation. In the United States, this includes compliance with the FDA’s bioresearch monitoring
regulations and Good Clinical Practice (“GCP”) requirements, which establish standards for conducting,
recording data from, and reporting the results of, clinical trials, with the goal of assuring that the data and
results are credible and accurate and that study participants’ rights, safety and well-being are protected.
Each clinical trial must be conducted under a protocol that details the study objectives, parameters for
monitoring safety and the efficacy criteria, if any, to be evaluated. The protocol is submitted to the FDA
as part of the IND and reviewed by the agency before the study is commenced. Additionally, each
clinical trial must be reviewed, approved and conducted under the auspices of an Institutional Review
Board (“IRB”) at the institution at which the trial is being conducted. The sponsor of a clinical trial, the
investigators and IRBs each must comply with requirements and restrictions that govern obtaining
informed consent from each study subject, complying with the protocol and investigational plan,
adequately monitoring the clinical trial, and timely reporting adverse events. Foreign studies conducted
under an IND must meet the same requirements applicable to studies conducted in the United States.
However, if a foreign study is not conducted under an IND, the data may still be submitted to the FDA in
support of a product application, if the study was conducted in accordance with GCP and the FDA is able
to validate the data.
Sponsors of clinical trials are required to make public certain information about active clinical
trials and trial results by posting the information on government or independent websites, such as
http://clinicaltrials.gov. Clinical testing is typically performed in three phases.
In Phase I, the drug is administered to a small number of human subjects to confirm its safety and
to develop detailed profiles of its pharmacological and pharmacokinetic actions (i.e., absorption,
distribution, metabolism, and excretion). Although Phase I trials typically are conducted in healthy
human subjects, in some instances (including, for example, with some cancer therapies) the study subjects
are patients with the targeted disease or condition.
In Phase II, the drug is administered to groups of patients (usually no more than several hundred)
to develop initial data regarding efficacy against the targeted disease and determine the requisite dose and
dose intervals, and generate additional information regarding the drug’s safety. In a typical development
program, additional animal toxicology studies precede this phase. In some cases, the trial can be split
into Phase IIa and IIb studies in order to test smaller subject pools. Some Phase I clinical studies may
proceed in parallel with some Phase II studies.
In Phase III, the drug is administered to a larger group of patients (usually from several hundred
to several thousand or more). Phase III studies also can include patients with concomitant diseases and
medications. Larger patient populations are evaluated in Phase III at multiple study sites and many
clinical trial programs or registration studies are conducted concurrently for the sake of time and
efficiency. The extensive clinical testing is intended to obtain additional information about product
safety and effectiveness necessary to evaluate the drug’s overall risk-benefit profile and to provide a basis
for physician labeling. Phase III data often form the core basis on which the FDA evaluates the
product’s safety and effectiveness when considering an application to market the drug.
The study sponsor, the FDA or an IRB may suspend or terminate a clinical trial at any time on
various grounds, including a determination that study subjects are being exposed to an unacceptable
health risk. Additionally, success in early-stage clinical trials does not assure success in later-stage
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clinical trials, and data from clinical trials are not always conclusive and may be subject to alternative
interpretations that could delay, limit or prevent approval.
NDA Submission and Review. After completing the clinical studies, a sponsor seeking approval
to market a drug in the United States submits to the FDA a New Drug Application (“NDA”). The NDA
is a comprehensive, multi-volume application intended to demonstrate the product’s safety and
effectiveness and includes, among other things, pre-clinical and clinical data, information about the drug’s
composition, the sponsor’s plans for manufacturing and packaging and proposed labeling. When an
NDA is submitted, the FDA makes an initial determination as to whether the application is sufficiently
complete to be accepted for review. If the application is not, the FDA may refuse to accept the NDA for
filing and request additional information. A refusal to file, which requires resubmission of the NDA
with the requested additional information, delays review of the application.
FDA performance goals regarding the timeliness of NDA review generally provide for action on
an NDA within 12 months of its submission. That deadline can be extended under certain
circumstances, including by FDA requests for additional information. The targeted action date can also
be shortened to eight months after submission, for products that are intended to treat serious or
life-threatening conditions and demonstrate the potential to address unmet medical needs. Additionally,
the FDA has programs for enhanced communication and consultation and other steps to expedite
submission and consideration of such products. We anticipate, but cannot ensure, that our products will
qualify for such programs.
If it concludes that an NDA does not meet the regulatory standards for approval, the FDA
typically issues a Complete Response letter, which communicates the reasons for the agency’s decision
not to approve the application and may request additional information, including additional clinical data.
An NDA may be resubmitted with the deficiencies addressed, but that does not guarantee approval.
Data from clinical trials are not always conclusive, and the FDA’s interpretation of data may differ from
the sponsor’s. Obtaining approval can take years, requires substantial resources and depends on a
number of factors, including the severity of the targeted disease or condition, the availability of
alternative treatments, and the risks and benefits demonstrated in clinical trials. Additionally, as a
condition of approval, the FDA may impose restrictions that could affect the commercial prospects of a
product, such as a Risk Evaluation and Mitigation Strategy (“REMS”), and could require post-approval
commitments to conduct additional studies or conduct surveillance programs to monitor the drug’s
effects.
Moreover, once a product is approved, information about its safety or effectiveness from actual
use can limit or prevent successful commercialization, either because of regulatory action or market
forces. Post-approval modifications to a drug product, such as changes in indications, labeling or
manufacturing processes or facilities, may require development and submission of additional information
or data in a new or supplemental NDA, which would also require FDA approval.
One of our drug candidates, Archexin is an antisense oligonucleotide (“ASO”) compound. To
date, the FDA has not approved any NDAs for any ASO compounds for cancer treatment; however, the
FDA has approved the ASO compounds fomivirsen (marketed as Vitravene®) as a treatment for
cytomegalovirus retinitis, and mipomersen sodium (marketed as Kynamro®), as a treatment for
homozygous familial hypercholesterolemia. In addition, Archexin and Archexin-nano are in a drug class
known as Akt-1 inhibitors, and drugs from this class has not been approved by the FDA to date, and we
have not submitted an NDA for any of these drug candidates.
Exclusivity and Patent Protection. In the United States and elsewhere, certain regulatory
exclusivities and patent rights can provide an approved drug product with protection from certain
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competitors’ products for a period of time and within certain scopes. In the United States, those
protections include exclusivity under the Orphan Drug Act, which is available for drugs intended to treat
rare diseases or conditions, which generally are diseases or conditions that affect fewer than
200,000 persons in the United States. If a sponsor demonstrates that a drug is intended to treat a rare
disease or condition, the FDA grants orphan drug designation to the product for that use. A product that
has received orphan drug designation is eligible for research and development tax credits and is exempt
from user fees. Additionally, a drug that is approved for its orphan-designated indication receives seven
years of orphan drug exclusivity. During that period, FDA generally may not approve any other
application for a product containing the same active moiety and proposed for the same indication. There
are exceptions, however, most notably when the later product is shown to be clinically superior to the
product with exclusivity. Products that qualify for orphan designation may also qualify for other FDA
programs that are intended to expedite the development and approval process and, as a practical matter,
clinical trials for orphan products may be smaller, simply because of the smaller patient population.
Nonetheless, the same approval standards apply to orphan-designated products as for other drugs.
Archexin has received orphan drug designation from the FDA for RCC, glioblastoma, ovarian
cancer, stomach cancer and pancreatic cancer. RX-3117 received orphan drug designation for
pancreatic cancer in September 2014.
Post-Approval Regulation
Once approved, products are subject to continuing extensive regulation by the FDA. If ongoing
regulatory requirements are not met, or if safety problems occur after a product reaches market, the FDA
may take actions to change the conditions under which the product is marketed, including suspending or
even withdrawing approval. In addition to FDA regulation, the healthcare industry, and therefore our
business, is also subject to extensive federal, state, local and foreign regulation.
Good Manufacturing Practices. Companies engaged in manufacturing drug products or their
components must comply with applicable current Good Manufacturing Practice (“cGMP”) requirements,
which include requirements regarding organization and training of personnel, building and facilities,
equipment, control of components and drug product containers, closures, production and process controls,
packaging and labeling controls, holding and distribution, laboratory controls and records and reports.
The FDA inspects equipment, facilities and manufacturing processes before approval and conducts
periodic re-inspections after approval. Failure to comply with applicable cGMP requirements or the
conditions of the product’s approval may lead the FDA to take administrative enforcement action.
Although we periodically monitor the FDA compliance of the third parties on which we rely for
manufacturing our drug products, we cannot be certain that our present or future third-party
manufacturers will consistently comply with cGMP or other applicable FDA regulatory requirements.
Sales and Marketing. Once a product is approved, its advertising, promotion and marketing will
be subject to close regulation, including with regard to promotion to healthcare practitioners,
direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific
and educational activities and promotional activities involving the internet. In addition to FDA
restrictions on marketing of pharmaceutical products, state and federal fraud and abuse laws have been
applied to restrict certain marketing practices in the pharmaceutical industry in recent years. Some of
the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and
their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are
subject to change.
Fraud and Abuse Laws. The restrictions under applicable federal and state health care fraud and
abuse laws and regulations that may affect our ability to operate include:
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(cid:31) The federal Anti-Kickback Law, which prohibits, among other things, knowingly or
willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in
cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any health care items or service for which
payment may be made, in whole or in part, by federal healthcare programs such as
Medicare and Medicaid. This statute has been interpreted to apply to arrangements
between pharmaceutical companies on one hand and prescribers, purchasers and
formulary managers on the other. Further, the Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Reconciliation Act of 2010, together the
Affordable Care Act, clarified among other things that liability may be established under
the federal Anti-Kickback law without proving actual knowledge of the statute or specific
intent to violate it. In addition, the Affordable Care Act amended the Social Security Act
to provide that the government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Law constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act. Although there are a
number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback
Law protecting certain common business arrangements and activities from prosecution or
regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices
that do not fit squarely within an exemption or safe harbor may be subject to scrutiny;
(cid:31) The federal civil False Claims Act, which prohibits, among other things, individuals or
entities from knowingly presenting, or causing to be presented, a false or fraudulent claim
for payment of government funds or knowingly making, using or causing to be made or
used, a false record or statement material to an obligation to pay money to the
government or knowingly concealing or knowingly and improperly avoiding, decreasing
or concealing an obligation to pay money to the federal government. Many
pharmaceutical and other healthcare companies have been investigated and have reached
substantial financial settlements with the federal government under the civil False Claims
Act for a variety of alleged improper marketing activities, including: providing free
product to customers with the expectation that the customers would bill federal programs
for the product; providing consulting fees, grants, free travel and other benefits to
physicians to induce them to prescribe the company’s products; and inflating prices
reported to private price publication services, which are used to set drug payment rates
under government healthcare programs. In addition, in recent years the government has
pursued civil False Claims Act cases against a number of pharmaceutical companies for
causing false claims to be submitted as a result of the marketing of their products for
unapproved, and thus non-reimbursable, uses. Pharmaceutical and other healthcare
companies also are subject to other federal false claim laws, including, among others,
federal criminal healthcare fraud and false statement statutes
to
non-government health benefit programs;
that extend
(cid:31) Analogous state laws and regulations, such as state anti-kickback and false claims laws,
may apply to items or services reimbursed under Medicaid and other state programs or, in
several states, apply regardless of the payor. Some state laws also require pharmaceutical
companies to report expenses relating to the marketing and promotion of pharmaceutical
products and to report gifts and payments to certain healthcare providers in the states.
Other states prohibit providing meals to prescribers or other marketing related activities.
In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical
companies to implement compliance programs or marketing codes of conduct.
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(cid:31) The federal Physician Payment Sunshine Act, being implemented as the Open Payments
Program, requires certain pharmaceutical manufacturers to engage in extensive tracking
of payments and other transfers of value to physicians and teaching hospitals, and to
submit such data to the Centers for Medicare and Medicaid Studies (“CMS”), which will
then make all of this data publicly available on the CMS website. Pharmaceutical
manufacturers with products for which payment is available under Medicare, Medicaid or
the State Children’s Health Insurance Program are required to have started tracking
reportable payments on August 1, 2013 and must submit a report to CMS on or before the
90th day of each calendar year disclosing reportable payments made in the previous
calendar year. Failure to comply with the reporting obligations may result in civil
monetary penalties;
(cid:31) The federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in
other jurisdictions generally prohibit companies and their intermediaries from providing
money or anything of value to officials of foreign governments, foreign political parties,
or international organizations with the intent to obtain or retain business or seek a
business advantage. Recently, there has been a substantial increase in anti-bribery law
enforcement activity by U.S. regulators, with more frequent and aggressive investigations
and enforcement proceedings by both the Department of Justice and the U.S. Securities
and Exchange Commission (“SEC”). Violations of United States or foreign laws or
regulations could result in the imposition of substantial fines, interruptions of business,
loss of supplier, vendor or other third-party relationships, termination of necessary
licenses and permits and other legal or equitable sanctions. Other internal or government
investigations or legal or regulatory proceedings, including lawsuits brought by private
litigants, may also follow as a consequence.
Violations of any of the laws described above or any other governmental regulations are punishable by
significant civil, criminal and administrative penalties, damages, fines and exclusion from
government-funded healthcare programs, such as Medicare and Medicaid. Although compliance
programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks
cannot be entirely eliminated. Moreover, achieving and sustaining compliance with applicable federal
and state privacy, security and fraud laws may prove costly.
Privacy Laws. We are also subject to laws and regulations covering data privacy and the
protection of health-related and other personal information. The legislative and regulatory landscape for
privacy and data protection continues to evolve, and there has been an increasing focus on privacy and
data protection issues which may affect our business, including recently enacted laws in all jurisdictions
where we operate. Numerous federal and state laws, including state security breach notification laws,
state health information privacy laws and federal and state consumer protection laws, govern the
collection, use and disclosure of personal information. In addition, if we successfully commercialize our
drug candidates, we may obtain patient health information from healthcare providers who prescribe our
products and research institutions we collaborate with, and they are subject to privacy and security
requirements under the Health Insurance Portability and Accountability Act of 1996, as amended by the
Health Information Technology for Economic and Clinical Health Act (“HIPAA”). Although we are not
directly subject to HIPAA other than with respect to providing certain employee benefits, we could
potentially be subject to criminal penalties if we knowingly obtain or disclose individually identifiable
health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted
by HIPAA.
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Other Requirements. Companies that manufacture or distribute drug products that are the
subject of approved NDAs must meet other regulatory requirements, including reporting and
record-keeping obligations.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any drug candidates
for which we may obtain regulatory approval. The regulations that govern marketing approvals, pricing
and reimbursement for new drug products vary widely from country to country. Current and future
legislation may significantly change the approval requirements in ways that could involve additional costs
and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before
it can be marketed. In many countries, the pricing review period begins after marketing or product licensing
approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to
continuing governmental control even after initial approval is granted. As a result, we might obtain
marketing approval for a product in a particular country, but then be subject to price regulations that delay
our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the
revenues we are able to generate from the sale of the product in that particular country. Adverse pricing
limitations may hinder our ability to recoup our investment in one or more product candidates even if our
product candidates obtain marketing approval.
Our ability to commercialize any products successfully also will depend in part on the extent to
which coverage and adequate reimbursement for these products and related treatments will be available in a
timely manner from government third-party payors, including government healthcare programs such as
Medicare and Medicaid, commercial health insurers and managed care organizations. Government
authorities and other third-party payors, such as private health insurers and health maintenance
organizations, determine which medications they will cover and establish reimbursement levels.
Third-party payors may limit coverage to specific products on an approved list, or formulary, which
might not include all of the FDA approved products for a particular indication. The process for
determining whether a payor will provide coverage for a product may be separate from the process for
setting the price or reimbursement rate that the payor will pay for the product once coverage is approved.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government
healthcare programs and other third-party payors are increasingly challenging the prices charged for
medical products and services and examining the medical necessity and cost-effectiveness of medical
products and services, in addition to their safety and efficacy, and have attempted to control costs by
limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party
payors are requiring that drug companies provide them with predetermined discounts from list prices and
are challenging the prices charged for medical products. We cannot be sure that coverage and
reimbursement will be available promptly or at all for any product that we commercialize and, if
reimbursement is available, what the level of reimbursement will be. Moreover, eligibility for coverage and
reimbursement does not imply that any drug will be paid for in all cases. Limited coverage may impact the
demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and
reimbursement are not available or reimbursement is available only to limited levels, we may not
successfully commercialize any product candidate for which we obtain marketing approval.
Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as
average sales price (“ASP”), average manufacturer price, and actual acquisition cost. The existing data for
reimbursement based on these metrics is relatively limited, although certain states have begun to survey
acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare
and Medicaid Services (“CMS”), the federal agency that administers the Medicare and Medicaid programs,
has made draft National Average Drug Acquisition Cost (“NADAC”), and draft National Average Retail
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Price (“NARP”), data publicly available on at least a monthly basis. In July 2013, CMS suspended the
publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to
publishing final rather than draft NADAC data and has since made updated NADAC data publicly available
on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement
mechanics on the willingness of payors to cover any products that we are able to successfully
commercialize.
If we successfully commercialize any of our products, we may participate in the Medicaid Drug
Rebate Program. Participation is required for federal funds to be available for our products under
Medicaid and Medicare Part B. Under the Medicaid Drug Rebate Program, we would be required to pay a
rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid
beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made
available to the states for our drugs under Medicaid and Part B of the Medicare program.
Federal law requires that any company that participates in the Medicaid Drug Rebate Program also
participate in the Public Health Service’s 340B drug pricing program in order for federal funds to be
available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B drug pricing
program requires participating manufacturers to agree to charge statutorily-defined covered entities no
more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered
entities include a variety of community health clinics and other entities that receive health services grants
from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income
patients.
In addition, in order to be eligible to have its products paid for with federal funds under the
Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, a
manufacturer also must participate in the Department of Veterans Affairs Federal Supply Schedule
(“FSS”), pricing program, established by Section 603 of the Veterans Health Care Act of 1992 (“VHCA”).
Under this program, the manufacturer is obligated to make its innovator and single source products
available for procurement on an FSS contract and charge a price to four federal agencies, Department of
Veterans Affairs, Department of Defense (“DoD”), Public Health Service, and Coast Guard, that is no
higher than the statutory Federal Ceiling Price. Moreover, pursuant to regulations issued by the DoD
TRICARE Management Activity (“TMA”), now the Defense Health Agency (“DHA”), to implement
Section 703 of the National Defense Authorization Act for Fiscal Year 2008, manufacturers are required to
provide rebates on utilization of their innovator and single source products that are dispensed to TRICARE
beneficiaries by TRICARE network retail pharmacies. The formula for determining the rebate is
established in the regulations and is based on the difference between the annual non-federal average
manufacturer price and the Federal Ceiling Price (these price points are required to be calculated by us
under the VHCA). The requirements under the 340B, FSS, and TRICARE programs could reduce the
revenue we may generate from any products that are commercialized in the future and could adversely
affect our business and operating results.
There may be significant delays in obtaining coverage and reimbursement for newly approved
drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or
comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not
imply that a drug will be paid for in all cases or at a rate that covers our costs, including research,
development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable,
may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary
according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement
levels already set for lower cost drugs and may be incorporated into existing payments for other services.
Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from
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countries where they may be sold at lower prices than in the United States. Limited coverage may impact
the demand for, or the price of, any product candidate for which we obtain marketing approval.
Third-party payors also may seek additional clinical evidence, including expensive pharmacoeconomic
studies, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value
in specific patient populations, before covering our products for those patients. If reimbursement is
available only for limited indications, we may not be able to successfully commercialize any product
candidate for which we obtain marketing approval. Our inability to promptly obtain coverage and
profitable reimbursement rates from both government-funded and private payors for any approved products
that we develop could have a material adverse effect on our operating results, our ability to raise capital
needed to commercialize products and our overall financial condition.
United States Healthcare Reform
The United States and many foreign jurisdictions have enacted or proposed legislative and
regulatory changes affecting the healthcare system that could prevent or delay marketing approval of our
product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any
product candidate for which we obtain marketing approval. The United States government, state
legislatures and foreign governments also have shown significant
implementing
cost-containment programs to limit the growth of government-paid healthcare costs, including price
controls, restrictions on reimbursement and requirements for substitution of generic products for branded
prescription drugs.
interest
in
In recent years, Congress has considered reductions in Medicare reimbursement levels for drugs
administered by physicians. CMS, the agency that administers the Medicare and Medicaid programs, also
has authority to revise reimbursement rates and to implement coverage restrictions for some drugs. Cost
reduction initiatives and changes in coverage implemented through legislation or regulation could decrease
utilization of and reimbursement for any approved products, which in turn would affect the price we can
receive for those products. While Medicare regulations apply only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their
own reimbursement rates. Therefore, any reduction in reimbursement that results from federal legislation or
regulation may result in a similar reduction in payments from private payors.
In March 2010, President Obama signed into law the Affordable Care Act. This law substantially
changes the way healthcare is financed by both governmental and private insurers, and significantly
impacts the pharmaceutical industry. The Affordable Care Act is intended to broaden access to health
insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare
fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose
new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health
policy reforms. Among other things, the Affordable Care Act expanded manufacturers’ rebate liability
under the Medicaid Drug Rebate Program by increasing the minimum Medicaid rebate for both branded
and generic drugs, expanded the 340B program, and revised the definition of average manufacturer price
(“AMP”), which could increase the amount of Medicaid drug rebates manufacturers are required to pay to
states. The legislation also extended Medicaid drug rebates, previously due only on fee-for-service
Medicaid utilization, to include the utilization of Medicaid managed care organizations as well and created
an alternative rebate formula for certain new formulations of certain existing products that is intended to
increase the amount of rebates due on those drugs. In 2012, CMS issued proposed regulations to
implement the changes to the Medicaid program under the Affordable Care Act, but CMS has not yet issued
final regulations. CMS is currently expected to release the final regulations in 2015. Although it is too
early to determine the full effect of the Affordable Care Act, this law appears likely to continue the
downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also
increase our regulatory burdens and operating costs.
