UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 001-13341
TITAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
400 Oyster Point Blvd., Suite 505,
South San Francisco, California
(Address of principal executive offices)
94-3171940
(I.R.S. Employer
Identification Number)
94080
(Zip code)
Registrant’s telephone number, including area code: (650) 244-4990
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨ No
x
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 ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
the filing requirements for the past 90 days. Yes x No ¨
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). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
¨
¨
Accelerated filer
Smaller Reporting Company
x
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the closing
price on June 30, 2016 was $113.1 million.
As of March 10, 2017, 21,198,879 shares of common stock, $0.001 par value, of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K or in the documents incorporated by reference herein may contain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”). Reference is made in particular to the description of our plans and objectives for future
operations, assumptions underlying such plans and objectives and other forward-looking terminology such as “may,” “expects,” “believes,”
“anticipates,” “intends,” “projects,” or similar terms, variations of such terms or the negative of such terms. Forward-looking statements
are based on management’s current expectations. Actual results could differ materially from those currently anticipated due to a number of
factors, including but not limited to, uncertainties relating to the commercialization of Probuphine, financing and strategic agreements and
relationships; difficulties or delays in the regulatory approval process; uncertainties relating to manufacturing, sales, marketing and
distribution of our drug candidates that may be successfully developed and approved for commercialization; adverse side effects or
inadequate therapeutic efficacy of our drug candidates that could slow or prevent product development or commercialization; dependence
on third party suppliers; the uncertainty of protection for our patents and other intellectual property or trade secrets; and competition.
We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such
statement is based.
References herein to “we,” “us,” “Titan,” and “our company” refer to Titan Pharmaceuticals, Inc. unless the context otherwise
requires.
Probuphine ® and ProNeura™ are trademarks of our company. This Annual Report on Form 10-K also includes trade names and
trademarks of companies other than Titan.
Item 1.
Business
Overview
We are a pharmaceutical company developing proprietary therapeutics for the treatment of serious medical disorders. Our product
development programs utilize our proprietary long-term drug delivery platform, ProNeura™, and focus primarily on innovative treatments
for select chronic diseases for which steady state delivery of a drug provides an efficacy and/or safety benefit.
Probuphine®, our first product candidate based on the ProNeura platform, was approved by the United States Food and Drug
Administration, or FDA, on May 26, 2016 for the maintenance treatment of opioid dependence in patients who are stable on low to
moderate doses of daily sublingual buprenorphine treatment. We have licensed development and commercialization rights of Probuphine
for the U.S. and Canadian markets to Braeburn Pharmaceuticals, Inc. or Braeburn, and pursuant to the license agreement as amended to
date, received $15 million shortly after FDA approval and we will receive royalties on net sales of Probuphine ranging in percentage from
the mid-teens to the low twenties based on a tiered structure. The agreement also provides for up to an additional $165 million in sales
milestones and $35 million in regulatory milestones on Probuphine. Additionally, in certain circumstances, the agreement entitles us to a
low single digit royalty, up to an aggregate of $50 million, on net sales by Braeburn, if any, of other future competing products in the
addiction market, e.g. a monthly depot injection.
Braeburn commenced U.S. commercialization activities through a medical affairs introduction in advance of the Probuphine product
launch shortly after FDA approval focusing on the following two areas that are key to a successful launch for Probuphine:
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(i)
training of qualified health care providers on the use of Probuphine, the procedures for insertion and removal of the implant that
are part of the Risk Evaluation and Mitigation Strategies, or REMS. approved by the FDA, and the selection of eligible patients
a. Over 2,500 health care providers from all 50 states and Puerto Rico have already been certified to provide Probuphine to
their patients, and Braeburn has continued to conduct additional training programs as needed.
b. Shipment of Probuphine commenced in late June 2016 and the first patients were treated soon thereafter. Some of the
initial patients have already begun to receive their second course of implants.
(ii)
obtaining third party payor coverage for Probuphine and the insertion/removal procedures.
a. Probuphine is now covered by more than 70 insurance plans, including coverage under Medicare and Medicaid and
Veterans Administration programs.
In January 2017, Braeburn announced that the Centers for Medicare & Medicaid Services (CMS) had granted a Healthcare Common
Procedure Coding System (HCPCS) code, or permanent J-code, for Probuphine, as the first six-month buprenorphine implant for the
maintenance treatment of opioid addiction. The new J-code (J0570) became effective January 1, 2017 and coincided with the activation of
a new Braeburn field force. Braeburn continues to work to obtain additional codes to further facilitate reimbursement of Probuphine
insertion and removal procedures. HCPCS codes are used by healthcare