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The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to
pay a branded prescription drug fee to the federal government. Each individual pharmaceutical
manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015, based on the
dollar value of its branded prescription drug sales to certain federal programs identified in the law.
Furthermore, the new law requires manufacturers to provide a 50% discount off the negotiated price of
prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.”
The Affordable Care Act also expanded the Public Health Service’s 340B drug pricing discount
program. As noted above, the 340B drug pricing program requires participating manufacturers to agree to
charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s
covered outpatient drugs. The Affordable Care Act expanded the 340B program to include additional
types of covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral
centers and sole community hospitals, each as defined by the Affordable Care Act. The Affordable Care
Act exempts “orphan drugs”—those designated under section 526 of the Food, Drug, and Cosmetic
Act—from the ceiling price requirements for these newly-eligible entities. The Health Resources and
Services Administration, or HRSA, which administers the 340B program, issued an interpretive rule to
implement the orphan drug exception which interprets the orphan drug exception narrowly. It exempts
orphan drugs from the ceiling price requirements for the newly eligible entities only when the orphan drug
is used for its orphan indication. The newly eligible entities are entitled to purchase orphan drugs at the
ceiling price when the orphan drug is not used for its orphan indication. A manufacturer trade group has
filed a lawsuit challenging the interpretive rule as inconsistent with the statutory language. That challenge
remains ongoing. The uncertainty regarding how the statutory orphan drug exception will be applied will
increase the complexity of compliance, will make compliance more time-consuming, and could negatively
impact our results of operations if we are able to commercialize our products. If HRSA's narrow
interpretation of the scope of the orphan drug exception prevails, it could potentially negatively impact the
price we are paid by certain entities for orphan drugs that we successfully commercialize and increase the
complexity of compliance with the 340B program. In addition, because the 340B ceiling price is
determined based on AMP and Medicaid drug rebate data, the revisions to the Medicaid rebate formula and
AMP definition described above could cause the required 340B discounts to increase.
In addition, other legislative changes have been proposed and adopted since the Affordable Care
Act was enacted. For example, recent legislative enactments have resulted in Medicare payments being
subject to a two percent reduction, referred to as sequestration, until 2024. Continuation of sequestration
or enactment of other reductions in Medicare reimbursement for drugs could affect our ability to achieve
a profit on any candidate products that are approved for marketing.
We expect that the Affordable Care Act, as well as other healthcare reform measures that have and
may be adopted in the future, may result in more rigorous coverage criteria and in additional downward
pressure on the price that we receive for any approved product and could seriously harm our future
revenues. Any reduction in reimbursement from Medicare, Medicaid, or other government programs may
result in a similar reduction in payments from private payors. The implementation of cost containment
measures or other healthcare reforms may prevent us from being able to generate revenue, attain
profitability or commercialize our products.
Foreign Regulation
In addition to regulations in the United States, we will be subject to a number of significant
regulations in other jurisdictions regarding clinical trials, approval, manufacturing, marketing and
promotion and safety reporting. These requirements and restrictions vary from country to country, but
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in many instances are similar to the United States requirements, and failure to comply with them could
have the same negative effects as noncompliance in the United States.
Sales and Marketing
We do not currently have the sales and marketing infrastructure in place that would be necessary
to sell and market products. As our drug candidates progress in clinical trials, we may build the
commercial infrastructure that would be needed to successfully market and sell any successful drug
candidate. For drug candidates that may require larger clinical trials or sales efforts, we intend to establish
strategic alliances and partnerships with large pharmaceutical companies during the development process.
Research Technologies
Our research technologies are focused on our proprietary multi-target aimed ligands platform and
nano-based drug delivery, which are described further below. For a discussion of collaboration
arrangements pursuant to which we obtain research and development services from universities, research
institutions and other organizations, see “Collaboration and License Agreements” in this Item 1.
The Inhibitors of Multi-Expression Signals (TIMES)
TIMES is our platform for discovering ligands, which are molecules coordinated to a central
atom or molecule in a larger chemical complex, that target multi-expression signals. Because cancer is a
complex disease caused by multiple factors as well as genetic modifications, cancer treatment involves a
combination of drugs with different mechanisms of action, which may result in compounding the degree
and extent of toxicities to which a patient is exposed. TIMES permits us to control multiple targets
important for cancer proliferation with a single agent. In doing so, we utilize a proprietary,
genomics-based integrated, gene expression system to identify potentially important targets that control
multiple genes or signaling events in cancer cells.
3-D Gateway of Ligand Discovery (3-D GOLD)
3-D GOLD is a drug discovery platform that integrates three-dimensional (“3D”) molecular
modeling, databases of chemicals and proteins and ligand filtering and generation. The chemical database
contains 3D structures of approximately seven million compounds. Our proprietary docking tools
quantitative structure-activity relationship tool for innovative discovery are parts of the platform. Ligand
filtering highlights similarities in pharmacophore and 3D fingerprinting, while ligand generation helps
optimize the identification of such similarities.
Nano-medicine Drug Delivery
We have developed unique proprietary drug delivery nano-systems that we believe may increase
the availability of a drug at the disease site, minimize adverse reactions, and provide longer duration of
action. We are currently testing multiple nanoliposomal- and nanopolymer-based anticancer drugs.
RX-21101 is an investigational nanoliposomal-based drug, and Archexin-Nano is an investigational
nanopolymer-based anticancer drug.
Manufacturing and Distribution
We have no experience in drug formulation or manufacturing, and we lack the resources and
expertise to formulate or manufacture our own drug candidates internally. Therefore, we rely on
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third-party expertise to support us in this area. We have entered into contracts with third-party
manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical
trials. If any of our drug candidates receive FDA approval, we expect to rely on third-party contractors to
manufacture our drugs. We have no current plans to build internal manufacturing capacity for any
product, and we have no long-term supply arrangements.
Intellectual Property
We generally seek proprietary patent and intellectual property (“IP”) protection for our drug
candidates, processes, and other know-how. In addition to patent protection, we rely upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to develop and safeguard and
maintain our IP.
We hold U.S. and foreign patents for our drug candidates that expire from 2020 to 2030. We hold
U.S. patents for Archexin, RX-3117 and Supinoxin. We also hold multiple foreign patents for Archexin,
RX-3117, and Supinoxin. Additional U.S. and foreign patent applications related to Archexin, RX-3117,
Supinoxin, and RX-21101 are pending.
In 2014, we were granted a U.S. patent for a novel targeted cancer drug delivery platform, and
multiple foreign patents for novel anti-tumor isoquinolinamine compounds.
In February 2005, we in-licensed the intellectual property rights to Zoraxel and Serdaxin from
Revaax Pharmaceuticals, LLC (“Revaax”). Under the agreement with Revaax, we obtained exclusive
rights to four U.S. and several foreign patents related to Serdaxin and to two U.S. patents related to
Zoraxel. We also have rights to additional pending U.S. and foreign patent applications related to
Zoraxel and Serdaxin. See “Collaboration and License Arrangements” below for additional information.
Collaboration and License Arrangements
We have numerous collaborative research and development relationships with universities, research
institutions pharmaceutical companies and other organizations.
The University of Maryland Baltimore (“UMB”)
On February 1, 2007, we entered into a Maryland Industrial Partnership Agreement with UMB to
collaborate with and sponsor the joint development of polymer-drug conjugates for the targeted delivery
of cancer drugs. Intellectual property made or developed under this agreement is jointly owned by us and
UMB.
In July 2013, we entered into an exclusive license agreement with UMB for a novel drug delivery
platform, Nano-Polymer-Drug Conjugate Systems. This platform combines existing chemotherapeutic
agents with a proprietary polymer carrier that contains a signaling moiety to direct the agents into a
tumor. RX-21101 is our first drug candidate utilizing this platform and is a conjugated form of
docetaxel, a common chemotherapy agent. This agreement requires us to make payments to UMB if
RX-21101 or any other products developed from the licensed delivery platform achieve development
milestones.
Ohio State University
In October 2013, we entered into an exclusive license agreement with the Ohio State Innovation
Foundation, an affiliate of the Ohio State University, for a novel oligonucleotide drug delivery platform,
Lipid-Coated Albumin Nanoparticle (“LCAN”). The LCAN platform incorporates both cationic lipid
and cationized albumin that can form an electrostatic complex with oligonucleotides and be
19
co-encapsulated by lipids. Archexin-Nano is our first drug candidate to be developed with this platform.
The agreement requires us to make payments to the Ohio State if any products from the licensed delivery
platform achieve development milestones.
Korea Research Institute of Chemical Technology (“KRICT”)
On June 22, 2009, we entered into a license agreement with KRICT to acquire all intellectual
property related to Quinoxaline-Piperazine derivatives, which includes Supinoxin. We paid an initial
license fee of $100,000 in July 2009, and will pay $1,000,000 to KRICT upon marketing approval from
the FDA for the first commercial product stemming from the agreement.
Rexgene Biotech Co., Ltd. (“Rexgene”)
On February 6, 2003, we entered into a research collaboration agreement with Rexgene, which is
engaged in the development of pharmaceutical products in Asia. Rexgene has agreed to assist us with the
research, development and clinical trials necessary for registration of Archexin in Asia. Under the
agreement, Rexgene has exclusive rights to license, sublicense, make, have made, use, sell and import
Archexin in Asia. In accordance with the agreement, Rexgene paid the us a one-time fee of $1,500,000 in
2003. Rexgene also agreed to pay us a royalty fee of 3% of net sales of licensed products related to
Archexin in all countries in Asia by Rexgene or any sublicensee of Rexgene.
The agreement expires upon the last to expire of all U.S. and foreign patents presently or in the future
issued that cover Archexin, or, if no licensed patent is issued, within 20 years from the date of execution
of the agreement. A breach of the agreement by either party give the non-breaching party the right to
terminate the agreement upon 90 days written notice of termination specifying the obligations breached,
provided that within said 90 days the breaching party does not remedy the breach.
Revaax Pharmaceuticals LLC (“Revaax”)
On February 10, 2005, we in-licensed on an exclusive basis, with the right to sublicense, all of the IP
of Revaax with respect to certain chemical structures that have demonstrated in pre-clinical research the
potential to treat certain behavioral disorders, such as anxiety, depression and cognitive disorders (the
“Licensed Products”), which includes four patents and multiple patent applications. This intellectual
property was used to develop Serdaxin and Zoraxel. This agreement expires upon the expiration of the
royalty term for all Licensed Products in all countries, which is no earlier than August 2020 and could
extend to August 2024.
Under the agreement, we paid Revaax an initial license fee over a period of two years beginning in
2005. We also agreed to make payments to Revaax upon the achievement of certain development
milestones, such as dosing the first patient in a Phase III clinical trial or other controlled study in humans
of the efficacy and safety for a Licensed Product and obtaining approval by any federal, state or local
regulatory, department, bureau or other governmental entity necessary prior to the commercial sale for a
Licensed Product. We are not obligated to make any payments for development milestone events for
which we receive non-creditable upfront fees or milestone payments received from any sublicense in
connection with the development and commercialization of a Licensed Product by such sublicense, less
any license fees, milestone payments, or royalties payable by us to a third party under any technology
acquisition agreement in connection with the development or commercialization of a Licensed Product,
but specifically excluding any royalties revenues derived from any sublicense agreements.
In addition to milestone payments, we agreed to pay Revaax royalty payments on all sales of a
Licensed Product to third parties. Such royalty payments are equal to a low single digit percentage of the
aggregate net sales of the Licensed Product, with the percentage increasing in relation to the aggregate net
sales. Royalty payments for a Licensed Product expire upon the later of (a) the expiration of any claim of
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an issued and unexpired patent of the Licensed Product that has not been held unenforceable or invalid
and that has not been disclaimed or admitted to be invalid or unenforceable through reissue or otherwise
and (b) 10 years after the first commercial sale of the Licensed Product. Royalty payments are reduced
upon expiration of any patent claims for the Licensed Product within a particular country.
Total Research and Development Costs
We have incurred research and development costs of $7,015,901 and $3,253,139 for the years
ended December 31, 2014 and 2013 respectively. Research and development costs primarily consist of
clinical trials and pre-clinical development costs, as well as payroll costs for research and development
personnel.
Employees
We currently have 22 full-time employees, all of whom are based either at our Rockville,
Maryland office or our Germantown, Maryland lab facility. Our employees are not covered by any
collective bargaining agreement and we have never experienced a work stoppage. We believe our
relationships with our employees are satisfactory.
Available Information
Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are required to
file annual, quarterly and current reports, proxy statements and other information with the SEC. Any
document we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about
the public reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC.
We make available, free of charge, on our website at www.rexahn.com our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and all amendments thereto, as
soon as reasonably practicable after they are filed with or furnished to the SEC. Investors are encouraged to
access these reports and the other information about our business on our website. Information found on our
website is not part of this Annual Report on Form 10-K. We will also provide copies of this Annual Report
on Form 10-K, free of charge, upon written request to the Investor Relations Department at our main
address, 15245 Shady Grove Road, Suite 455, Rockville MD, 20850.
Also posted on our website, and available in print upon written request of any shareholder to our
Investor Relations Department, are the charters of the standing committees of our Board.
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Item 1A. Risk Factors.
You should carefully consider the risks described below together with the other information included in
this Form 10-K. Our business, financial condition or results of operations could be adversely affected by
any of these risks. If any of these risks occur, the value of our common stock could decline.
Risks Related to Our Financial Position and Capital Needs
We currently have no product revenues, have incurred negative cash flows from operations since
inception and will need to raise additional capital to operate our business.
To date, we have generated no product revenues and have incurred negative cash flow from
operations. Until we receive approval from the FDA and other regulatory authorities for our drug
candidates, we cannot sell our drugs and will not have product revenues. We expect to continue to incur
significant development and other expenses related to our ongoing operations. Therefore, for the
foreseeable future, we will have to fund all of our operations and capital expenditures from the net
proceeds of equity or debt offerings, cash on hand, licensing fees and grants, if any. If we are not able to
raise sufficient funds, we will have to reduce our research and development activities. We will first reduce
research and development activities associated with our pre-clinical compounds. To the extent necessary,
we will then reduce our research and development activities related to some or all of our clinical stage
product candidates.
Unforeseen events, difficulties, complications and delays may occur that could cause us to utilize
our existing capital at a faster rate than projected, including the progress of our research and development
efforts, the cost and timing of regulatory approvals and the costs of protecting our intellectual property
rights. We may seek additional financing to implement and fund other drug candidate development,
clinical trial and research and development efforts, including clinical trials for other new drug candidates,
as well as other research and development projects.
We will need additional financing to continue to develop our drug candidates, which may not be
available on favorable terms, if at all. If we are unable to secure additional financing in the future on
acceptable terms, or at all, we may be unable to complete our planned pre-clinical and clinical trials or
obtain approval of our drug candidates from the FDA and other regulatory authorities. In addition, we
may be forced to reduce or discontinue product development or product licensing, reduce or forego sales
and marketing efforts and forego attractive business opportunities in order to improve our liquidity to
enable us to continue operations. Any additional sources of financing will likely involve the sale of our
equity securities or securities convertible into our equity securities, which may have a dilutive effect on
our stockholders.
We are not currently profitable and may never become profitable.
To date, we have generated no product revenues and have incurred negative cash flow from
operations. Our accumulated deficit as of December 31, 2014 and 2013 was $91,332,308 and
$72,810,707, respectively. For the years ended December 31, 2014, and 2013, we had net losses of
$18,521,601 and $9,499,424, respectively. Even if we succeed in developing and commercializing one or
more of our drug candidates, we expect to incur substantial losses for the foreseeable future and may
never become profitable. We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the foreseeable future, based
on the following considerations:
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(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
continued pre-clinical development and clinical trials for our current and new drug candidates;
finding suitable partners to help us research, develop and commercialize new drug candidates;
efforts to seek regulatory approvals for our drug candidates;
implementing additional internal systems and infrastructure;
in-licensing additional technologies to develop; and
hiring additional personnel or entering into relationships with third parties to perform functions
that we are unable to perform on our own.
We also expect to continue to experience negative cash flow for the foreseeable future as we fund
our operations and capital expenditures. Until we have the capacity to generate revenues, we are relying
upon outside funding resources to fund our cash flow requirements. If these resources are depleted or
unavailable, we may be unable to continue to expand our operations or otherwise capitalize on our
business opportunities, and our business, financial condition and results of operations would be materially
adversely affected.
We have a limited operating history, and we have not demonstrated an ability to commercialize drug
candidates.
We are a clinical-stage company with a limited number of drug candidates. We currently do not
have any products that have gained regulatory approval, and we have not demonstrated an ability to
perform the functions necessary for the successful commercialization of any of our drug candidates. The
successful commercialization of our drug candidates will require us to first perform a variety of functions,
including:
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conducting pre-clinical and clinical trials;
participating in regulatory approval processes;
formulating and manufacturing products; and
conducting sales and marketing activities.
To date, our operations have been limited to organizing and staffing the Company, acquiring,
developing and securing our proprietary technology, and undertaking drug candidate research and
development, including pre-clinical trials and clinical trials of our principal drug candidates. These
operations provide a limited basis for assessing our ability to commercialize drug candidates.
Several of our drug candidates are in clinical trials, which are very expensive, time-consuming and
difficult to design and implement.
Our drug candidates are in various stages of development and require extensive clinical testing.
Such testing is expensive and time-consuming and requires specialized knowledge and expertise.
Archexin entered a Phase IIa clinical trial in January 2014, RX-3117 entered a Phase Ib clinical trial in
January 2014, and Supinoxin entered a Phase I clinical trial in August 2013.
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Human clinical trials are very expensive and difficult to design and implement, in part because
they are subject to rigorous regulatory requirements. The clinical trial process is also time-consuming, and
the outcome is not certain; the results of pre-clinical studies and early clinical trials may not be predictive
of the results of later-stage clinical trials. We estimate that clinical trials of our current drug candidates
will take multiple years to complete. Furthermore, failure can occur at any stage of a clinical trial, and we
could encounter problems that cause us to abandon or repeat clinical trials. The commencement and
completion of clinical trials may be delayed or precluded by a number of factors, including:
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delay or failure in reaching agreement with the FDA or a foreign regulatory authority on the
design of a given trial, or in obtaining authorization to commence a trial;
delay or failure in reaching agreement on acceptable terms with prospective contract research
organizations (“CROs”) and clinical trial sites;
delay or failure in obtaining approval of an IRB to conduct a clinical trial at a given site;
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the ineligibility of a site to participate;
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delay or failure in recruiting and enrolling study subjects;
delay or failure in having subjects complete a clinical trial or return for post-treatment follow up;
clinical sites or investigators deviating from trial protocol, failing to conduct the trial in
accordance with applicable regulatory requirements, or dropping out of a trial;
inability to identify and maintain a sufficient number of trial sites;
failure of third-party clinical trial managers to meet their contractual obligations or deadlines;
the need to modify a study protocol;
unforeseen safety issues;
emergence of dosing issues;
lack of effectiveness during clinical trials;
change in the standard of care of the indication being studied;
reliance on third-party suppliers for the clinical trial supply of drug candidates;
inability to monitor patients adequately during or after treatment;
lack of sufficient funding to finance the clinical trials; and
changes in governmental regulations or administrative action.
We, the FDA or an IRB may suspend a clinical trial at any time if it appears that we are exposing
participants to unacceptable health risks or if the FDA finds deficiencies in our IND applications or the
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conduct of these trials. Additionally, we may have difficulty enrolling patients in our clinical trials. If
we experience such difficulties, we may not be able to complete a clinical trial or we may experience
significant delays in completing a clinical trial.
If the results of our clinical trials fail to support the claims of any of our drug candidates, the
completion of development of that candidate may be significantly delayed, or we may be forced to
abandon development altogether, which will significantly impair our ability to generate product
revenues.
Even if our clinical trials are completed as planned, we cannot be certain that clinical results will
support our drug candidate claims. Success in pre-clinical testing and early clinical trials does not ensure
that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will
replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to
demonstrate that one or more of our drug candidates is safe and effective for indicated uses. As a result,
we may have to conduct additional clinical trials or may decide to abandon a drug candidate, in which
case we may never recognize any revenue related to such candidate. Standard of care treatments may
change, which may require additional clinical trials. Repeating clinical trials or conducting additional
clinical trials will delay the filing of an NDA and, ultimately, delay our ability to commercialize our drug
candidates and generate product revenues.
We may not obtain the necessary U.S. or worldwide regulatory approvals to commercialize our drug
candidates, and we cannot guarantee how long it will take the FDA or other comparable regulatory
agencies to review applications for our drug candidates.
We will need FDA approval to commercialize our drug candidates in the United States and
approvals from the comparable regulatory authorities to commercialize our drug candidates in foreign
jurisdictions.
The time it takes to obtain approval, either in the United States or foreign jurisdictions, is
unpredictable, but typically takes many years, depending upon a variety of factors, including the type,
complexity and novelty of the drug candidate. Obtaining approval requires substantial resources and is
subject to regulatory authorities’ substantial discretion. In addition, approval policies, regulations or the
type and amount of clinical data necessary to gain approval may change during the course of a product
candidate’s development and may vary among jurisdictions. We cannot guarantee that any of our drug
candidates will ultimately be approved by the FDA or any other regulatory authority, or the length of time
obtaining approval will take. One of our drug candidates, Archexin is an ASO compound. To date, the
FDA has approved very few ASO compounds. In addition, Archexin, and Archexin-Nano are in the drug
class known as Akt-1 inhibitors that to date have not been approved by the FDA, nor have we submitted
an NDA. After clinical trials are completed, the FDA has substantial discretion in the drug approval
process and may require us to conduct additional pre-clinical and clinical testing or to perform
post-marketing studies.
Our product candidates could fail to receive regulatory approval from the FDA or a comparable
foreign authority for a variety of reasons, including:
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disagreement with the design or implementation of our clinical trials;
failure to demonstrate to the authority’s satisfaction that the product candidate is safe and
effective for the proposed indication;
failure of clinical trials to meet the level of statistical significance required for approval;
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failure to demonstrate that the product’s benefits outweigh its risks;
disagreement with our interpretation of pre-clinical or clinical data; and
inadequacies in the manufacturing facilities or processes of third-party manufacturers.
The FDA or a comparable foreign authority may require us to conduct additional pre-clinical and
clinical testing, which may delay or prevent approval and our commercialization plans or cause us to
abandon the development program. Further, any approval we receive may be for fewer or more limited
indications than we request, may not include labeling claims necessary for successful commercialization
of the product candidate or may be contingent upon our conducting costly post-marketing clinical trials,
Any of these scenarios could materially harm the commercial prospects of a product candidate.
Even if our product candidates obtain approval, they may face future development and regulatory
difficulties that can negatively affect commercial prospects.
Even if we obtain approval for a product candidate, it would be subject to ongoing regulatory
requirements and restrictions of the FDA and comparable regulatory authorities regarding manufacturing,
quality control, further development, labeling, packaging, storage, distribution safety surveillance, import,
export, advertising, promotion, recordkeeping and reporting. Failure by us or any of the third parties on
which we rely to meet those requirements can lead to enforcement action that could significantly impair
our ability to successfully commercialize a given product. If the FDA or a comparable regulatory
authority becomes aware of new safety information, it can impose additional restrictions on how the
product is marketed, if at all.
There is no assurance that any of our products that has received or will receive orphan drug
designation will subsequently obtain orphan drug exclusivity, or that any such exclusivity will provide
the desired benefit.
Although we have obtained orphan drug designation for several uses of Archexin and one use of
RX-3117 and may obtain additional orphan drug designation for these or other product candidates, we are
not assured of being awarded orphan drug exclusivity or the enjoying the benefits of such exclusivity,
even if any of these products is approved for its orphan-designated use. If another company also holding
orphan drug designation for a product containing the same active moiety intended for the same rare
disease or condition receives approval before our orphan-designated product, approval of our product
could be precluded for seven years, because of that product’s orphan drug exclusivity, unless we could
demonstrate our product to be clinically superior to the earlier-approved product. Similarly, even if our
orphan designated drug were approved first and awarded seven-year orphan drug exclusivity, it would not
block approval of the other product, if that product were shown to be clinically superior, or if we fail to
assure a sufficient quantity of our orphan drug. Additionally, because orphan drug exclusivity is
product- and indication-specific, it does not prevent approval of another drug for the same orphan
indication or the same drug for a different use.
If physicians and patients do not accept and use our drugs, our ability to generate revenue from sales
of our products will be materially impaired.
Even if the FDA approves our drug candidates, physicians and patients may not accept and use
them. Future acceptance and use of our products will depend upon a number of factors including:
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awareness of a drug’s availability and benefits;
perceptions by members of the health care community, including physicians, about the safety and
effectiveness of our drugs;
pharmacological benefit and cost-effectiveness of our products relative to competing products;
availability of reimbursement for our products from government or other third-party payors;
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any;
and
the price at which we sell our products.
Because we expect sales of our current drug candidates, if approved, to generate substantially all
of our product 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.
Even if we are able to commercialize any of our product candidates, these products may become subject
to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives,
which could harm our business.
The regulations that govern marketing approvals, pricing and reimbursement for new drug products
vary widely from country to country. Current and future legislation may significantly change the approval
requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some
countries require approval of the sale price of a drug before it can be marketed. In many countries, the
pricing review period begins after marketing or product licensing approval is granted. In some foreign
markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after
initial approval is granted. As a result, we might obtain marketing approval for a product in a particular
country, but then be subject to price regulations that delay our commercial launch of the product, possibly
for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale
of the product in that particular country. Adverse pricing limitations may hinder our ability to recoup our
investment in one or more product candidates even if our product candidates obtain marketing approval.
Our ability to commercialize any products successfully also will depend in part on the extent to
which coverage and adequate reimbursement for these products and related treatments will be available in a
timely manner from government third-party payors, including governmental healthcare programs such as
Medicare and Medicaid, commercial health insurers and managed care organizations. Government
authorities and other third-party payors, such as private health insurers and health maintenance
organizations, determine which medications they will cover and establish reimbursement levels.
Third-party payors may limit coverage to specific products on an approved list, or formulary, which
might not include all of the FDA approved products for a particular indication. The process for
determining whether a payor will provide coverage for a product may be separate from the process for
setting the price or reimbursement rate that the payor will pay for the product once coverage is approved.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government
healthcare programs and other third-party payors are increasingly challenging the prices charged for
medical products and services and examining the medical necessity and cost-effectiveness of medical
products and services, in addition to their safety and efficacy, and have attempted to control costs by
limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party
payors are requiring that drug companies provide them with predetermined discounts from list prices and
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are challenging the prices charged for medical products. We cannot be sure that coverage and
reimbursement will be available promptly or at all for any product that we commercialize and, if
reimbursement is available, what the level of reimbursement will be. Moreover, eligibility for coverage and
reimbursement does not imply that any drug will be paid for in all cases. Limited coverage may impact the
demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and
reimbursement are not available or reimbursement is available only to limited levels, we may not
successfully commercialize any product candidate for which we obtain marketing approval.
Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as
average sales price (“ASP”), average manufacturer price, and actual acquisition cost. The existing data for
reimbursement based on these metrics is relatively limited, although certain states have begun to survey
acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare
and Medicaid Services (“CMS”), the federal agency that administers the Medicare and Medicaid programs,
has made draft National Average Drug Acquisition Cost (“NADAC”), and draft National Average Retail
Price (“NARP”), data publicly available on at least a monthly basis. In July 2013, CMS suspended the
publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to
publishing final rather than draft NADAC data and has since made updated NADAC data publicly available
on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement
mechanics on the willingness of payors to cover any products that we are able to successfully
commercialize.
If we successfully commercialize any of our products, we may participate in the Medicaid Drug
Rebate program. Participation is required for federal funds to be available for our products under
Medicaid and Medicare Part B. Under the Medicaid Drug Rebate Program, we would be required to pay a
rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid
beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made
available to the states for our drugs under Medicaid and Part B of the Medicare program.
Federal law requires that any company that participates in the Medicaid Drug Rebate Program also
participate in the Public Health Service’s 340B drug pricing program in order for federal funds to be
available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B drug pricing
program requires participating manufacturers to agree to charge statutorily-defined covered entities no
more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These 340B covered
entities include a variety of community health clinics and other entities that receive health services grants
from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income
patients.
In addition, in order to be eligible to have its products paid for with federal funds under the
Medicaid and Medicare Part B programs and purchased by certain federal agencies and grantees, a
manufacturer also must participate in the Department of Veterans Affairs Federal Supply Schedule
(“FSS”), pricing program, established by Section 603 of the Veterans Health Care Act of 1992 (“VHCA”).
Under this program, the manufacturer is obligated to make its innovator and single source products
available for procurement on an FSS contract and charge a price to four federal agencies, Department of
Veterans Affairs, Department of Defense (“DoD”), Public Health Service, and Coast Guard, that is no
higher than the statutory Federal Ceiling Price. Moreover, pursuant to regulations issued by the DoD
TRICARE Management Activity (“TMA”), now the Defense Health Agency (“DHA”), to implement
Section 703 of the National Defense Authorization Act for Fiscal Year 2008, manufacturers are required to
provide rebates on utilization of their innovator and single source products that are dispensed to TRICARE
beneficiaries by TRICARE network retail pharmacies. The formula for determining the rebate is
established in the regulations and is based on the difference between the annual non-federal average
manufacturer price and the Federal Ceiling Price (these price points are required to be calculated by us
under the VHCA). The requirements under the 340B, FSS, and TRICARE programs could reduce the
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revenue we may generate from any products that are commercialized in the future and could adversely
affect our business and operating results.
There may be significant delays in obtaining coverage and reimbursement for newly approved
drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or
comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not
imply that a drug will be paid for in all cases or at a rate that covers our costs, including research,
development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable,
may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary
according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement
levels already set for lower cost drugs and may be incorporated into existing payments for other services.
Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from
countries where they may be sold at lower prices than in the United States. Limited coverage may impact
the demand for, or the price of, any product candidate for which we obtain marketing approval.
Third-party payors also may seek additional clinical evidence, including expensive pharmacoeconomic
studies beyond the data required to obtain marketing approval, demonstrating clinical benefits and value
in specific patient populations, before covering our products for those patients. If reimbursement is
available only for limited indications, we may not be able to successfully commercialize any product
candidate for which we obtain marketing approval. Our inability to promptly obtain coverage and
profitable reimbursement rates from both government-funded and private payors for any approved products
that we develop could have a material adverse effect on our operating results, our ability to raise capital
needed to commercialize products and our overall financial condition.
Changes in healthcare law and implementing regulations, including those based on recently enacted
and future legislation, as well as changes in healthcare policy, may increase the difficulty and cost for us
to commercialize our product candidates and affect the prices we may obtain.
The United States and many foreign jurisdictions have enacted or proposed legislative and
regulatory changes affecting the healthcare system that could prevent or delay marketing approval of our
product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any
product candidate for which we obtain marketing approval. The United States government, state
legislatures and foreign governments also have shown significant interest in implementing
cost-containment programs to limit the growth of government-paid healthcare costs, including price
controls, restrictions on reimbursement and requirements for substitution of generic products for branded
prescription drugs.
In recent years, Congress has considered reductions in Medicare reimbursement levels for drugs
administered by physicians. CMS also has authority to revise reimbursement rates and to implement
coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented
through legislation or regulation could decrease utilization of and reimbursement for any approved
products, which in turn would affect the price we can receive for those products. While Medicare
regulations apply only to drug benefits for Medicare beneficiaries, private payors often follow Medicare
coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction
in reimbursement that results from federal legislation or regulation may result in a similar reduction in
payments from private payors.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable
Care Act”). This law substantially changes the way healthcare is financed by both governmental and
private insurers, and significantly impacts the pharmaceutical industry. The Affordable Care Act is
intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending,
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enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare
and health insurance industries, impose new taxes and fees on pharmaceutical and medical device
manufacturers, and impose additional health policy reforms. Among other things, the Affordable Care Act
expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the
minimum Medicaid rebate for both branded and generic drugs, expanded the 340B program, and revised
the definition of average manufacturer price (“AMP”), which could increase the amount of Medicaid drug
rebates manufacturers are required to pay to states. The legislation also extended Medicaid drug rebates,
previously due only on fee-for-service Medicaid utilization, to include the utilization of Medicaid managed
care organizations as well and created an alternative rebate formula for certain new formulations of certain
existing products that is intended to increase the amount of rebates due on those drugs. In 2012, CMS
issued proposed regulations to implement the changes to the Medicaid program under the Affordable Care
Act, but CMS has not yet issued final regulations. CMS is currently expected to release the final
regulations in 2015. Although it is too early to determine the full effect of the Affordable Care Act, this
law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the
Medicare program, and may also increase our regulatory burdens and operating costs.
The Affordable Care Act requires pharmaceutical manufacturers of branded prescription drugs to
pay a branded prescription drug fee to the federal government. Each individual pharmaceutical
manufacturer pays a prorated share of the branded prescription drug fee of $3.0 billion in 2015, based on the
dollar value of its branded prescription drug sales to certain federal programs identified in the law.
Furthermore, the new law requires manufacturers to provide a 50% discount off the negotiated price of
prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.”
The Affordable Care Act also expanded the Public Health Service’s 340B drug pricing discount
program. The 340B drug pricing program requires participating manufacturers to agree to charge
statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered
outpatient drugs. The Affordable Care Act expanded the 340B program to include additional types of
covered entities: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and
sole community hospitals, each as defined by the Affordable Care Act. The Affordable Care Act exempts
“orphan drugs”—those designated under section 526 of the Food, Drug, and Cosmetic Act—from the
ceiling price requirements for these newly-eligible entities. The Health Resources and Services
Administration (“HRSA”), which administers the 340B program, issued an interpretive rule to implement
the orphan drug exception which interprets the orphan drug exception narrowly. It exempts orphan drugs
from the ceiling price requirements for the newly eligible entities only when the orphan drug is used for its
orphan indication. The newly eligible entities are entitled to purchase orphan drugs at the ceiling price when
the orphan drug is not used for its orphan indication. A manufacturer trade group has filed a lawsuit
challenging the interpretive rule as inconsistent with the statutory language. That challenge remains
ongoing. The uncertainty regarding how the statutory orphan drug exception will be applied will increase
the complexity of compliance, will make compliance more time-consuming, and could negatively impact
our results of operations if we are able to commercialize our products. If HRSA's narrow interpretation of
the scope of the orphan drug exception prevails, it could potentially negatively impact the price we are paid
by certain entities for orphan drugs that we successfully commercialize and increase the complexity of
compliance with the 340B program. In addition, because the 340B ceiling price is determined based on
AMP and Medicaid drug rebate data, the revisions to the Medicaid rebate formula and AMP definition
described above could cause the required 340B discounts to increase.
In addition, other legislative changes have been proposed and adopted since the Affordable Care
Act was enacted. For example, recent legislative enactments have resulted in Medicare payments being
subject to a two percent reduction, referred to as sequestration, until 2024. Continuation of sequestration or
enactment of other reductions in Medicare reimbursement for drugs could affect our ability to achieve a
profit on any candidate products that are approved for marketing.
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We expect that the Affordable Care Act, as well as other healthcare reform measures that have
and may be adopted in the future, may result in more rigorous coverage criteria and in additional
downward pressure on the price that we receive for any approved product and could seriously harm our
future revenues. Any reduction in reimbursement from Medicare, Medicaid, or other government
programs may result in a similar reduction in payments from private payors. The implementation of cost
containment measures or other healthcare reforms may prevent us from being able to generate revenue,
attain profitability or commercialize our products.
If we are able to successfully commercialize any of our products and if we participate in the Medicaid
drug rebate program or other governmental pricing programs, failure to comply with reporting and
payment obligations under these programs could result in additional reimbursement requirements,
penalties, sanctions and fines which could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
The Medicaid Drug Rebate Program and other governmental pricing programs require
manufacturers to report pricing data to the government. Pricing calculations vary among products and
programs and include average manufacturer price and best price for the Medicaid Drug Rebate Program,
average sales price for certain categories of drugs that are paid under Part B of the Medicare program, and
non-federal average manufacturer price for the FSS pricing program. If we successfully commercialize
any of our products and participate in such governmental pricing programs, we will be liable for errors
associated with our submission of pricing data. That liability could be significant. For example, if we
are found to have knowingly submitted false average manufacturer price, average sales price, best price,
or non-federal average manufacturer price information to the government, we may be liable for civil
monetary penalties in the amount of $100,000 per item of false information. If we are found to have
made a misrepresentation in the reporting of average sales price, the statute provides for civil monetary
penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was
applied. Our failure to submit monthly/quarterly average manufacturer price, average sales price, and
best price, and quarterly/annual non-federal average manufacturer price data on a timely basis could result
in a civil monetary penalty of $10,000 per day for each day the information is late beyond the due date.
Such failure also could be grounds for other sanctions, such as termination from the Medicaid Drug
Rebate Program.
Our relationships with customers and third-party payors will be subject to applicable anti-kickback,
fraud and abuse, transparency and other healthcare laws and regulations, which could expose us to
criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and
diminished profits and future earnings.
Healthcare providers, physicians and third-party payors play a primary role in the recommendation
and prescription of any product candidates for which we obtain marketing approval. Our future
arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse
and other healthcare laws and regulations that may constrain the business or financial arrangements and
relationships through which we market, sell and distribute our products for which we obtain marketing
approval. Restrictions under applicable federal and state healthcare laws and regulations, include the
following:
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the federal Anti-Kickback Statute prohibits persons from, among other things, knowingly
and willfully soliciting, offering, receiving or providing remuneration, directly or
indirectly, in cash or in kind, to induce or reward, or in return for, the referral of an
individual for the furnishing or arranging for the furnishing, or the purchase, lease or order,
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or arranging for or recommending purchase, lease or order, any good or service for which
payment may be made under a federal healthcare program such as Medicare and Medicaid;
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the federal civil False Claims Act imposes penalties, including through civil whistleblower
or qui tam actions, against individuals or entities for, among other things, knowingly
presenting, or causing to be presented, to the federal government, claims for payment that
are false or fraudulent or making a false statement material to an obligation to pay money
to the government or knowingly concealing or knowingly and improperly avoiding,
decreasing, or concealing an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
imposes criminal liability for knowingly and willfully executing a scheme to defraud any
healthcare benefit program, knowingly and willfully embezzling or stealing from a health
care benefit program, willfully obstructing a criminal investigation of a health care offense,
or knowingly and willfully making false statements relating to healthcare matters;
(cid:31) HIPAA, as amended by the Health Information Technology for Economic and Clinical
Health Act of 2009 and its implementing regulations, also imposes obligations on certain
covered entity health care providers, health plans and health care clearinghouses as well as
their business associates that perform certain services involving the use or disclosure of
individually identifiable health information, including mandatory contractual terms, with
respect to safeguarding the privacy, security and transmission of individually identifiable
health information;
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the federal Open Payments program, created under Section 6002 of the Affordable Care
Act and its implementing regulations, requires manufacturers of drugs, devices, biologics
and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program (with certain exceptions) to report annually to the
CMS information related to “payments or other transfers of value” made to physicians
(defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and
teaching hospitals, and applicable manufacturers and applicable group purchasing
organizations to report annually CMS ownership and investment interests held by
physicians (as defined above) and their immediate family members; and
analogous state and foreign laws and regulations, such as state anti-kickback and false
claims laws, which may apply to sales or marketing arrangements and claims involving
healthcare items or services reimbursed by non-governmental third-party payors, including
private insurers; state and foreign laws that require pharmaceutical companies to comply
with the pharmaceutical industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government or otherwise restrict
payments that may be made to certain healthcare providers; state and foreign laws that
require drug manufacturers to report information related to payments and other transfers of
value to physicians and other healthcare providers or marketing expenditures; and state and
foreign laws that govern the privacy and security of health information in certain
circumstances, many of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable
healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case
law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are
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found to be in violation of any of these laws or any other governmental regulations that may apply to us, we
may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment,
exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the
curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or
entities with whom we expect to do business is found not to be in compliance with applicable laws, that
person or entity may be subject to criminal, civil or administrative sanctions, including exclusions from
government funded healthcare programs. For a fuller discussion of the applicable anti-kickback fraud and
abuse, transparency and other healthcare laws and regulations applicable to our business, see Item 1,
‘Description of Business – Government Regulation”
Developments by competitors may render our products or technologies obsolete or non-competitive.
We compete against fully integrated pharmaceutical companies and smaller companies that are
collaborating with larger pharmaceutical companies as well as academic institutions, government
agencies and other public and private research organizations. Many of these competitors, either alone or
together with their collaborative partners, operate larger research and development programs or have
substantially greater financial resources than we do, as well as more experience in:
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developing drugs;
undertaking pre-clinical testing and human clinical trials;
obtaining FDA and other regulatory approvals of drugs;
formulating and manufacturing drugs; and
launching, marketing and selling drugs.
Large pharmaceutical companies currently sell both generic and proprietary compounds for the
treatment of cancer. In addition, companies pursuing different but related fields represent substantial
competition. Many of these organizations have substantially greater capital resources, larger research and
development staff and facilities, longer drug development history in obtaining regulatory approvals and
greater manufacturing and marketing capabilities than we do. These organizations also compete with us to
attract qualified personnel, parties for acquisitions, joint ventures or other collaborations. Our competitors
may succeed in developing products that are more effective and/or safe than ours, which could render our
product candidates less competitive prior to recovery by us of expenses incurred with respect to their
development.
If we are unable to successfully manage our growth, our business may be harmed.
In addition to our own internally developed drug candidates, we are actively seeking
opportunities to in-license compounds in oncology and other therapeutic areas that are strategic additions
to our product pipeline. Such additional drug candidates could significantly increase our capital
requirements and place further strain on our resources, including on the time of our existing personnel,
which may delay or otherwise adversely affect the development of our existing drug candidates. As of
December 31, 2014, we had 20 full-time employees. We may need to hire more employees as our product
pipeline and operations expand, further increasing the size of our organization and related expenses. If we
are unable to manage our growth effectively, we may not efficiently use our resources, which may delay
the development of our drug candidates and negatively impact our business, results of operations and
financial condition.
33
We may not be able to attract and retain qualified personnel necessary for the development and
commercialization of our drug candidates. Our success may be negatively impacted if key personnel
leave.
Attracting and retaining qualified personnel is critical to our future success. We compete for
qualified individuals with numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals is intense, and we cannot assure you that we will be
successful in engaging personnel with the skills and experience to support our business and research and
development activities.
Our key personnel, especially Dr. Chang H. Ahn, our Chairman and Chief Scientist, Dr. Peter
Suzdak, our Chief Executive Officer, and Dr. Tae Heum Jeong, our Chief Financial Officer, provide
critical technical knowledge and expertise. The loss of Dr. Ahn, Dr. Suzdak, Dr. Jeong, or any of the
other members of our management team, could result in delays in product development and diversion of
management resources, which could adversely affect our operating results. We do not have “key person”
life insurance policies for any of our executive officers.
Risks Related to Reliance on Third Parties
Much of our drug development program depends upon third-party researchers, and the results of our
clinical trials and such research activities are, to a limited extent, beyond our control.
We have engaged third-party contract research organizations and other investigators and
collaborators, such as universities and medical institutions, to conduct our pre-clinical studies, toxicology
studies and clinical trials. Engaging third-party contract research organizations is typical practice in our
industry. However, relying on such organizations means that the clinical trials and other studies described
above are being conducted at external locations and that the completion of these trials and studies is not
within our direct control. Trials and studies may be delayed due to circumstances outside our control, and
such delays may result in additional expenses for us.
While we make every effort internally to oversee the work of third-party contractors, these
collaborators are not our employees, and we cannot control the effort, time or other resources that they
devote to our programs. Third parties may not assign priority to our programs or pursue them as diligently
as we would if we were undertaking them ourselves. If outside collaborators fail to devote sufficient time
and resources to our drug-development programs, or if their performance is substandard, the approval of
our FDA applications and introduction of new drugs to the market may be delayed. These collaborators
may also have relationships with other commercial entities, some of which may compete with us. If our
collaborators assist our competitors at our expense, our competitive position would be harmed.
We rely exclusively on third parties to formulate and manufacture our drug candidates, which exposes
us to a number of risks that may delay development, regulatory approval and commercialization of our
products or result in higher product costs.
We have no experience in drug formulation or manufacturing and we lack the resources and
expertise to formulate or manufacture our own drug candidates internally. Therefore, we rely on
third-party expertise to support us in this area. We have entered into contracts with third-party
manufacturers to manufacture, supply, store and distribute supplies of our drug candidates for our clinical
trials. If any of our drug candidates receives FDA approval, we expect to rely on third-party contractors to
manufacture our drugs. We have no current plans to build internal manufacturing capacity for any
product, and we have no long-term supply arrangements.
34
Our reliance on third-party manufacturers exposes us to the following potential risks:
(cid:31) We may be unable to contract with third-party manufacturers on acceptable terms, or at all,
because the number of potential manufacturers is limited and is subject to FDA approval. FDA
approval requires testing and compliance inspections. In addition, any new manufacturer would
have to be qualified and approved to produce our products after receipt of FDA approval, if any;
(cid:31) Our third-party manufacturers might be unable to formulate and manufacture our drugs in the
volume and of the quality required to meet our clinical and commercial needs, if any;
(cid:31) Our third-party manufacturers may not perform as agreed or may not remain in the contract
manufacturing business for the time required to supply our clinical trials through completion or to
successfully produce, store and distribute our commercial products, if approved;
(cid:31) Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, and
other government agencies to ensure compliance with cGMP and other government regulations
and corresponding foreign standards. We do not have control over third-party manufacturers’
compliance with these regulations and standards, but we may ultimately be responsible for any of
their failures;
(cid:31)
If any third-party 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
improvements; and
(cid:31) A third-party manufacturer may gain knowledge from working with us that could be used to
supply one of our competitors with a product that competes with ours.
Each of these risks could delay or have other adverse impacts on our clinical trials and the
approval and commercialization of our drug candidates, potentially resulting in higher costs, reduced
revenues or both.
We have no experience selling, marketing or distributing products and currently no internal capability
to do so.
We currently have no sales, marketing or distribution capabilities. While we intend to have a role
in the commercialization of our products, we do not anticipate having the resources in the foreseeable
future to develop global sales and marketing capabilities for all of our proposed products. Our future
success depends, in part, on our ability to enter into and maintain collaborative relationships with other
companies that have sales, marketing and distribution capabilities, a strategic interest in the products
under development and the ability to successfully market and sell our products. To the extent that we
decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and
marketing of our proposed products, significant capital expenditures, management resources and time will
be required to establish and develop an in-house marketing and sales force with the necessary expertise.
We cannot assure you that we will be able to establish or maintain relationships with third-party
collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third
parties for marketing and distribution, any revenues we receive will depend upon the efforts of such third
parties, as well as the terms of our agreements with such third parties, which cannot be predicted at this
early stage of our development. We cannot assure you that such efforts will be successful. In addition, we
cannot assure you that we will be able to market and sell our products in the United States or overseas.
35
We may incur substantial liabilities and may be required to limit commercialization of our products in
response to product liability lawsuits.
The testing and marketing of medical products entail an inherent risk of product liability. Product
liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare
providers or others using, administering or selling our products. Large judgments have been awarded in
class action lawsuits based on drugs that had unanticipated side effects. If we cannot successfully defend
ourselves against product liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products we develop, alone or with collaborators. Although we
currently carry clinical trial insurance and product liability insurance we, or any collaborators, may not be
able to maintain such insurance at a reasonable cost. Even if our agreements with any future collaborators
entitle us to indemnification against losses, such indemnification may not be available or adequate should
any claims arise.
Risks Related to Our Intellectual Property
If we breach the license agreements for our product candidates, we could lose the ability to continue
the development and commercialization of our product candidates.
We do not own the rights to the intellectual property underlying Serdaxin and Zoraxel. Our
rights to these product candidates have been granted by third parties pursuant to license agreements. If
we fail to meet our obligations under these license agreements or otherwise breach the agreements, we
may lose our exclusive rights, which may result in a complete termination of our product development
and any commercialization efforts for the applicable product candidate.
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of
others, the value of our intellectual property rights would diminish, and our business and competitive
position would suffer.
Our success, competitive position and future revenues will depend in part on our ability and the
abilities of our licensors and licensees to obtain and maintain patent protection for our products, methods,
processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on
our proprietary rights and to operate without infringing the proprietary rights of third parties. We have an
active patent protection program that includes filing patent applications on new compounds, formulations,
delivery systems and methods of making and using products and prosecuting these patent applications in
the United States and abroad. As patents issue, we also file continuation applications as appropriate.
Although we have taken steps to build a strong patent portfolio, we cannot predict:
(cid:31)
(cid:31)
the degree and range of protection any patents will afford us against competitors, including
whether third parties find ways to invalidate or otherwise circumvent our licensed patents;
if and when patents will issue in the United States or any other country;
(cid:31) whether or not others will obtain patents claiming aspects similar to those covered by our licensed
patents and patent applications;
(cid:31) whether we will need to initiate litigation or administrative proceedings to protect our intellectual
36
property rights, which may be costly whether we win or lose;
(cid:31) whether any of our patents will be challenged by our competitors alleging invalidity or
unenforceability and, if opposed or litigated, the outcome of any administrative or court action as
to patent validity, enforceability or scope;
(cid:31) whether a competitor will develop a similar compound that is outside the scope of protection
afforded by a patent or whether the patent scope is inherent in the claims modified due to
interpretation of claim scope by a court;
(cid:31) whether there were activities previously undertaken by a licensor that could limit the scope,
validity or enforceability of licensed patents and intellectual property; or
(cid:31) whether a competitor will assert infringement of its patents or intellectual property, whether or
not meritorious, and what the outcome of any related litigation or challenge may be.
Our success also depends upon the skills, knowledge and experience of our scientific and
technical personnel, our consultants and advisors as well as our licensors, sublicensees and contractors.
To help protect our proprietary know-how and our inventions for which patents may be unobtainable or
difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we
require all employees to enter into agreements that prohibit the disclosure of confidential information and,
where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and
inventions important to our business. These agreements may not provide adequate protection for our trade
secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or
the lawful development by others of such information. If any of our trade secrets, know-how or other
proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights
would be significantly impaired, and our business and competitive position would suffer.
Due to legal and factual uncertainties regarding the scope and protection afforded by patents and other
proprietary rights, we may not have meaningful protection from competition.
Our long-term success will substantially depend upon our ability to protect our proprietary
technologies from infringement, misappropriation, discovery and duplication and avoid infringing the
proprietary rights of others. Our patent rights, and the patent rights of biopharmaceutical companies in
general, are highly uncertain and include complex legal and factual issues. These uncertainties also mean
that any patents that we own or may obtain in the future could be subject to challenge, and even if not
challenged, may not provide us with meaningful protection from competition. Patents already issued to us
or our pending applications may become subject to dispute, and any dispute could be resolved against us.
In connection with the process of seeking patent protection for Supinoxin in Japan, we filed a
patent application including claims covering Supinoxin with the Japanese Patent Office (“JPO”) for
examination. The JPO initially agreed that the claims covering the compound for Supinoxin were
allowable, but as a result of a mistake in the patent application filing as prepared and submitted by our
Japanese patent attorneys and incomplete review by the JPO’s patent examiner, the JPO issued a decision
to grant a patent with claims that did not include Supinoxin. We appealed this decision with the JPO to
request withdrawal of the decision to grant so that the correct claims would be allowed, but the JPO
refused to withdraw its decision. As a result, and in accordance with Japanese law and procedure for
appealing patent application decisions, we have filed a lawsuit against the JPO in Tokyo District Court to
cause the JPO to reverse its decision to grant the errant patent and to allow a patent that includes claims
covering Supinoxin. The patent application at issue remains pending subject to the outcome of this
37
action. There can be no guarantee that we will be successful in winning the appeal to correct the error in
the patent registration that would exclude the compound for Supinoxin.
If we infringe the rights of third parties, we could be prevented from selling products and be forced to
defend against litigation and pay damages.
If our products, methods, processes and other technologies infringe the proprietary rights of other
parties, we could incur substantial costs and may have to:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
obtain licenses, which may not be available on commercially reasonable terms, if at all;
redesign our products or processes to avoid infringement;
stop using the subject matter claimed in patents held by others, which could cause us to lose the
use of one or more of our drug candidates;
pay damages; or
defend litigation or administrative proceedings that may be costly whether we win or lose and
that could result in a substantial diversion of our management resources.
Although we have not received any claims of infringement by any third parties to date, we expect
that as our drug candidates move further into clinical trials and commercialization and our public profile
is raised, we may be subject to such claims.
Risks Related to Ownership of Our Common Stock
An investment in shares of our common stock is very speculative and involves a very high degree of
risk.
To date, we have generated no revenues from product sales and only minimal revenues from a
research agreement with a minority shareholder and interest on bank account balances and short-term
investments. Our accumulated deficit as of December 31, 2014 and 2013 was $91,332,308 and
$72,810,707, respectively. For the years ended December 31, 2014, and 2013, we had net losses of
$18,521,601 and $9,499,424, respectively, partially as a result of expenses incurred through a
combination of research and development activities related to the various technologies under our control
and expenses supporting those activities. Until we receive approval from the FDA and other regulatory
authorities for our drug candidates, we cannot sell our drugs and will not have product revenues.
The market price of our common stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly in response to factors, some of
which are beyond our control, such as:
(cid:31)
(cid:31)
(cid:31)
the announcement of new products or product enhancements by us or our competitors;
changes in our relationships with our licensors or other strategic partners;
developments concerning intellectual property rights and regulatory approvals;
38
(cid:31)
(cid:31)
(cid:31)
(cid:31)
variations in our and our competitors’ results of operations;
changes in earnings estimates or recommendations by securities analysts;
changes in the structure of healthcare payment systems; and
developments and market conditions in the pharmaceutical and biotechnology industries.
Further, the stock market, in general, and the market for biotechnology companies, in particular,
have experienced extreme price and volume fluctuations. Continued market fluctuations could result in
extreme volatility in the price of our common stock, which may be unrelated or disproportionate to our
operating performance and which could cause a decline in the value of our common stock. You should
also be aware that price volatility might be worse if the trading volume of our common stock is low.
We will require additional capital funding the receipt of which may impair the value of our common
stock.
Our future capital requirements depend on many factors, including our research, development,
sales and marketing activities. We will need to raise additional capital through public or private equity or
debt offerings or through arrangements with strategic partners or other sources in order to continue to
develop our drug candidates. There can be no assurance that additional capital will be available when
needed or on terms satisfactory to us, if at all. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience substantial dilution and the new equity securities may have
greater rights, preferences or privileges than our existing common stock.
We have not paid dividends to our stockholders in the past, and we do not anticipate paying dividends
to our stockholders in the foreseeable future.
We have not declared or paid cash dividends on our common stock. We currently intend to retain
all future earnings, if any, to fund the continuing operation of our business, and therefore we do not
anticipate paying dividends on our common stock in the foreseeable future. As a result, you will not
realize any income from an investment in our common stock until and unless you sell your shares at a
profit.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile, and in the past companies that have
experienced volatility in the market price of their stock have been subject to securities class action
litigation. We may be the target of this type of litigation in the future. Securities litigation against us
could result in substantial costs and direct our management’s attention from other business concerns,
which could seriously harm our business.
Item 1B. Unresolved Staff Comments.
None
39
Item 2. Description of Property.
We lease approximately 7,103 square feet of office space in Rockville, Maryland. We also lease
approximately 1,100 square feet of laboratory space in Germantown, Maryland. The laboratory space is
equipped with the requisite laboratory services required to conduct our business and we believe that our
existing facilities are adequate to meet our needs for the foreseeable future. The office lease, which
originally commenced on June 29, 2009, expires in June 2019. The laboratory lease, which originally
commenced on July 1, 2009 has been renewed annually for successive one-year terms. The current term of
the laboratory lease expires in June 2015. We do not own any real property.
Item 3. Legal Proceedings.
None
Item 4. Mine Safety Disclosures
Not Applicable
(cid:31)
40
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock is traded on the NYSE MKT, formerly known as the American Stock
Exchange, under the ticker symbol “RNN”. As of March 16, 2015, there were approximately 66
stockholders of record of our common stock. The following table sets forth the high and low sales
prices of our common shares as reported on the NYSE MKT during the periods indicated.
Period
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
High
0.41
0.52
0.66
0.62
1.85
1.29
0.89
0.82
Low
0.30
0.28
0.36
0.37
0.50
0.78
0.65
0.65
We have not paid any cash dividends on common stock and do not expect to do so in the
foreseeable future. We anticipate that any earnings generated from future operations will be used to
finance our operations. No restrictions exist upon our ability to pay dividends.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
There were no repurchases of equity securities in 2014.
Item 6. Selected Financial Data.
A smaller reporting company is not required to provide information required by this Item 6.
41
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our results of operations, financial condition
and liquidity in conjunction with our financial statements and the related notes, which are included in this
Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set
forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and
strategies for our business, statements regarding the industry outlook, our expectations regarding the
future performance of our business, and the other non-historical statements contained herein are
forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
You should also review the “Risk Factors” section under this Item 1A of this Annual Report for a
discussion of important factors that could cause actual results to differ materially from the results
described herein or implied by such forward-looking statements.
OVERVIEW
We are a clinical stage biopharmaceutical company dedicated to the discovery, development and
commercialization of innovative treatments for cancer and other medical needs. Our pipeline features one
oncology candidate in Phase II clinical trials, two oncology candidates in Phase I clinical trials, and other
drug candidates in pre-clinical development. Our strategy is to continue building a significant product
pipeline of innovative medicines that we will commercialize alone or with pharmaceutical partners.
Since our inception, our operations have been limited to organizing and staffing the Company,
acquiring, developing, and securing our proprietary
technology, drug candidate research and
development, and undertaking, through third parties, pre-clinical and clinical trials of our principal drug
candidates. As a clinical stage company, we have no product sales to date, and we will not generate any
product sales until we receive approval from FDA or equivalent foreign regulatory bodies to begin selling
our pharmaceutical candidates. Our major sources of working capital have been proceeds from various
private financings, primarily private sales of common stock and debt securities and collaboration
agreements with our strategic investors.
Critical Accounting Policies
A “critical accounting policy” is one which is both important to the portrayal of our financial
condition and results and requires our management’s most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our accounting policies are in accordance with U.S. generally accepted accounting principles and their
basis of application is consistent with that of the previous year. Our significant estimates include
assumptions made in estimating the fair values of stock-based compensation, warrant liabilities,
marketable securities, and our assessment relating to costs incurred on research and development
contracts.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses
consist primarily of third party service costs under research and development agreements, salaries and
related personnel costs, as well as stock compensation related to these costs, costs to acquire
pharmaceutical products and product rights for development and amounts paid to contract research
organizations, hospitals and laboratories for the provision of services and materials for drug development
and clinical trials.
Costs incurred in obtaining the license rights to technology in the research and development stage
42
that have no alternative future uses and are for unapproved product compounds are expensed as incurred.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying financial statements for cash and cash
equivalents, prepaid expenses and other current assets and accounts payable and accrued expenses
approximate fair value because of the short-term maturity of these financial instruments. The fair value
methodology for our warrant liabilities and marketable securities is described in detail in Item 8 of this
Annual Report on Form 10-K.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification (“ASC”)
740, “Income Taxes.” Deferred tax assets and liabilities are recorded for differences between the
financial statement and tax basis of the assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates. ASC 740 requires that a valuation allowance
be established when it is more likely than not that all portions of a deferred tax asset will not be realized.
A review of all positive and negative evidence needs to be considered, including a company’s current and
past performance, the market environment in which the company operates, length of carryback and
carryforward periods and existing contracts that will result in future profits. Income tax expense is
recorded for the amount of income tax payable or refundable for the period, increased or decreased by the
change in deferred tax assets and liabilities during the period.
As a result of our significant cumulative losses, we determined that it was appropriate to establish
a valuation allowance for the full amount of our deferred tax assets.
The calculation of our tax liabilities involves the inherent uncertainty associated with the
application of complex tax laws. We are subject to examination by various taxing authorities. We
believe that as a result of our losses sustained to date, any examination would result in a reduction of our
net operating loss carryforward rather than a tax liability. As such, we have not provided for additional
taxes estimated under ASC 740.
Warrant Liabilities
In accordance with ASC 480, “Distinguishing Liabilities from Equity,” we record warrant
liabilities at fair value due to provisions in our warrant agreements, as discussed in Footnote 12 of Item 8
of this Annual Report on Form 10-K. We reevaluate the fair value of our warrants at each reporting
period, and changes in the fair value between reporting periods is recorded as “unrealized loss on fair
value of warrants” in the statement of operations.
Stock-Based Compensation
In accordance with ASC 718, “Stock Compensation” compensation costs related to share-based
payment transactions, including employee stock options, are to be recognized in the financial statements. In
addition, we adhere to the guidance set forth within SEC Staff Accounting Bulletin No. 107 (“SAB 107”),
which provides the Staff’s views regarding the interaction between ASC 718 and certain SEC rules and
regulations, and provides interpretations with respect to the valuation of share-based payments for public
companies.
Concentration of Credit Risk
ASC 825, “Financial Instruments,” requires disclosure of any significant off-balance sheet risk and
credit risk concentration. We do not have significant off-balance sheet risk or credit concentration. We
maintain cash and short-term investments with major financial institutions. From time to time we have
funds on deposit with commercial banks that exceed federally insured limits. The balances are insured by
the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2014, our uninsured cash
43
balance was $7,671,892. Management does not consider this to be a significant credit risk as the banks are
large, established financial institutions.
Recently Issued Accounting Standards
In June 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting
Standards Update (“ASU”) 2014-10, “Development Stage Entities: Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810,
Consolidation.” ASU 2014-10 eliminates several of the reporting requirements for development stage
entities, including the requirement to present inception to date information in the statements of income,
comprehensive income, cash flows, and shareholder equity, and to label the financial statements as those
of a development stage entity. ASU 2014-10 also clarifies that the guidance in Accounting Standards
Codification (“ASC”) Topic 275, “Risks and Uncertainties”, is applicable to entities that have not
commenced principal operations, and eliminates an exception to the sufficiency-of-equity risk criterion
for development stage entities, and will require all reporting entities that have an interest in development
stage enterprises to apply consistent consolidation guidance for variable interest entities. ASU 2014-10 is
effective for all annual reporting periods beginning after December 15, 2014, with early adoption
permitted. We adopted ASU 2014-10 during the year ended December 31, 2014, and removed the
incremental reporting requirements for development stage entities.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, a
comprehensive new revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under US Generally Accepted Accounting Principles. The standard’s core
principle is that a company should recognize revenue when it transfers goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for
those goods and services, and provides a revenue recognition framework in accordance with this
principle. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016
and interim periods therein. We are currently evaluating the impact that the adoption of this guidance
will have on our financial statements and future operating results.
In August 2014, the FASB issued ASU 2014-15: Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which requires management to perform interim and annual
assessments as to the entity’s ability to continue as a going concern and provides related disclosure
guidance. ASU 2014-15 will be effective for reporting periods beginning after December 15, 2016, with
early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have
on its financial statements.
Results of Operations
Comparison of the Years Ended December 31, 2014 and December 31, 2013
Total Revenues
We had no revenues for the years ended December 31, 2014 or 2013.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, recruitment expenses, professional fees and other
corporate expenses, including business development, investor relations, and general legal activities.
44
General and administrative expenses increased $1,527,629, or 32.3%, to $6,253,328 for the year ended
December 31, 2014 from $4,725,699 for the year ended December 31, 2013. The year over year
increase is primarily attributable to an increase in professional fees and personnel expenses.
Professional fees increased approximately $1,015,000 during the year ended December 31, 2014 due to
increased legal and accounting fees regarding corporate organizational matters, consulting, proxy
solicitation fees, and investor relations fees and compensatory stock. For the year ended December 31,
2014, general and administrative expenses also increased approximately $175,000 due to an increase in
personnel, and $150,000 due to an increase in insurance coverage.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel costs, fees
paid to consultants and outside service providers for laboratory development and other expenses relating
to the design, development, testing, and enhancement of our drug candidates. We expense our research
and development costs as they are incurred.
Research and development expenses increased $3,762,762, or 115.7%, to $7,015,901 for the year
ended December 31 2014, from $3,253,139 for the year ended December 31, 2013. The increase is
primarily attributable to the advancement of our drug candidates. During the year ended December 31,
2014, one of our drug candidates, Archexin, entered a Phase IIa clinical trial to study its safety and
efficacy in patients with metastatic renal cell carcinoma (“RCC”) and another drug candidate, RX-3117,
entered a Phase Ib clinical trial to study its safety and efficacy in patients with solid tumors. Our Phase I
trial for Supinoxin was initiated in August 2013 and continued through 2014. Research and development
personnel and overhead increased due to the hiring of additional personnel.
The table below summarizes the approximate amounts spent on each of our research and
development projects for the years ended December 31, 2014 and 2013:
Clinical Candidates:
Archexin
RX-3117
Supinoxin
Pre-clinical Compounds:
R&D Personnel and Overhead:
Total
Interest Income
For the years ended December 31,
2014
2013
$ 1,215,000 $ 144,300
402,000
784,800
1,897,000
1,351,000
268,000
222,000
2,284,901
1,700,039
$ 7,015,901 $ 3,253,139
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
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(cid:31)
(cid:31)
Interest income increased $84,627, or 171.7% to $133,907 for the year ended December 31, 2014
from $49,280 for the year ended December 31, 2013. The increase is primarily attributable to higher
cash and cash equivalents and marketable securities balances due to our registered direct offering in
January 2014 and the exercise of warrants in 2014.
45
Unrealized Loss on Fair Value of Warrants
Our warrants are recorded as liabilities at fair value, and the warrants are valued using a lattice
model. Changes in the fair value of warrants are recorded as an unrealized gain or loss in our statement
of operations. During the years ended December 31, 2014 and 2013, we recorded unrealized losses on
the fair value of our warrants of $5,180,107 and $1,365,654, respectively. Estimating fair values of
warrants requires the development of significant and subjective estimates that may, and are likely to,
change over the duration of the warrant with related changes to external market factors. The large
unrealized loss for the year ended December 31, 2014 primarily resulted from an increased stock price of
the underlying common stock at December 31, 2014 and on the dates in 2014 when warrant holders
exercised their warrants.
Financing Expense
We incurred $206,172 and $204,212 of financing expenses during the years ended December 31,
2014 and 2013, respectively, related to our registered direct offerings in January 2014, October, 2013 and
July 2013.
Net Loss
As a result of the above, net loss for the years ended December 31, 2014 and 2013 was
$18,521,601 and $9,499,424 or $0.11 and $0.07 per share, respectively.
Research and Development Projects
Research and development costs are expensed as incurred. These costs consist primarily of
salaries and related personnel costs, costs to acquire pharmaceutical products and product rights for
development and amounts paid to contract research organizations, hospitals and laboratories for the
provision of services and materials for drug development and clinical trials. Costs incurred in obtaining
the license rights to technology in the research and development stage that have no alternative future uses
are expensed as incurred. Our research and development programs are related to our oncology clinical
stage drug candidates, Archexin, RX-3117 and Supinoxin, and our pre-clinical stage drug candidates,
Archexin-Nano and RX-21101. As we expand our clinical studies, we will enter into additional
development agreements. Significant additional expenditures will be required if we complete our clinical
trials, start new trials, apply for regulatory approvals, continue development of our technologies, expand
our operations and bring our products to market. The eventual total cost of each clinical trial is dependent
on a number of uncertainties such as trial design, the length of the trial, the number of clinical sites and
the number of patients. The process of obtaining and maintaining regulatory approvals for new
therapeutic products is lengthy, expensive and uncertain. Because the successful development of our
most advanced drug candidates, Archexin, RX-3117 and Supinoxin, is uncertain, and because
Archexin-Nano, and RX-21101 are in early-stage development, we are unable to estimate the costs of
completing our research and development programs, the timing of bringing such programs to market and,
therefore, when material cash inflows could commence from the sale of these drug candidates, if any. If
these projects are not completed as planned, our results of operations and financial condition would be
negatively affected.
Archexin®
Archexin is a potential best-in-class, potent inhibitor of the protein kinase phosphorylated Akt-1,
which is over-expressed in cancer cells and which we believe plays a critical role in cancer cell
46
proliferation, survival, angiogenesis, metastasis and drug resistance. Archexin has received “orphan drug”
designation from the FDA, for RCC, glioblastoma, ovarian cancer, stomach cancer and pancreatic cancer.
That designation provides tax incentives for clinical research and a waiver of user fees. In addition, a drug
that is approved for its orphan-designated use receives seven years of exclusivity after approval, during
which the FDA generally cannot approve another product with the same active moiety for the same
indication.
In August 2012, we announced top line results of an open label 2-stage Phase IIa clinical trial for
Archexin that was designed to assess the safety and efficacy of Archexin in combination with gemcitabine.
Gemcitabine is used to treat pancreatic, breast, ovarian and lung cancers. Gemcitabine is a member of a
group of chemotherapy drugs known as anti-metabolites. It prevents cells from making DNA and RNA,
which stops cell growth and causes cells to die. Stage 1 was the dose-finding portion of the study, and
Stage 2 was the dose-expansion portion of the study using the dose identified in Stage 1 administered with
gemcitabine. The study enrolled 31 subjects aged 18 to 65 with metastatic pancreatic cancer at nine
centers in the United States and India. The primary endpoint was overall survival following four cycles of
therapy with a six month follow-up. For those evaluable patients, the study demonstrated that treatment
with Archexin in combination with gemcitabine provided a median survival rate of 9.1 months compared to
the historical survival data of 5.65 months for standard single agent gemcitabine therapy. The most
frequent reported adverse events were constipation, nausea, abdominal pain and pyrexia, regardless of
relatedness.
We initiated a Phase IIa clinical proof-of-concept clinical trial of Archexin in January 2014 to study
its safety and efficacy in patients with metastatic RCC. In the trial, Archexin will be administered in
combination with everolimus (Afinitor®), and will be conducted in two stages. The first stage will be dose
ranging, with up to three dose groups with three RCC patients each, to determine its maximal tolerated dose
(“MTD”) in combination with everolimus. Once the MTD has been determined, thirty RCC patients will
be randomized to either Archexin in combination with everolimus or everolimus alone, in a ratio of 2:1.
Rexahn plans to complete the initial safety component of this study in the second half of 2015. We expect
that expenses related to Archexin will increase in 2015 compared to 2014 as we carry out the Phase IIa
clinical trial.
RX-3117
RX-3117 is a small molecule nucleoside compound with an anti-metabolite mechanism of
action, and we believe it has therapeutic potential in a broad range of cancers including colon, lung, and
pancreatic cancer. RX-3117 has received orphan drug designation for the treatment of patients with
pancreatic cancer. RX-3117 has also been shown to be effective in inhibiting the growth of
gemcitabine-resistant human cancers and in improving overall survival in pre-clinical animal models.
We completed an exploratory Phase I clinical study of RX-3117 in 2012 that demonstrated the oral
bioavailability of RX-3117 in humans with no adverse effects reported in the study.
In January 2014, we initiated a Phase Ib clinical trial to study the safety, tolerability,
dose-limiting toxicities and MTD of RX-3117 in patients with solid tumors. Secondary endpoints will
include characterizing the pharmacokinetic profile of RX-3117 and evaluating the preliminary anti-tumor
effects of RX-3117. Patient enrollment has been completed in eight dose groups (30mg, 60mg, 100mg,
150mg, 200mg, 500mg, 1,000mg and 1,500mg). The MTD of RX-3117 has not yet been achieved. We
expect to complete patient enrollment in the first half of 2015. RX-3117 continues to preliminarily
demonstrate safety and tolerability, requiring higher dose levels than expected to be tested to achieve the
MTD. To date, no dose-limiting toxicities have been associated with RX-3117 treatment. Based on the
progress of the RX-3117 clinical development program and the level of interest expressed from a number of
oncology-focused pharmaceutical companies, Rexahn is continuing its discussions with multiple
47
companies to explore collaborative business structures in an effort to maximize the potential upside value
of the program. We expect that expenses related to RX-3117 will increase in 2015 compared to 2014 as
we carry out the Phase I trial and continue to seek collaboration partners.
Supinoxin (RX-5902)
Supinoxin is a potential first-in-class small molecule that inhibits the phosphorylation of p68
RNA helicase, a protein that we believe plays a key role in cancer growth, progression and metastasis.
Phosphorylated p68, which is highly expressed in cancer cells, but not in normal cells, results in
up-regulation of cancer-related genes and a subsequent proliferation or tumor growth of cancer cells.
Supinoxin selectively blocks phosphorylated p68, thereby decreasing the proliferation or growth of cancer
cells. In pre-clinical tissue culture models and in-vivo xenograft models, Supinoxin has demonstrated
single-agent tumor growth inhibition synergism with cytotoxic agents and activity against drug resistant
cancer cells. In particular, in in-vivo xenograft models of human RCC and pancreatic cancer, treatment
with Supinoxin on days 1 to 20 in mouse models produced a survival benefit beyond 65 days.
In July 2012, we submitted an investigational new drug application, or IND, to the FDA for
Supinoxin. We initiated a Phase I clinical trial in August 2013 to study Supinoxin’s safety and efficacy in
patients with solid tumors. Patients in seven dose groups (25mg, 50mg, 100mg, 150mg, 225mg, 300mg
and 425mg) have been enrolled and the MTD of Supinoxin has not yet been reached. Depending on the
number of dose groups needed to determine the MTD, we expect to complete this trial in the first half of
2015. Supinoxin continues to preliminarily demonstrate safety and tolerability, requiring higher dose
levels than expected to achieve the MTD. Based on the progress of the Supinoxin clinical development
program and the level of interest expressed from a number of oncology-focused pharmaceutical companies,
Rexahn is continuing its discussions with multiple companies to explore collaborative business structures in
an effort to maximize the potential upside value of the program. We expect that expenses related to
Supinoxin will increase in 2015 compared to 2014 as we complete the Phase I clinical trial and continue
development.
Pre-clinical Pipeline
Archexin-Nano and RX-21101 are in a pre-clinical stage of development. We expect that
expenses related to our pre-clinical candidates will remain flat in 2015 compared to 2014 as we continue
research and development efforts related to these candidates.
Research and Development Process
We have engaged third-party contract research organizations and other investigators and
collaborators, such as universities and medical institutions, to conduct our pre-clinical studies, toxicology
studies and clinical trials. Engaging third-party contract research organizations is typical practice in our
industry. However, relying on such organizations means that the clinical trials and other studies described
above are being conducted at external locations and that the completion of these trials and studies is not
within our direct control. Trials and studies may be delayed due to circumstances outside our control, and
such delays may result in additional expenses for us.
Liquidity and Capital Resources
Cash Flows
Cash used in operating activities was $11,041,211 for the year ended December 31, 2014. The
operating cash flows during the year ended December 31, 2014 reflect our net loss of $18,521,601, which
48
includes an unrealized loss on fair value of warrants of $5,180,107 and a net increase of cash components
of working capital and other non-cash charges totaling $2,300,283. Cash used in operating activities
was $7,984,856 for the year ended December 31, 2013, which reflects our net loss of $9,499,424 and a
net increase of cash components of working capital and non-cash charges totaling $1,514,568.
Cash used in investing activities was $22,661,045 for the year ended December 31, 2014, which
consisted of $26,075,926 and $41,249 for the purchases of marketable securities and equipment,
respectively, offset by a decrease in restricted cash equivalents of $196,130 and $3,260,000 from the
redemption of marketable securities. Cash provided by investing activities for the year ended December
31, 2013 was $845,522, which consisted of a decrease in restricted cash equivalents of $895,671, offset
by $50,149 for the purchase of equipment.
Cash provided by financing activities was $24,840,470 for the year ended December 31, 2014,
which consisted of net proceeds of $18,634,247 from our registered direct public offering in January
2014, $258,955 from the exercise of stock options and $5,947,268 from the exercise of warrants. Cash
provided by financing activities was $12,340,822 for the year ended December 31, 2013, which consisted
of net proceeds of $10,041,155 from our registered direct public offerings in July and October, 2013,
$90,000 from the exercise of stock options, and $2,209,667 from the exercise of warrants.
Financings
On July 26, 2013 we closed on a registered direct public offering to issue and sell 11,400,000
shares of common stock and warrants to purchase up to 3,990,000 shares of common stock. The
common stock and warrants were sold in units, consisting of common stock and a warrant to purchase
0.35 shares of common stock, at a price of $0.50 per unit, and the warrants have an exercise price of
$0.59 per share. The total gross proceeds of the offering were $5,700,000. The warrants issued are
exercisable beginning six months after the closing date until the five-year anniversary of the closing date.
On October 16, 2013 we closed on a registered direct public offering to issue and sell 10,192,309
shares of common stock and warrants to purchase up to 3,567,309 shares of common stock. The
common stock and warrants were sold in units, consisting of common stock and a warrant to purchase
0.35 shares of common stock, at a price of $0.52 per unit, and the warrants have an exercise price of
$0.575 per share. The total gross proceeds of the offering were $5,300,001. The warrants issued are
exercisable beginning six months after the closing date until the five-year anniversary of the closing date.
On January 21, 2014 we closed on a registered direct public offering to issue and sell 19,047,620
shares of common stock and warrants to purchase up to 4,761,905 shares of common stock. The
common stock and warrants were sold in units, consisting of common stock and a warrant to purchase
0.25 shares of common stock, at a price of $1.05 per unit, and the warrants have an exercise price of
$1.28 per share. The total gross proceeds of the offering were $20,000,001. The warrants issued are
exercisable beginning six months and one day after the closing date until the five-year anniversary of the
closing date.
We will need to raise additional capital through public or private equity or debt offerings or
through arrangements with strategic partners or other sources in order to continue to develop our drug
candidates. There can be no assurance that additional capital will be available when needed or on terms
satisfactory to us, if at all. If we are not able to raise sufficient additional capital, we will have to reduce
our research and development activities. We will first reduce research and development activities
associated with our pre-clinical compounds. To the extent necessary, we will then reduce our research
and development activities related to some or all of our clinical drugs.
49
At Market Issuance Sales Agreement
On March 16, 2015, we entered into an at market issuance sales agreement (the “Sales
Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which we may issue and sell shares of our
common stock having an aggregate offering price of up to $40 million from time to time, at our option,
through MLV as our sales agent, subject to certain terms and conditions. Upon our delivery and MLV’s
acceptance of a placement notice, MLV will use commercially reasonable efforts to sell shares, consistent
with its normal trading and sales practices, in transactions deemed to be “at the market” offerings as
defined in Rule 415 of the Securities Act of 1933, as amended, including by means of ordinary brokers’
transactions at market prices, in block transactions or as otherwise agreed by MLV and us. MLV may also
sell the shares of common stock in negotiated transactions, subject to our prior approval. Any shares sold
will be sold pursuant to our effective shelf registration statement on Form S-3 (File No. 333-196255), as
supplemented by a prospectus supplement dated March 16, 2015. We will pay MLV a commission of
3.0% of the gross proceeds of the sale of any shares sold through MLV. To date, no shares have been sold
under the Sales Agreement. We are not obligated to make any sales under the Sales Agreement and no
assurance can be given that we will sell any shares under the Sales Agreement, or, if we do, as to the price
or amount of shares that we will sell, or the dates on which any such sales will take place The Sales
Agreement will terminate upon the earlier of the issuance and sale of all common stock subject to the
Sales Agreement or termination of the Sales Agreement by us or MLV. We have provided MLV with
customary indemnification rights. The foregoing description of the Sales Agreement is not complete and
is qualified in its entirety by reference to the full text of the Sales Agreement, a copy of which is filed as
Exhibit 10.18 to this Annual Report.
Contractual Obligations
We have contracted with various vendors for research and development services. The terms of
these agreements usually require an initial fee and monthly or periodic payments over the term of the
agreement, ranging from two months to 36 months. The costs to be incurred are estimated and are subject
to revision. As of December 31, 2014, the total estimated cost to complete these agreements was
approximately $8,440,000. All of these agreements may be terminated by either party upon appropriate
notice as stipulated in the respective agreements.
On June 22, 2009, we entered into a License Agreement with Korea Research Institute of
Chemical Technology (“KRICT”) to acquire the rights to all intellectual properties related to
Quinoxaline-Piperazine derivatives that were synthesized under a Joint Research Agreement. The initial
license fee was $100,000, all of which was paid as of December 31, 2009. The agreement with KRICT
calls for a one-time milestone payment of $1,000,000 within 30 days after the first achievement of
marketing approval of the first commercial product arising out of or in connection with the use of
KRICT’s intellectual properties. As of December 31, 2014, the milestone has not occurred.
On June 29, 2009, we signed a five-year commercial lease agreement for 5,466 square feet of
office space in Rockville, Maryland. Under the lease agreement, we pay our allocable portion of real
estate taxes and common area operating charges. Rent paid under our lease during the years ended
December 31, 2014 and 2013, including the amendments’ terms described below, was $155,057 and
$117,977, respectively. On June 7, 2013, we entered into the first amendment to the lease agreement.
According to the terms of this amendment, we extended the lease term until June 30, 2019. The
amendment term began on July 1, 2013 with an initial base rent of $100,210 and requires annual base rent
increases over the remaining term of the lease. On July 26, 2014 we entered into the second
amendment to the lease agreement pursuant to which we leased an additional 1,637 square feet of office
space with an initial term beginning on September 1, 2014 and ending on August 31, 2015.
50
On August 26, 2014 and June 24, 2013, we signed one-year renewals to use laboratory space
commencing on July 1, 2014 and 2013, respectively. The laboratory lease originally commenced on
July 1, 2009 and has thereafter been renewed annually for successive one-year terms The lease
requires monthly rental payments of $4,554. Rent paid under the Company’s lease during the years
ended December 31, 2014 and 2013 was $54,648.
We have established a 401(k) plan for our employees. We have elected to match 100% of the
first 3% of an employee’s compensation plus 50% of an additional 2% of the employee’s deferral.
Expense related to this matching contribution aggregated to $91,241 and $78,487 for the years ended
December 31, 2014 and 2013, respectively.
In July 2013, we entered into an exclusive license agreement with the University of Maryland,
Baltimore for a novel drug delivery platform, Nano-Polymer Drug Conjugate Systems. RX-21101 is the
Company’s first drug candidate utilizing this platform. The agreement requires us make payments to the
University of Maryland if RX-21101 or any products from the licensed delivery platform achieve
development milestones. As of December 31, 2014, no development milestones have occurred.
In October 2013 we signed an exclusive license agreement with the Ohio State Innovation
Foundation, for a novel oligonucleotide drug delivery platform, Lipid-Coated Albumin Nanoparticle
(“LCAN”). The agreement requires us to make payments to the Ohio State Innovation Foundation or
any products from the licensed delivery platform achieve development milestones. As of December 31,
2014, no development milestones have occurred.
Current and Future Financing Needs
We have incurred negative cash flow from operations since we started our business. We have
spent, and expect to continue to spend, substantial amounts in connection with implementing our business
strategy, including our planned product development efforts, our clinical trials and our research and
development efforts. We will need to raise additional capital through public or private equity or debt
offerings or through arrangements with strategic partners or other sources in order to continue to develop
our drug candidates. There can be no assurance that additional capital will be available when needed or
on terms satisfactory to us, if at all. If we are not able to raise sufficient additional capital, we will have
to reduce our research and development activities. The Company believes that its cash, cash equivalents,
and marketable securities will be sufficient to cover its cash flow requirements for its current activities for
at least the next 12 months.
The actual amount of funds we will need to operate is subject to many factors, some of which are
beyond our control. These factors include the following:
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the progress of our product development activities;
the number and scope of our product development programs;
the progress of our pre-clinical and clinical trial activities;
the progress of the development efforts of parties with whom we have entered into
collaboration agreements;
our ability to maintain current collaboration programs and to establish new collaboration
arrangements;
51
(cid:31)
(cid:31)
the costs involved in prosecuting and enforcing patent claims and other intellectual
property rights; and
the costs and timing of regulatory approvals.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
For the year ended December 31, 2014, we are exposed to the following market risks:
Interest Rate Risk
We invest our cash in a variety of financial instruments. At December 31, 2014, our cash was
invested primarily in short term bank deposits and municipal obligations, all of which were denominated
in U.S. dollars. Due to the conservative nature of these investments, which primarily bear interest at
fixed rates, we do not believe we have material exposure to interest rate risk.
Foreign Currency Risk
We are exposed to risks associated with foreign currency transactions on contracts with vendors
associated outside of the United States. Accordingly changes in the value of the U.S. dollar, relative to
other currencies, may have an impact on our financial statements and earnings. The number and dollar
amount of contracts denominated in foreign currency is immaterial; therefore, we believe we do not have
material exposure to foreign currency risk.
Item 8. Financial Statements and Supplementary Data.
Our financial statements and the Report of the Independent Registered Public Accounting Firm
thereon filed pursuant to this Item 8 and are included in this Annual Report on Form 10-K beginning on
page F-1
53
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))
as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required to be disclosed by us in
reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of
the controls system are met, and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting. During the most recent quarter ended
December 31, 2014, there has been no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
(cid:31)
54
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). 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 and includes those policies and procedures that:
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(cid:31)
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Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and the dispositions of our assets;
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 authorization of our management and the board of directors; and
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 evaluations of effectiveness to future periods are subject to risk
that controls may become inadequate because of changes in conditions or because of declines in the degree
of compliance with the policies or procedures.
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In
making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in the Internal Control-Integrated Framework (2013).
Based on this evaluation, our management, with the participation of the Chief Executive Officer and
Chief Financial Officer, concluded that, as of December 31, 2014 our internal control over financial
reporting was effective.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting has been audited by Baker Tilly Virchow Krause, LLP, an independent registered public
accounting firm. Baker Tilly Virchow Krause, LLP has issued an attestation report on the effectiveness of
the Company’s internal control over financial reporting, which appears herein.
55
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Rexahn Pharmaceuticals, Inc.
We have audited Rexahn Pharmaceuticals Inc.’s internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control—Integrated Framework (2013 framework)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Rexahn
Pharmaceuticals 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 Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the entity’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 of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
An entity’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 accounting principles generally accepted in the United States of America. An
entity’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 entity; (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 entity are being made only in accordance with
authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’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.
(cid:31) (cid:31)
56
In our opinion, Rexahn Pharmaceuticals Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2014, based on criteria established in Internal
Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheets and the related statements of operations, comprehensive loss,
stockholders’ equity, and cash flows of Rexahn Pharmaceuticals Inc., and our report dated March 16, 2015
expressed an unqualified opinion.
/s/ Baker Tilly Virchow Krause, LLP
Wyomissing, Pennsylvania
March 16, 2015
57
Item 9B. Other Information.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – At Market Issuance Sales Agreement.”
58
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item is set forth in our 2015 Proxy Statement to be filed with the
SEC within 120 days of December 31, 2014 and is incorporated into this Annual Report on Form 10-K by
reference.
Item 11. Executive Compensation.
The information required by this Item is set forth in our 2015 Proxy Statement to be filed with the
SEC within 120 days of December 31, 2014 and is incorporated into this Annual Report on Form 10-K by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required by this Item is set forth in our 2015 Proxy Statement to be filed with the
SEC within 120 days of December 31, 2014 and is incorporated into this Annual Report on Form 10-K by
reference.
Item 13. Certain Relationships and Related Transactions; and Director Independence.
The information required by this Item is set forth in our 2015 Proxy Statement to be filed with the
SEC within 120 days of December 31, 2043 and is incorporated into this Annual Report on Form 10-K by
reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is set forth in our 2015 Proxy Statement to be filed with the
SEC within 120 days of December 31, 2014 and is incorporated into this Annual Report on Form 10-K by
reference.
59
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
(1) Financial Statements:
Report of Baker Tilly Virchow Krause, LLP
Balance Sheet as of December 31, 2014 and December 31, 2013
Statement of Operations for the years ended December 31, 2014 and December 31, 2013
Statement of Comprehensive Loss for the years ended December 31, 2014 and
December 31, 2013
Statement of Stockholders’ Equity for the years ended December 31, 2014 and
December 31, 2013
F-1
F-2
F-3
F-4
F-5
Statement of Cash Flows for the years ended December 31, 2014 and December 31, 2013 F-6
Notes to the Financial Statements
F-8
(2) Exhibits:
See the accompanying Index to Exhibits filed as a part of this Annual Report on Form 10-K,
which list is incorporated by reference in this Item.
60
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized
on this 16th day of March, 2015.
REXAHN PHARMACEUTICALS, INC.
By: /s/ Peter D. Suzdak
Peter D. Suzdak
Chief Executive Officer
In accordance with the requirement of the Securities Exchange Act of 1934, this report has been signed on
the 16th day of March, 2015 by the following persons on behalf of the issuer and in the capacities
indicated:
Name
/s/ Peter Suzdak*
Peter Suzdak
/s/ Tae Heum Jeong*
Tae Heum Jeong
/s/ Chang H. Ahn*
Chang H. Ahn
/s/ Peter Brandt*
Peter Brandt
/s/ David McIntosh*
David McIntosh
/s/ Charles Beever*
Charles Beever
/s/ Kwang Soo Cheong*
Kwang Soo Cheong
/s/ Si Moon Hwang*
Si Moon Hwang
/s/ Mark Carthy*
Mark Carthy
/s/ Richard Rodgers*
Richard Rodgers
Title
Chief Executive Officer and Director (Principal
Executive Officer)
Chief Financial Officer, and Secretary
(Principal Financial and Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
* By: /s/ Tae Heum Jeong, Attorney-in Fact
Tae Heum Jeong, Attorney-in-Fact**
** By authority of the power of attorney filed as Exhibit 24 hereto.
61
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Rexahn Pharmaceuticals, Inc.
We have audited the accompanying balance sheet of Rexahn Pharmaceuticals, Inc. as of December 31, 2014
and 2013, and the related statements of operations, comprehensive loss, stockholders’ equity, and cash flows
the years then ended. These financial statements are the responsibility of the entity’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 Rexahn Pharmaceuticals, Inc. as of December 31, 2014 and 2013, and the results of its operations
and its cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Rexahn Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31,
2014, based on criteria established in Internal Control—Integrated Framework (2013 framework) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 16, 2015 expressed an unqualified opinion.
/s/ Baker Tilly Virchow Krause, LLP
Wyomissing, Pennsylvania
March 16, 2015
F-1
REXAHN PHARMACEUTICALS, INC.
Balance Sheet
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, 2014 December 31, 2013
ASSETS
Current Assets:
Cash and cash equivalents
Marketable securities (note 3)
Prepaid expenses and other current assets (note 4)
Total Current Assets
Restricted Cash Equivalents (note 7)
Security Deposit (note 14)
Equipment, Net (note 5)
Total Assets
$
$
9,826,245 $
22,872,051
730,987
33,429,283
-
25,681
78,096
33,533,060 $
18,688,031
100,000
507,165
19,295,196
196,130
-
65,172
19,556,498
Current Liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses (note 6)
$
2,459,263 $
933,758
Deferred Research and Development Arrangements (note
7)
600,000
833,630
Other Liabilities (note 8)
124,955
129,564
Warrant Liabilities (note 12)
3,768,351
5,034,058
Total Liabilities
Commitments and Contingencies (note 14)
Stockholders’ Equity (note 10):
6,952,569
6,931,010
Preferred stock, par value $0.0001, 100,000,000 authorized
shares, none issued and outstanding
Common stock, par value $0.0001, 500,000,000 authorized
shares, 178,366,533 and 146,732,000 issued and
178,253,318 and 146,717,795 outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock, 113,215 and 14,205 shares, at cost
(cid:31)
(cid:31)
-
(cid:31)
(cid:31)
-
17,837
118,057,019
(33,647)
(91,332,308)
(128,410)
14,673
85,449,932
-
(72,810,707)
(28,410)
Total Stockholders’ Equity
26,580,491
12,625,488
Total Liabilities and Stockholders’ Equity
$
33,533,060 $
19,556,498
(See accompanying notes to the financial statements)
F-2
REXAHN PHARMACEUTICALS, INC.
Statement of Operations
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Revenues
Expenses:
General and administrative
Research and development
Total Expenses
Loss from Operations
Other Income (Expense)
Interest income
Unrealized loss on fair value of warrants
Financing expense
Total Other Income (Expense)
Net Loss Before Provision for Income Taxes
Provision for income taxes
Net Loss
Net loss per share, basic and diluted
For the Year Ended December
31,
2014
2013
$
-$
-
6,253,328
7,015,901
4,725,699
3,253,139
13,269,229
7,978,838
(13,269,229)
(7,978,838)
133,907
49,280
(5,180,107)
(1,365,654)
(206,172)
(5,252,372)
(204,212)
(1,520,586)
(18,521,601)
(9,499,424)
-
(18,521,601)$
-
(9,499,424)
(cid:31)
(cid:31)
(0.11)$
(0.07)
$
$
Weighted average number of shares outstanding, basic and diluted
176,106,981
128,649,303
(See accompanying notes to the financial statements)
F-3
REXAHN PHARMACEUTICALS, INC.
Statement of Comprehensive Loss
For the Year Ended December
31,
2014
2013
Net Loss
$
(18,521,601)$
(9,499,424)
Unrealized loss on available-for-sale securities
(33,647)
-
Comprehensive Loss
$
(18,555,248)$
(9,499,424)
(cid:31)
(cid:31)
(See accompanying notes to the financial statements)
F-4
REXAHN PHARMACEUTICALS, INC.
Statement of Stockholders’ Equity
For the Years Ended December 31, 2014 and 2013
Common Stock
Treasury Stock
Number of
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Number
of Shares
Amount
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
Balances at
December 31, 2012
Issuance of common
stock and units
Stock issuance costs
Common stock issued
in exchange for services
Stock options exercised (cid:31)
Stock warrants
exercised
Stock based
Net loss
i
Balances at
December 31, 2013
Issuance of common
stock and units
Stock issuance costs
Common stock issued
in exchange for services(cid:31)
Stock options exercised (cid:31)
Shares surrendered for
net stock option
exercise
Stock warrants
exercised
Stock based
(cid:31)
i
Net loss
Other comprehensive
loss
Balances at
December 31, 2014
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31) 146,732,000 $
14,673 $ 85,449,932 $ (72,810,707)
14,205 $ (28,410)$
-$
12,625,488
119,443,194
11,944
72,861,738
(63,311,283)
14,205
(28,410)
(cid:31)
(cid:31)
21,592,309
-
2,159
-
8,631,696
(952,490)
640,000
375,000
4,681,497
-
-
64
38
468
-
-
306,736
89,962
3,946,862
565,428
-
-
-
(9,499,424)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(cid:31)
(cid:31)
19,047,620
-
1,905
-
16,306,667
(1,159,582)
400,000
448,693
40
45
408,960
358,910
-
-
-
-
-
-
-
-
- -
-
-
-
-
-
-
-
99,010
(100,000)
11,738,220
-
-
1,174
-
-
16,083,337
608,795
-
-
-
(18,521,601)
(cid:31)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9,533,989
8,633,855
(952,490)
306,800
90,000
3,947,330
565,428
(9,499,424)
-
-
-
-
-
-
-
-
16,308,572
(1,159,582)
409,000
358,955
(100,000)
16,084,511
608,795
(18,521,601)
(33,647)
(33,647)
(cid:31) 178,366,533 $
17,837 $ 118,057,019 $ (91,332,308)
113,215 $ (128,410)$
(33,647)$
26,580,491
(See accompanying notes to the financial statements)
F-5
REXAHN PHARMACEUTICALS, INC.
Statement of Cash Flows
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
For the Year Ended
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Compensatory stock
Depreciation and amortization
Amortization of premiums and discounts on marketable securities, net
Stock-based compensation
Amortization of deferred research and development arrangements
Unrealized loss on fair value of warrants
Financing expense
Amortization of deferred lease incentive
Deferred lease expenses
Changes in assets and liabilities:
Prepaid expenses and other assets
Accounts payable and accrued expenses
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Restricted cash equivalents
Purchase of equipment
Purchase of marketable securities
Redemption of marketable securities
Net Cash (Used In) Provided by Investing Activities
Cash Flows from Financing Activities:
December 31,
2014
2013
$
(18,521,601)$
(9,499,424)
409,000
28,325
10,228
608,795
(233,630)
5,180,107
206,172
(12,443)
7,834
306,800
37,133
-
565,428
(792,370)
1,365,654
204,212
(16,222)
25,709
(249,503)
1,525,505
(263,697)
81,921
(11,041,211)
(7,984,856)
196,130
(41,249)
(26,075,926)
3,260,000
(22,661,045)
895,671
(50,149)
-
-
845,522
Issuance of common stock and units, net of issuance costs
18,634,247
10,041,155
Proceeds from exercise of stock options
Proceeds from exercise of stock warrants
Net Cash Provided by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents – beginning of period
Cash and Cash Equivalents - end of period
258,955
5,947,268
24,840,470
(8,861,786)
18,688,031
90,000
2,209,667
12,340,822
5,201,488
13,486,543
$
9,826,245 $
18,688,031
(See accompanying notes to the financial statements)
F-6
�
�
�
�
�
�
For the Year Ended
December 31,
2014
2013
�
�
3,691,429 $�
10,137,243 $�
100,000 $�
-$�
2,564,002
1,737,663
-
54,660
REXAHN PHARMACEUTICALS, INC.
Statement of Cash Flows (continued)
�
Supplemental Cash Flow Information
Non-cash financing and investing activities:
Warrants issued
Warrant liability extinguishment from exercise of warrants
Shares withheld for net stock option exercise
Leasehold improvement incentive
�
�
�
�
�
�
�
�
�
�
$�
$�
$�
$�
(See accompanying notes to the financial statements)
F-7
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
1. Operations and Organization
Operations
Rexahn Pharmaceuticals, Inc. (the “Company,” or “Rexahn Pharmaceuticals”), a Delaware
corporation, is a biopharmaceutical company whose principal operations are the discovery,
development and commercialization of innovative treatments for cancer and other medical needs.
The Company had an accumulated deficit of $91,332,308 at December 31, 2014 and anticipates
incurring losses through fiscal year 2015 and beyond. The Company has not yet generated
commercial revenues and has funded its operating losses to date through the sale of shares of its
common stock and warrants to purchase shares of its common stock, convertible debt, financings,
interest income from cash, cash equivalents and marketable securities, and proceeds from
reimbursed research and development costs. The Company believes that its cash, cash
equivalents, and marketable securities, will be sufficient to cover its cash flow requirements for its
current activities for at least the next 12 months. Management has the capability of managing the
Company’s operations within existing cash available by focusing on select research and
development activities, selecting projects in conjunction with potential financings and milestones,
and efficiently managing its general and administrative affairs.
2. Summary of Significant Accounting Policies
a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments purchased with
remaining maturities of three months or less at acquisition.
b) Marketable Securities
Marketable securities are considered “available-for-sale” in accordance with Financial Statement
Accounting Board (“FASB”) Accounting Standard Codification (“ASC”) 320, “Debt and Equity
Securities”, and thus are reported at fair value in the Company’s accompanying balance sheet, with
unrealized gains and losses excluded from earnings and reported as a separate component of
stockholders’ equity. Amounts reclassified out of accumulated other comprehensive income into
realized gains and losses are accounted for on the basis of specific identification and are included in
other income or expense in the statement of operations. The Company classifies such investments
as current on the balance sheet as the investments are readily marketable and available for use in
Rexahn Pharmaceuticals’ current operations.
c) Equipment
Equipment is stated at cost less accumulated depreciation. Depreciation, based on the lesser of the
term of the lease or the estimated useful life of the assets, is provided as follows:
Life Depreciation Method
Furniture and fixtures
Office equipment
Lab equipment
Computer equipment
Leasehold improvements
7 years
5 years
5-7 years
3-5 years
3-5 years
straight line
straight line
straight line
straight line
straight line
F-8
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
d) Research and Development
Research and development costs are expensed as incurred. Research and development expenses
consist primarily of third party service costs under research and development agreements, salaries
and related personnel costs, as well as stock compensation related to these costs, costs to acquire
pharmaceutical products and product rights for development and amounts paid to contract research
organizations, hospitals and laboratories for the provision of services and materials for drug
development and clinical trials.
Costs incurred in obtaining the licensing rights to technology in the research and development stage
that have no alternative future uses and are for unapproved product compounds are expensed as
incurred.
e) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. These estimates are based on management’s best knowledge of current events
and actions the Company may undertake in the future. Actual results may ultimately differ from
these estimates. These estimates are reviewed periodically and as adjustments become necessary,
they are reported in earnings in the period in which they become available.
f) Fair Value of Financial Instruments
The carrying amounts reported in the accompanying financial statements for cash and cash
equivalents, prepaid expenses and other current assets, the security deposit and accounts payable
and accrued expenses approximate fair value because of the short-term maturity of these financial
instruments. The fair value for marketable securities, warrant liabilities, and certain other assets
and liabilities is discussed in Notes 3, 12, and 15, respectively.
g) Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. Deferred
tax assets and liabilities are recorded for differences between the financial statement and tax basis
of the assets and liabilities that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates. ASC 740 requires that a valuation allowance be established when it is
more likely than not that all portions of a deferred tax asset will not be realized. A review of all
positive and negative evidence needs to be considered, including a company’s current and past
performance, the market environment in which the company operates, length of carryback and
carryforward periods and existing contracts that will result in future profits. Income tax expense is
recorded for the amount of income tax payable or refundable for the period, increased or decreased
by the change in deferred tax assets and liabilities during the period.
As a result of the Company’s significant cumulative losses, the Company determined that it was
appropriate to establish a valuation allowance for the full amount of deferred tax assets.
The calculation of the Company’s tax liabilities involves the inherent uncertainty associated with
the application of complex tax laws. The Company is subject to examination by various taxing
F-9
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
authorities. The Company believes that, as a result of its loss carryforward sustained to date, any
examination would result in a reduction of its net operating losses rather than a tax liability. As
such, the Company has not provided for any additional taxes that would be estimated under ASC
740.
h) Stock-Based Compensation
In accordance with ASC 718, “Stock Compensation,” compensation costs related to share-based
payment transactions, including employee stock options, are to be recognized in the financial
statements. In addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, which provides the
Staff’s views regarding the interaction between ASC 718 and certain SEC rules and regulations,
and provides interpretations with respect to the valuation of share-based payments for public
companies.
i) Concentration of Credit Risk
ASC 825, “Financial Instruments,” requires disclosure of any significant off balance sheet risk and
credit risk concentration. The Company does not have significant off-balance sheet risk or credit
concentration. The Company maintains cash and cash equivalents with major financial
institutions. From time to time the Company has funds on deposit with commercial banks that
exceed federally insured limits. The balances are insured by the Federal Deposit Insurance
Corporation up to $250,000. At December 31, 2014, the Company’s uninsured cash balance was
$7,671,892. Management does not consider this to be a significant credit risk as the banks are large,
established financial institutions.
j) Reclassification
Certain amounts in the prior year’s financial statements have been reclassified to conform to the
current year presentation with no material effect on the financial statements.
k) Recent Accounting Pronouncements Affecting the Company
Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including
an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
In June 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting
Standards Update (“ASU”) 2014-10 “Development Stage Entities: Elimination of Certain
Financial Reporting Requirements, Including an Amendment to Variable Interest Entities
Guidance in Topic 810, Consolidation.” ASU 2014-10 eliminates several of the reporting
requirements for development stage entities, including the requirement to present inception to date
information in the statements of income, comprehensive income, cash flows, and shareholder
equity, and to label the financial statements as those of a development stage entity. ASU 2014-10
also clarifies that the guidance in Accounting Standards Codification (“ASC”) Topic 275, “Risks
and Uncertainties”, is applicable to entities that have not commenced principal operations, and
eliminates an exception to the sufficiency-of-equity risk criterion for development stage entities,
and will require all reporting entities that have an interest in development stage enterprises to apply
consistent consolidation guidance for variable interest entities. ASU 2014-10 is effective for all
annual reporting periods beginning after December 15, 2014, with early adoption permitted. The
Company adopted ASU 2014-10 during the year ended December 31, 2014, and removed the
incremental reporting requirements for development stage entities from the financial statements for
this period.
F-10
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, a
comprehensive new revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under US Generally Accepted Accounting Principles. The standard’s core
principle is that a company should recognize revenue when it transfers goods or services to
customers in an amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods and services, and provides a revenue recognition framework
in accordance with this principle. ASU 2014-09 is effective for annual reporting periods
beginning after December 15, 2016 and interim periods therein. The Company is currently
evaluating the impact that the adoption of this guidance will have on its financial statements and
future operating results.
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB issued ASU 2014-15: Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which requires management to perform interim and
annual assessments as to the entity’s ability to continue as a going concern and provides related
disclosure guidance. ASU 2014-15 will be effective for reporting periods beginning after
December 15, 2016, with early adoption permitted. The Company is currently evaluating the
impact the adoption of this guidance will have on its financial statements.
F-11
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
3. Marketable Securities
The following table shows the Company’s marketable securities’ adjusted cost, gross unrealized gains
and losses, and fair value by significant investment category as of December 31, 2014 and 2013:
(cid:31)
(cid:31)
(cid:31)
December 31, 2014
Certificates of Deposit
Commercial Paper
Corporate Bonds
Total Marketable Securities
(cid:31)
(cid:31)
State and Municipal Obligations
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Cost
Basis
$ 18,865,000 $
1,998,001
2,042,697
$ 22,905,698 $
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Gross
Unrealized
Gains
Fair
Value
Gross
Unrealized
Losses
(26,789)$ 18,838,271
1,997,910
2,035,870
(33,769)$ 22,872,051
(cid:31)
(153)
(6,827)
(cid:31)
60
62
-
122 $
(cid:31)
(cid:31)
December 31, 2013
Cost
Basis
100,000 $
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
-$
-$
Fair
Value
100,000
The Company typically invests in highly-rated securities, with the primary objective of minimizing
the potential risk of principal loss. As of December 31, 2014, the Company had certificates of
deposit with a fair value of $18,598,211 and unrealized losses of $26,789, commercial paper with a
fair value of $998,180 and unrealized losses of $153, and corporate bonds with a fair value of
$2,035,870 and unrealized losses of $6,827, all of which have been unrealized losses for less than 12
months. The Company does not have the intent to sell its marketable securities in an unrealized loss
position. Based upon the Company’s securities’ fair value relative to the cost, high ratings, and
volatility of fair value, the Company considers the declines in market value of its marketable
investments
securities
other-than-temporarily impaired, and anticipates that it will recover the entire amortized cost basis.
in nature and does not consider any of
temporary
to be
its
The amortized cost and fair value of marketable securities at December 31, 2014 by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because the
Company may redeem certain securities at par.
Maturity
Less than 1 year
1 to 5 years
Total Marketable Securities
Cost Basis
Fair Value
$
$
17,023,001 $
5,882,697
22,905,698 $
17,010,586
5,861,465
22,872,051
F-12
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
4. Prepaid Expenses and Other Current Assets
(cid:31)
(cid:31)
(cid:31)
Deposits on contracts
Prepaid expenses and other assets
(cid:31)
December 31, December 31,
(cid:31)
(cid:31)
2014
2013
$
$
369,811 $
361,176
37,760
469,405
730,987 $
507,165
Deposits on contracts consist of deposits on research and development contracts for services that had
not been incurred as of the balance sheet date. Prepaid expenses and other assets include prepaid
general and administrative expenses, such as insurance, rent, investor relations fees and compensatory
stock issued for services not yet incurred as of the balance sheet date.
5. Equipment, Net
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, December 31,
(cid:31)
(cid:31)
Furniture and fixtures
Office equipment
Lab and computer equipment
Leasehold improvements
Total equipment
Less: Accumulated depreciation and
2014
2013
$
70,320 $
57,893
425,195
133,762
59,133
41,752
425,195
119,841
687,170
(609,074)
645,921
(580,749)
Net carrying amount
$
78,096 $
65,172
Depreciation and amortization expense was $28,325 and $37,133 for the years ended December 31,
2014 and 2013, respectively.
6. Accounts Payable and Accrued Expenses
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, December 31,
(cid:31)
(cid:31)
Trade payables
Accrued expenses
Accrued research and development contract costs
Payroll liabilities
F-13
2014
2013
$
706,781$
56,884
1,078,532
617,066
251,687
25,367
215,211
441,493
$
2,459,263$
933,758
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
7. Deferred Research and Development Arrangements
Rexgene Biotech Co., Ltd.
In 2003, the Company entered into a collaborative research agreement with Rexgene Biotech Co.,
Ltd. (“Rexgene”), a shareholder. Rexgene is engaged in the development of pharmaceutical
products in Asia and has agreed to assist the Company with the research, development and clinical
trials necessary for registration of the Company’s drug candidate Archexin in Asia. This
agreement provides Rexgene with exclusive rights to license, sublicense, make, have made, use, sell
and import Archexin in Asia. In accordance with the agreement, Rexgene paid the Company a
one-time fee of $1,500,000 in 2003. The agreement terminates at the later of 20 years or the term
of the patent. The amortization reduces research and development expenses for the periods
presented.
The Company is using 20 years as its basis for recognition and accordingly research and
development expenses were reduced by $75,000 for the years ended December 31, 2014 and 2013,
respectively. The remaining $600,000 and $675,000 to be amortized at December 31, 2014 and
December 31, 2013, respectively, are reflected as deferred research and development arrangements
on the balance sheet. The payment from Rexgene is being used in the cooperative funding of the
costs of development of Archexin. Royalties of 3% of net sales of licensed products will become
payable by Rexgene to the Company on a quarterly basis once commercial sales of Archexin begin
in Asia. The product is still under development and commercial sales in Asia are not expected to
begin until at least 2016. Under the terms of the agreement, Rexgene does not receive royalties on
the Company’s net sales outside of Asia.
Teva Pharmaceutical Industries, Ltd.
On September 21, 2009, the Company closed on a securities purchase agreement (the “Purchase
Agreement”) with Teva Pharmaceutical Industries Limited (“Teva”), and contemporaneous with the
execution and delivery of the Purchase Agreement, the parties executed a research and exclusive
license option agreement (the “RELO Agreement”) pursuant to which the Company agreed to use
proceeds from the issuance and sale of shares to Teva to fund a research and development program
for the pre-clinical development of RX-3117. On November 27, 2012, the Company and Teva
entered into a second amendment to the RELO Agreement, pursuant to which Teva provided the
Company with an additional $926,000 of research funding for the development of RX-3117, which
was recorded as restricted cash on the Company’s balance sheet. The contribution from the second
amendment was recorded in deferred research and development arrangements on the balance sheet.
Costs incurred for the development of RX-3117 were paid from restricted cash, reduced the deferred
research and development arrangement and therefore were not an expense in the Company’s
statement of operations. On August 28, 2013, the Company announced that Teva had decided not
to exercise its option to license RX-3117, and as a result the RELO Agreement was terminated, and
any proceeds remaining from the restricted cash at that time would be used to pay for unbilled
expenses. As of December 31, 2013, the Company had proceeds remaining of $158,630, which
was included in restricted cash and deferred research and development arrangements on the balance
sheet. During the year ended December 31, 2014, $158,630 was reduced from the deferred
research and development arrangement to pay for costs incurred for the development of RX-3117,
and therefore, as of December 31, 2014, no proceeds remained in restricted cash or a deferred
research and development liability related to Teva.
F-14
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
8. Other Liabilities
Deferred Lease Incentive
On June 29, 2009, the Company entered into a five-year office lease agreement as disclosed in Note
14. The lessor agreed to grant a leasehold improvement allowance of $100,000 to the Company to
be used for the construction cost of improvements to the leased property, which included
architectural and engineering fees, government agency plan check, permit and other fees, sales and
use taxes, testing and inspection costs and telephone and data cabling and wiring in the premises.
The Company accounted for the benefit of the leasehold improvement allowance as a reduction of
rental expense over the five-year term of the office lease.
On June 7, 2013, the Company entered into the first amendment to the lease agreement, also
disclosed in Note 14. According to the terms of the amendment, the Company extended the lease
term until June 30, 2019, and the amendment term began on July 1, 2013. The lessor agreed to
grant an additional leasehold improvement allowance of $54,660 to the Company to be used for
further construction to the leased property, furniture and equipment. The Company accounts for
this benefit, including the unamortized portion from the original lease agreement, as a reduction of
rental expense over the six-year amended term of the lease.
The following table sets forth the cumulative deferred lease incentive:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Deferred lease incentive
Less accumulated amortization
Balance
Deferred Office Lease Expense
December 31,
2014
December 31,
2013
$
$
154,660 $
(98,665)
154,660
(86,222)
55,995 $
68,438
The lease agreement, as amended and disclosed above, requires an initial annual base rent with
annual increases over the next six years. The Company recognizes rental expense on a straight-line
basis over the term of the lease, which resulted in a deferred rent liability of $68,960 and $61,126 as
of December 31, 2014 and 2013, respectively.
9. Net Loss per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of
shares of common stock outstanding for the period. Diluted loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock outstanding, plus the
number of common share equivalents that would be dilutive. As of December 31, 2014 and 2013,
there were stock options and warrants to acquire, in the aggregate, 24,606,677 and 34,325,663
shares of the Company’s common stock, respectively, that are potentially dilutive. However, diluted
loss per share for all periods presented is the same as basic loss per share because the inclusion of
common share equivalents would be anti-dilutive.
F-15
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
10. Common Stock
The following transactions occurred during the years ended December 31, 2014 and 2013:
a) On May 10, 2013, the Company issued 120,000 shares of stock to a vendor in exchange for
investor relations services. The market value of the stock issued was $0.31, and the total
market value of the issuance was $37,200.
b) On June 10, 2013, the Company issued 200,000 shares of stock to a vendor in exchange for
financial advisory services. The market value of the stock issued was $0.50, and the total
market value of the issuance was $100,000.
c) On July 26, 2013 the Company closed on a registered direct public offering to issue and sell
11,400,000 shares of common stock and warrants to purchase up to 3,990,000 shares of
common stock. The common stock and warrants were sold in units, consisting of common
stock and a warrant to purchase 0.35 shares of common stock, at a price of $0.50 per share, and
the warrants have an exercise price of $0.59 per share. The total gross proceeds of the
offering were $5,700,000. The warrants issued are exercisable beginning six months after the
closing date until the five-year anniversary of the closing date and were recorded as liabilities
at fair value.
The closing costs of $637,334 included 456,000 warrants valued at $110,489 and $526,845 for
placement agent and other fees. Based upon the estimated fair value of the stock and warrants
in the units, the Company allocated $112,559 to financing expense and $524,775 as stock
issuance costs.
A summary of the allocation of the proceeds of the offering is shown below:
(cid:31)
Gross Proceeds:
(cid:31)
(cid:31)
(cid:31)
$
5,700,000
Allocated to liabilities:
Warrant liabilities
Less: Warrants allocated to placement agent
Total allocated to liabilities
Allocated to equity:
Common stock and additional paid-in capital
1,406,441
(110,489)
1,295,952
4,404,048
Total allocated gross proceeds:
$
5,700,000
F-16
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
d) On August 1, 2013, the Company issued 120,000 shares of stock to a vendor in exchange for
investor relations services. The market value of the stock issued was $0.53, and the total
market value of the issuance was $63,600.
e) On October 10, 2013, the Company issued 200,000 shares of stock to a vendor in exchange for
financial advisory services. The market value of the stock issued was $0.53, and the total
market value of the issuance was $106,000.
f) On October 16, 2013, the Company closed on a registered direct public offering to issue and
sell 10,192,309 shares of common stock and warrants to purchase up to 3,567,309 shares of
common stock. The common stock and warrants were sold in units, consisting of common
stock and a warrant to purchase 0.35 shares of common stock, at a price of $0.52 per share, and
the warrants have an exercise price of $0.575 per share. The total gross proceeds of the
offering were $5,300,001. The warrants issued are exercisable beginning six months after the
closing date until the five-year anniversary of the closing date and were recorded as liabilities
at fair value.
The closing costs of $519,368 included 407,692 warrants valued at $87,368 and $432,000 for
placement agent and other fees. Based upon the estimated fair value of the stock and warrants
in the units, the Company allocated $91,653 to financing expense and $427,715 as stock
issuance costs.
A summary of the allocation of the proceeds of the offering is shown below:
(cid:31)
Gross Proceeds:
(cid:31)
(cid:31)
(cid:31)
$
5,300,001
Allocated to liabilities:
Warrant liabilities
Less: Warrants allocated to placement agent
Total allocated to liabilities
Allocated to equity:
Common stock and additional paid-in capital
1,157,561
(87,368)
1,070,193
4,229,808
Total allocated gross proceeds:
$
5,300,001
F-17
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
g) During the year ended December 31, 2013, option holders exercised stock options to purchase
shares of the Company’s common stock for cash of $90,000, and the Company issued 375,000
shares.
h) During the year ended December 31, 2013, warrant holders exercised warrants to purchase
shares of the Company’s common stock for cash of $2,209,667, and the Company issued
4,681,497 shares.
i) On January 21, 2014 the Company closed on a registered direct public offering to issue and sell
19,047,620 shares of common stock and warrants to purchase up to 4,761,905 shares of
common stock. The common stock and warrants were sold in units, consisting of common
stock and a warrant to purchase 0.25 shares of common stock, at a price of $1.05 per share, and
the warrants have an exercise price of $1.28 per share. The total gross proceeds of the
offering were $20,000,001. The warrants issued are exercisable beginning six months and
one day after the closing date until the five-year anniversary of the closing date and were
recorded as liabilities at fair value.
The total closing costs of the offering were $1,365,754, which consisted of placement agent and
other professional fees. Based upon the estimated fair value of the stock and warrants in the
units, the Company allocated $206,172 to financing expense and $1,159,582 as stock issuance
costs.
A summary of the allocation of the proceeds of the offering is shown below:
Gross Proceeds:
Allocated to liabilities:
Warrant liabilities
Allocated to equity:
Common stock and additional paid-in capital
$
20,000,001
3,691,429
16,308,572
Total allocated gross proceeds:
$
20,000,001
F-18
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
j) On February 10, 2014, the Company issued 300,000 shares of stock to two vendors in
exchange for investor relations and financial advisory services. The market value of the stock
issued was $1.12, and the total market value of the issuance was $336,000.
k) On April 14, 2014, an option holder exercised 125,000 stock options by a net exercise. The
Company withheld 99,010 shares in treasury as payment for the exercise price, and issued
25,990 shares to the option holder.
l) On August 1, 2014, the Company issued 100,000 shares of stock to a vendor in exchange for
investor relations services. The market value of the stock issued was $0.73, and the total
market value of the issuance was $73,000.
m) During the year ended December 31, 2014, option holders exercised stock options to purchase
shares of the Company’s common stock for cash of $258,955, and the Company issued
323,693 shares.
n) During the year ended December 31, 2014, warrant holders exercised warrants to purchase
shares of the Company’s common stock for cash of $5,947,268, and the Company issued
11,738,220 shares.
F-19
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
11. Stock-Based Compensation
As of December 31, 2014, the Company had 11,400,806 options outstanding.
At the Company’s Annual Meeting of the Stockholders held on June 10, 2013, the Company’s
stockholders voted to approve the Rexahn Pharmaceuticals, Inc. 2013 Stock Option Plan (the “2013
Plan”). Under the 2013 Plan, the Company grants stock options to key employees, directors and
consultants of the Company. A total of 17,000,000 shares of common stock have been reserved for
issuance pursuant to the 2013 Plan. As of December 31, 2014, there were 2,978,499 options
outstanding under the 2013 Plan, and 14,021,501 shares were available for issuance from the 2013
Plan.
On August 5, 2003, the Company established a stock option plan (the “2003 Plan”). Under the
2003 Plan, the Company granted stock options to key employees, directors and consultants of the
Company. With the adoption of the 2013 Plan, no new stock options may be issued under the 2003
Plan, but previously issued options under the 2003 Plan remain outstanding until their expiration.
As of December 31, 2014, there were 8,422,307 outstanding options under the 2003 Plan.
For the majority of the grants to employees, the vesting period is 30% on the first anniversary of the
grant date, an additional 30% on the second anniversary of the grant date and the remaining 40% on
the third anniversary. Options expire between five and ten years from the date of grant. For grants
to non-employee consultants of the Company, the vesting period is between one and three years,
subject to the fulfillment of certain conditions in the individual stock agreements, or 100% upon the
occurrence of certain events specified in the individual stock agreements.
Accounting for Employee Awards
The Company’s results of operations for the years ended December 31, 2014 and 2013 include
stock-based employee compensation expense totaling $587,414 and $553,163 respectively. Such
amounts have been included in the statement of operations in general and administrative and
research and development expenses. No income tax benefit has been recognized in the statement of
operations for stock-based compensation arrangements as the Company has provided for a 100%
valuation allowance on its deferred tax assets.
Employee stock option compensation expense is the estimated fair value of options granted
amortized on a straight-line basis over the requisite vesting service period for the entire portion of
the award.
Accounting for Non-Employee Awards
Stock-based compensation expenses related to non-employee options were $21,381 and $12,265 for
the years ended December 31, 2014 and 2013, respectively. Such amounts have been included in
the statement of operations in general and administrative and research and development expenses.
F-20
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
Summary of Stock Compensation Expense Recognized
Total stock-based compensation recognized by the Company in the years ended December 31, 2014
and 2013 is as follows:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Statement of operations line item:
General and administrative
Research and development
Total
Year Ended December 31,
2014
2013
$
$
457,128 $
151,667
503,076
62,352
608,795 $
565,428
Summary of Stock Option Transactions
There were 2,528,499 stock options granted at exercise prices ranging from $0.68 to $1.35 with an
aggregate fair value of $1,737,087 during the year ended December 31, 2014. There were
2,450,000 stock options granted at exercise prices ranging from $0.31 to $0.61 with an aggregate fair
value of $681,752 during the year ended December 31, 2013.
The fair value of options at the date of grant was estimated using the Black-Scholes option pricing
model. The Company took into consideration guidance under ASC 718, “Compensation-Stock
Compensation” and Staff Accounting Bulletin No. 107 (“SAB 107”) when reviewing and updating
assumptions. The expected volatility is based upon historical volatility of the Company’s stock.
The expected term is based upon the simplified method as allowed under SAB 107.
F-21
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
The assumptions made in calculating the fair values of options are as follows:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Year Ended December 31,
2014
2013
(cid:31)
Black-Scholes weighted average assumptions
Expected dividend yield
Expected volatility
Risk free interest rate
Expected term (in years)
0%
92-96%
1.49-1.75%
5 years
0%
94-96%
0.75-1.75%
5 years
The following table summarizes the employee and non-employee share-based transactions:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
2014
(cid:31)
(cid:31)
2013
Outstanding at
January 1
Granted
Exercised
Expired
Cancelled
Number of
Options
Weighted
Average
Exercise Price
(cid:31)
Number of
Options
Weighted
Average
Exercise Price
(cid:31)
9,356,795$
2,528,499
(448,693)
(35,795)
-
0.92
0.96
0.80
0.24
-
7,741,795 $
2,450,000
(375,000)
(375,000)
(85,000)
1.03
0.39
0.24
0.52
0.80
0.92
Outstanding at December 31
11,400,806$
0.93
9,356,795 $
The following table summarizes information about stock options outstanding as of December 31,
2014 and 2013:
Outstanding at
December 31, 2014
Exercisable at
December 31, 2014
Outstanding at
December 31, 2013
Exercisable at
December 31, 2013
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number of
Options
11,400,806 $
0.93
5.2 years$
842,300
8,167,307 $
0.97
3.6 years $
613,550
9,356,795 $
0.92
4.8 years $
350,865
7,956,795 $
0.99
4.0 years $
199,795
F-22
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
The total intrinsic value of the options exercised was $115,528 and $91,300 for the years ended
December 31, 2014 and 2013, respectively. The weighted average fair value of the options granted
was $0.69 and $0.28 for the years ended December 31, 2014 and 2013, respectively.
A summary of the Company’s unvested options as of December 31, 2014 and changes during the
year ended December 31, 2014 is presented below:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
2014
Unvested at January 1, 2014
Granted
Vested
Cancelled
Weighted Average Fair
Value at Grant Date
Number of Options
1,400,000
$
2,528,499
$
(695,000) $
- $
0.34
0.69
0.41
-
0.60
Unvested at December 31, 2014
3,233,499
$
As of December 31, 2014 and 2013, there was $1,423,150 and $281,957 of total unrecognized
compensation cost, respectively, related to all unvested stock options, which is expected to be
recognized over a weighted average vesting period of 2.2 years and 1.7 years, respectively.
12. Warrants
As of December 31, 2014, warrants to purchase 13,205,871 shares were outstanding, having exercise
prices ranging from $0.41 to $1.50 and expiration dates ranging from July 5, 2016 to January 21,
2019.
(cid:31)
(cid:31)
(cid:31)
(cid:31)
2014
(cid:31)
(cid:31)
(cid:31)
2013
Weighted average
exercise price
Number of
warrants
Balance, January 1
24,968,868
Issued during the period
4,761,905
Exercised during the period (12,058,871)
Expired during the period
(4,466,031)
Balance, December 31
13,205,871
$
$
$
$
$
Number of
warrants
21,656,142
8,421,001
(4,681,497)
(426,778)
0.86
1.28
0.52
1.59
1.07
24,968,868
Weighted average
exercise price
$
$
$
$
$
0.89
0.59
0.47
1.67
0.86
At December 31, 2014 and 2013, the average remaining contractual life of the outstanding warrants
was 3.2 years.
The warrants issued to investors in the June 2009, October 2009, June 2010, March 2011 and
December 2012 offerings contain a provision for net cash settlement in the event that there is a
fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender
offer or share exchange). If a fundamental transaction occurs in which the consideration issued
F-23
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
consists principally of cash or stock in a non-public company, then the warrant holder has the option
to receive cash, equal to the fair value of the remaining unexercised portion of the warrant. Due to
this contingent redemption provision, the warrants require liability classification in accordance with
ASC 480 and are recorded at fair value. The warrants issued to investors in the July 2013, October
2013 and January 2014 offerings contain a fundamental transaction provision, but the warrant
holders only have an option as to the type of consideration received if the holders of common stock
receive an option as to their consideration. In addition, the warrants issued in the June 2009,
October 2009, June 2010, March 2011, December 2012, July 2013, October 2013, and January 2014
offerings contain a cashless exercise provision that is exercisable only in the event that a registration
statement is not effective. That provision may not be operative if an effective registration statement
is not available because an exemption under the U.S. securities laws may not be available to issue
unregistered shares. As a result, net cash settlement may be required, and the warrants require
liability classification.
ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a
recurring basis in periods subsequent to the initial recognition. Fair values for warrants are
determined using the Binomial Lattice (“Lattice”) valuation technique. The Lattice model provides
for dynamic assumptions regarding volatility and risk-free interest rates within the total period to
maturity. Accordingly, within the contractual term, the Company provided multiple date intervals
over which multiple volatilities and risk free interest rates were used. These intervals allow the
Lattice model to project outcomes along specific paths that consider volatilities and risk free rates
that would be more likely in an early exercise scenario.
Significant assumptions are determined as follows:
Trading market values—Published trading market values;
Exercise price—Stated exercise price;
Term—Remaining contractual term of the warrant;
Volatility—Historical trading volatility for periods consistent with the remaining terms;
Risk-free rate—Yields on zero coupon government securities with remaining terms consistent with
the remaining terms of the warrants.
Due to the fundamental transaction provision, which could provide for early redemption of the
warrants, the model also considered the probability the Company would enter into a fundamental
transaction during the remaining term of the warrant. Because the Company is not yet achieving
positive cash flow, management believes the probability of a fundamental transaction occurring over
the term of the warrant is unlikely and therefore estimates the probability of entering into a
fundamental transaction to be 5%. For valuation purposes, the Company also assumed that if such
a transaction did occur, it was more likely to occur towards the end of the term of the warrants.
The significant unobservable inputs used in the fair value measurement of the warrants include
management’s estimate of the probability that a fundamental transaction may occur in the future.
Significant increases (decreases) in the probability of occurrence would result in a significantly
higher (lower) fair value measurement.
F-24
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
The following table summarizes the fair value of the warrants as of the respective balance sheet
dates:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Fair Value as of:
(cid:31)
Warrant Issuance:
June 5, 2009 financing:
Series III warrants
Warrants to placement agent
October 23, 2009 financing:
Warrants to institutional investors
June 30, 2010 financing:
Warrants to institutional investors
March 31, 2011 financing:
Warrants to institutional investors
December 4, 2012 financing:
Warrants to institutional investors
Warrants to placement agent
July 26, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
October 16, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
January 21, 2014 financing:
Warrants to institutional investors
Total:
December 31, 2014 December 31, 2013
$
-$
-
-
-
11
1
19,689
10
319,277
311,360
90,052
14,595
788,314
30,594
949,756
96,563
$
1,479,200
3,768,351 $
2,124,444
222,286
1,148,390
83,808
1,051,454
72,605
-
5,034,058
F-25
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
The following table summarizes the number of shares indexed to the warrants as of the respective
balance sheet dates:
(cid:31)
Warrant Issuance
June 5, 2009 financing:
Series III warrants
Warrants to placement agent
October 23, 2009 financing:
Warrants to institutional investors
June 30, 2010 financing
Warrants to institutional investors
March 31, 2011 financing:
Warrants to institutional investors
December 4, 2012 financing:
Warrants to institutional investors
Warrants to placement agent
July 26, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
October 16, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
January 21, 2014 financing:
Warrants to institutional investors
Total:
(cid:31)
(cid:31)
(cid:31)
Number of Shares indexed as of:
December 31, 2014 December 31, 2013
-
-
-
-
1,555,555
132,143
1,228,333
2,000,000
3,333,333
3,333,333
221,600
40,000
2,000,000
124,032
2,317,309
407,692
4,761,905
13,205,871
7,418,503
880,000
3,990,000
456,000
3,567,309
407,692
-
24,968,868
The assumptions used in calculating the fair values of the warrants are as follows:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
June 5, 2009 financing:
Trading market prices
Estimated future volatility
Dividend
Estimated future risk-free rate
Equivalent volatility
Equivalent risk-free rate
December 31, 2014
December 31, 2013
$
$
-
-
-
-
-
-
0.51
109 %
-
0.13 %
43-45%
0.05-0.06%
F-26
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
(cid:31)
(cid:31)
(cid:31)
(cid:31)
October 23, 2009 financing:
Trading market prices
Estimated future volatility
Dividend
Estimated future risk-free rate
Equivalent volatility
Equivalent risk-free rate
(cid:31)
June 30, 2010 financing:
Trading market prices
Estimated future volatility
Dividend
Estimated future risk-free rate
Equivalent volatility
Equivalent risk-free rate
(cid:31)
March 31, 2011 financing:
Trading market prices
Estimated future volatility
Dividend
Estimated future risk-free rate
Equivalent volatility
Equivalent risk-free rate
December 4, 2012 financing:
Trading market prices
Estimated future volatility
Dividend
Estimated future risk-free rate
Equivalent volatility
Equivalent risk-free rate
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, 2014
December 31, 2013
$
$
-
-
-
-
-
-
0.51
109 %
-
0.13 %
57 %
0.07%
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, 2014
December 31, 2013
$
$
-
-
-
-
-
-
0.51
109 %
-
0.13 %
49 %
0.06%
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31, 2014
December 31, 2013
$
$
0.70
108 %
-
0.91%
67%
0.22%
0.51
109 %
-
1.58%
71%
0.27%
December 31, 2014
December 31, 2013
$
$
0.70
108 %
-
0.74-1.90%
65-71%
0.18-0.43%
0.51
109 %
-
1.58-2.72%
69-73%
0.22-0.40%
F-27
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
July 26, 2013 financing:
Trading market prices
Dividend
Equivalent volatility
Equivalent risk-free rate
October 16, 2013 financing:
Trading market prices
Dividend
Equivalent volatility
Equivalent risk-free rate
December 31, 2014
December 31, 2013
$
0.70
-
65-74%
0.18-0.55%
0.51
-
69-77%
0.22-0.62%
December 31, 2014
December 31, 2013
$
0.70
-
65-75%
0.18-0.59%
0.51
-
69-76%
0.20-0.52%
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
January 21, 2014 financing:
Trading market prices
Dividend
Equivalent volatility
Equivalent risk-free rate
December 31, 2014
December 31, 2013
$
0.70
-
78%
0.63%
-
-
-
-
F-28
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
Changes in the fair value of the warrant liabilities, carried at fair value, as reported as “unrealized
loss on fair value of warrants” in the statement of operations:
Exercised and Expired Warrants
June 5, 2009 financing:
Series III warrants
Warrants to placement agent
October 23, 2009 financing:
Warrants to institutional investors
June 30, 2010 financing:
Warrants to institutional investors
March 31, 2011 financing:
Warrants to institutional investors
December 4, 2012 financing:
Warrants to institutional investors
Warrants to placement agent
July 26, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
October 16, 2013 financing:
Warrants to institutional investors
Warrants to placement agent
January 21, 2014 financing:
Warrants to institutional investors
Total:
$
Year Ended
December 31, 2014
Year Ended
December 31, 2013
- $
11
1
(277,791)
10
(7,917)
(4,120,103)
(514,881)
(1,272,731)
(234,877)
(940,100)
(23,956)
144
35,300
3,488
53,765
12,190
(5,027)
(1,598,195)
(75,062)
147,562
26,681
18,739
14,761
$
2,212,227
(5,180,107) $
-
(1,365,654)
F-29
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
13. Income Taxes
No provision for federal and state income taxes was required for the years ended December 31, 2014
and 2013 due to the Company’s operating losses and increased deferred tax asset valuation
allowance. At December 31, 2014 and 2013, the Company had unused net operating loss
carry-forwards of approximately $81,619,000 and $69,036,000, respectively, which expire at various
dates through 2034. Some of this amount may be subject to annual limitations under certain
provisions of the Internal Revenue Code related to “changes in ownership.”
As of December 31, 2014 and 2013, the deferred tax assets related to the aforementioned
carry-forwards have been fully offset by valuation allowances, because significant utilization of such
amounts is not presently expected in the foreseeable future.
Deferred tax assets and valuation allowances consist of:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
December 31,
2014
December 31,
2013
Net Operating Loss Carryforwards
Stock Compensation Expense
Book tax differences on assets and liabilities
Valuation Allowance
Net Deferred Tax Assets
$
$
31,831,000
2,221,000
416,000
(34,468,000)
26,924,000
2,028,200
424,000
(29,376,200)
-$
-
The Company files income tax returns in the U.S. federal and Maryland state jurisdictions. Tax
years for fiscal 2011 through 2014 are open and potentially subject to examination by the federal and
Maryland state taxing authorities.
F-30
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
14. Commitments and Contingencies
a) The Company has contracted with various vendors for research and development services. The
terms of these agreements usually require an initial fee and monthly or periodic payments over
the term of the agreement, ranging from two months to 36 months. The costs to be incurred are
estimated and are subject to revision. As of December 31, 2014, the total estimated cost to
complete these agreements was approximately $8,440,000. All of these agreements may be
terminated by either party upon appropriate notice as stipulated in the respective agreements.
b) On June 22, 2009, the Company entered into a License Agreement with Korea Research
Institute of Chemical Technology (“KRICT”) to acquire the rights to all intellectual properties
related to Quinoxaline-Piperazine derivatives that were synthesized under a Joint Research
Agreement. The initial license fee was $100,000, all of which was paid as of December 31,
2009. The agreement with KRICT calls for a one-time milestone payment of $1,000,000
within 30 days after the first achievement of marketing approval of the first commercial
product arising out of or in connection with the use of KRICT’s intellectual properties. As of
December 31, 2014, the milestone has not occurred.
c) On June 29, 2009, the Company signed a five-year commercial lease agreement for 5,466
square feet of office space in Rockville, Maryland. Under the lease agreement, the Company
pays its allocable portion of real estate taxes and common area operating charges. Rent paid
under the Company’s lease during the years ended December 31, 2014 and 2013, including the
amendments’ terms described below, was $155,057 and $117,977, respectively.
On June 7, 2013, the Company entered into the first amendment to the lease agreement.
According to the terms of this amendment, the Company extended the lease term until June 30,
2019. The amendment term began on July 1, 2013 with a base rent of $100,210 and requires
annual base rent increases over the remaining term of the lease.
On July 26, 2014 the Company entered into the second amendment to the lease agreement.
According to the terms of this amendment, the Company leased an additional 1,637 square feet
of office space, beginning on September 1, 2014 and ending on August 31, 2015.
Future rental payments over the next five years are as follows:
(cid:31)
For the year ending December 31:
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
2015
2016
2017
2018
2019
(cid:31)
(cid:31)
186,764
159,881
163,871
167,970
85,024
Total
$
763,510
In connection with the lease agreement, the Company, in lieu of a security deposit, maintained
a letter of credit of $37,500 as of December 31, 2013 in favor of the lessor. According to the
terms of the First Amendment, during the year ended December 31, 2014, the Company
provided the lessor with a security deposit of $25,681, and did not renew the letter of credit.
F-31
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
d) On August 26, 2014 and June 24, 2013, the Company signed one-year renewal to use
laboratory space commencing on July 1, 2014 and 2013, respectively. The lease requires
monthly rental payments of $4,554. Rent paid under the Company’s lease during the years
ended December 31, 2014 and 2013 was $54,648.
e) The Company has established a 401(k) plan for its employees. The Company has elected to
match 100% of the first 3% of an employee’s compensation plus 50% of an additional 2% of
the employee’s deferral. Expense related to this matching contribution aggregated to $91,241
and $78,487 for the years ended December 31, 2014 and 2013, respectively.
f)
In July 2013, the Company entered into an exclusive license agreement with the University of
Maryland, Baltimore for a novel drug delivery platform, Nano-Polymer Drug Conjugate
Systems. RX-21101 is the Company’s first drug candidate utilizing this platform. The
agreement requires the Company to make payments to the University of Maryland if
RX-21101 or any products from the licensed delivery platform achieve development
milestones. As of December 31, 2014, no development milestones have occurred.
g) In October 2013, the Company signed an exclusive license agreement with the Ohio State
Innovation Foundation, for a novel oligonucleotide drug delivery platform, Lipid-Coated
Albumin Nanoparticle (“LCAN”). The agreement requires the Company to make payments
to the Ohio State Innovation Foundation or any products from the licensed delivery platform
achieve development milestones. As of December 31, 2014, no development milestones have
occurred.
F-32
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
15. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date, not adjusted
for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels giving the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3).
The three levels are described below:
Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or
liabilities that are accessible by the Company;
Level 2 Inputs — Quoted prices in markets that are not active or financial instruments for
which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs — Unobservable inputs for the asset or liability including significant
assumptions of the Company and other market participants.
The following tables present assets and liabilities that are measured at fair value on a recurring
basis and are categorized using the fair value hierarchy. There have been no changes in the
methodologies used at December 31, 2014 and 2013.
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
(cid:31)
Fair Value Measurements at December 31, 2014
Level 3
Level 1
Level 2
(cid:31)
(cid:31)
(cid:31)
Total
Assets:
Certificates of Deposit
Commercial Paper
Corporate Bonds
Total Assets:
Liabilities:
Warrant Liabilities
18,838,271
1,997,910
2,035,870
22,872,051 $
$
18,838,271
1,997,910
2,035,870
-
-
-
- $ 22,872,051 $
-
-
-
-
$
3,768,351
-
- $
3,768,351
Assets:
Restricted Cash Equivalents
State and Municipal Obligations
Total Assets:
$
$
Total
Fair Value Measurements at December 31, 2013
Level 3
Level 1
Level 2
196,130 $
100,000
296,130 $
158,630 $
100,000
258,630 $
37,500 $
-
37,500 $
-
-
-
Liabilities:
Warrant Liabilities
$
5,034,058
-
- $
5,034,058
As of December 31, 2013, the Company’s restricted cash equivalents also included money market
funds valued at net asset value of shares held by the Company and classified within level 1 of the fair
value hierarchy, and a certificate of deposit, valued based upon the underlying terms of a letter of
F-33
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
credit, as disclosed in Note 14, and classified within level 2 of the fair value hierarchy.
The fair value of the Company’s Level 2 marketable securities is determined by using quoted prices
from independent pricing services that use market data for comparable securities in active or inactive
markets. A variety of data inputs, including benchmark yields, interest rates, known historical
trades and broker dealer quotes are using with pricing models to determine the quoted prices.
The fair value methodology for the warrant liabilities is disclosed in Note 12.
The carrying amounts reported in the financial statements for cash and cash equivalents (Level 1),
prepaid expenses, and other current assets and accounts payable and accrued expenses approximate
fair value because of the short term maturity of these financial instruments.
The following table sets forth a reconciliation of changes in the years ended December 31, 2014 and
2013 in the fair value of the liabilities classified as Level 3 in the fair value hierarchy:
Balance at January 1, 2014
Additions
Unrealized losses, net
Unrealized gains on expiration
Transfers out of level 3
Balance at December 31, 2014
Balance at January 1, 2013
Additions
Unrealized losses, net
Unrealized gains on expiration
Transfers out of level 3
Balance at December 31, 2013
Warrant Liabilities
5,034,058
3,691,429
5,180,107
-
(10,137,243)
3,768,351
Warrant Liabilities
2,842,065
2,564,002
1,365,654
-
(1,737,663)
5,034,058
$
$
$
$
Additions consist of the fair value of warrant liabilities upon issuance. Transfers out of Level 3 for
warrant liabilities consist of warrant exercises, where the liability is converted to additional paid-in
capital upon exercise. The Company’s policy is to recognize transfers in and transfers out as of the
actual date of the event or change in circumstance that caused the transfer.
F-34
REXAHN PHARMACEUTICALS, INC.
Notes to Financial Statements
16. Subsequent Events
On March 16, 2015, the Company entered into an at market issuance sales agreement (the “Sales
Agreement”) with MLV & Co. LLC (“MLV”) pursuant to which the Company may issue and sell shares
of its common stock having an aggregate offering price of up to $40 million from time to time, at its
option, through MLV as its sales agent, subject to certain terms and conditions. Any shares sold will be
sold pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-196255),
as supplemented by a prospectus supplement dated March 16, 2015. The Company will pay MLV a
commission of 3.0% of the gross proceeds of the sale of any shares sold through MLV. To date, no shares
have been sold under the Sales Agreement.
Since December 31, 2014, the Company granted 3,376,316 stock options to officers and employees.
Since December 31, 2014, option holders exercised their options to purchase shares of the Company’s
common stock for cash of $705,542 and the Company issued 881,928 shares.
F-35
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
EXHIBIT INDEX
Amended and Restated Certificate of Incorporation, filed as Appendix G to the Company’s
Definitive Proxy Statement on Schedule 14A (File No. 000-50590) dated April 29, 2005, is
incorporated herein by reference.
Amended and Restated Bylaws, as amended, through March 21, 2014, filed as exhibit 3.2 to
the Company’s Annual Report on Form 10-K on March 21, 2014, is incorporated herein by
reference.
Specimen Certificate for the Company’s Common Stock, par value $.0001 per share, filed as
Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (File No. 333-129294)
dated October 28, 2005, is incorporated herein by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on March 30, 2011, is incorporated
herein by reference.
Form of Senior Debt Securities Indenture, filed as Exhibit 4.3 to the Company’s Registration
Statement on Form S-3 dated June 22, 2011, is incorporated herein by reference.
Form of Subordinated Debt Securities Indenture, filed as Exhibit 4.3 to the Company’s
Registration Statement on Form S-3 dated June 22, 2011, is incorporated herein by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on November 30, 2012, is incorporated
herein by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.2
to the Company’s Current Report on Form 8-K filed on November 30, 2012, is incorporated
herein by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on July 24, 2013, is incorporated herein
by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on October 16, 2013, is incorporated
herein by reference.
Form of Warrant for the Company’s Common Stock Purchase Warrants, filed as Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on January 15, 2014, is incorporated
herein by reference.
5.1
Opinion of Hogan Lovells US LLP
*10.1.1
*10.1.2
*10.1.3
Rexahn Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as Exhibit 4.4 to the
Company’s Registration Statement on Form S-8 (File No. 333-129294) dated October 28,
2005, is incorporated herein by reference.
Form of Stock Option Grant Agreement for Employees, filed as Exhibit 4.5.1 to the
Company’s Registration Statement on Form S-8 (File No. 333-129294) dated October 28,
2005, is incorporated herein by reference.
Form of Stock Option Grant Agreement for Non-Employee Directors and Consultants, filed as
Exhibit 4.5.2 to the Company’s Registration Statement on Form S-8 (File No. 333-129294)
dated October 28, 2005, is incorporated herein by reference.
*10.2
Employment Agreement, dated as of September 9, 2010, by and between Rexahn
10.3
*10.4
10.5
10.6
10.7
10.8
10.9
*10.10
*10.11
10.12
*10.13
10.14
Pharmaceuticals, Inc. and T. H. Jeong, filed as Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on September 10, 2010, is incorporated herein by reference.
Lease Agreement, dated June 5, 2009, by and between Rexahn Pharmaceuticals, Inc. and The
Realty Associates Fund V, L.P., filed as Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2009, is incorporated herein by reference.
Employment Agreement, dated as of September 9, 2010, by and between Rexahn
Pharmaceuticals, Inc. and Rakesh Soni, filed as Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on September 10, 2010, is incorporated herein by reference.
Research and Exclusive License Option Agreement, dated as of June 26, 2009, by and
between Rexahn Pharmaceuticals, Inc. and Teva Pharmaceutical Industries Limited, filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2009, is
incorporated herein by reference.
Securities Purchase Agreement, dated as of June 26, 2009, by and between Rexahn
Pharmaceuticals, Inc. and Teva Pharmaceutical Industries Limited (the “Teva Securities
Purchase Agreement”), filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on September 21, 2009, and Amendment No. 1 to the Teva Securities Purchase
Agreement, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
September 21, 2009, are incorporated herein by reference.
Amendment No. 1 to the Research and Exclusive License Option Agreement, dated as of
January 19, 2011, by and between Rexahn Pharmaceuticals, Inc. and Teva Pharmaceutical
Industries Limited, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
on January 20, 2011, is incorporated herein by reference.
Amendment No. 2 to the Teva Securities Purchase Agreement, filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 20, 2011, is incorporated herein by
reference.
Amendment No. 2 to the Research and Exclusive License Option Agreement, dated as of
November 27, 2012, by and between Rexahn Pharmaceuticals, Inc. and Teva Pharmaceutical
Industries Limited, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on November 27, 2012, is incorporated herein by reference.
Employment Agreement, dated as of February 4, 2013, by and between Rexahn
Pharmaceuticals, Inc. and Peter Suzdak, filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on January 22, 2013, is incorporated herein by reference.
Employment Agreement, dated as of March 25, 2013, by and between Rexahn
Pharmaceuticals, Inc. and Chang H. Ahn, filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on March 29, 2013, is incorporated herein by reference.
First Amendment to Lease Agreement, dated June 7, 2013, by and between Rexahn
Pharmaceuticals, Inc. and SG Plaza Holdings, LLC, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, is incorporated
herein by reference.
Rexahn Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as Exhibit 10.1 to the
Company’s Registration Statement on Form S-8 (File No. 333-189240) dated June 11, 2013,
is incorporated herein by reference.
Form of Securities Purchase Agreement, dated as of July 23, 2013, by and between Rexahn
Pharmaceuticals, Inc. and the purchasers identified on the signature pages thereto, filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 24, 2014, is
incorporated herein by reference.
10.15
10.16
10.17
10.18
16.1
16.2
23.1
23.2
24.1
31.1
31.2
32.1
32.2
Form of Securities Purchase Agreement, dated as of October 10, 2013, by and between
Rexahn Pharmaceuticals, Inc. and the purchasers identified on the signature pages thereto,
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 16,
2014, is incorporated herein by reference.
Form of Securities Purchase Agreement, dated as of January 15, 2014, by and between
Rexahn Pharmaceuticals, Inc. and the purchasers identified on the signature pages thereto,
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 21,
2014, is incorporated herein by reference.
Second Amendment to Lease Agreement, dated July 26, 2014, by and between Rexahn
Pharmaceuticals, Inc. and SG Plaza Holdings, LLC, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, is
incorporated herein by reference.
At Market Issuance Sales Agreement, dated March 16, 2015, by and between Rexahn
Pharmaceuticals, Inc. and MLV & CO. LLC
Letter of Lazar Levine & Felix LLP dated February 27, 2009, filed as Exhibit 16.1 to the
Company’s Amended Current Report on Form 8-K filed on March 2, 2009, is incorporated
herein by reference.
Letter from ParenteBeard LLC dated October 3, 2014, filed as Exhibit 16.1 to the Company’s
Current Report on 8-K filed on October 3, 2014, is incorporated herein by reference.
Consent of Baker Tilly Virchow Krause, LLP, independent registered public accounting firm
Consent of Hogan Lovells US LLP (included in Exhibit 5.1)
Power of Attorney
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350
Certification of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Calculation Linkbase
101.DEF
XBRL Taxonomy Definition Linkbase
101.LAB
XBRL Taxonomy Label Linkbase
101.PRE
XBRL Taxonomy Presentation Linkbase
*Indicates management contract or compensatory plan or arrangement
CORPORATE INFORMATION
BOARD OF DIRECTORS
CORPORATE HEADQUARTERS
Chang H. Ahn, Ph.D. Chairman
Chief Scientist, Rexahn Pharmaceuticals
Charles Beever, Director
Vice President, PwC Strategy&
Peter Brandt, Director
Former President and Chief Executive
Officer, Noven Pharmaceuticals
Mark Carthy, Director
Managing Partner, Orion Equity Partners
Kwang Soo Cheong, Ph.D. Director
Associate Professor, Johns Hopkins
University
Si Moon Hwang, Director
Pharmacist, Onnuri Grand Pharmacy
David McIntosh, Director
President, Club for Growth
Richard J. Rodgers, Director
Former Executive Vice President and
Chief Financial Officer, TESARO
Peter D. Suzdak, Ph.D. Director
Chief Executive Officer, Rexahn
Pharmaceuticals
EXECUTIVE OFFICERS
Peter D. Suzdak, Ph.D.
Chief Executive Officer
Ely Benaim, M.D.
Chief Medical Officer
Rakesh (Rick) Soni, M.B.A.
President and Chief Operating Officer
Tae Heum (Ted) Jeong, D. Mgt.
Sr. Vice President, Chief Financial Officer
and Secretary
Rexahn Pharmaceuticals, Inc.
15245 Shady Grove Road, Suite 455
Rockville, MD 20850
Phone: 240-268-5300
www.rexahn.com
TRANSFER AGENT
Olde Monmouth Stock Transfer Co., Inc.
Matthew J. Troster
200 Memorial Parkway
Atlantic Highlands, NJ 07716
Phone: 732-872-2727
LEGAL COUNSEL
Hogan Lovells US LLP
100 International Drive, Suite 2000
Baltimore, MD 21202
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Baker Tilly Virchow Krause, LLP
2609 Keiser Blvd
Wyomissing, PA 19610-3338
SECURITIES INFORMATION
TRADING MARKET: NYSE MKT
SYMBOL: RNN
FOR INVESTOR RELATIONS INQUIRIES OR
TO REQUEST ADDITIONAL COPIES OF
THIS ANNUAL REPORT, CONTACT:
The Trout Group LLC
Tricia Truehart
(646)-378-2953
ttruehart@troutgroup.com
Stockholders may obtain a copy of any
exhibit to our Form 10-K free of charge
by writing to the company at our
corporate headquarters address above.
A N N U A L R E P O R T
2 0 1 4
REXAHN PHARMACEUTICALS, INC.
15245 Shady Grove Road, Suite 455
Rockville, MD 20850
T: 240.268.5300
ir@rexahn.com
www.rexahn.com
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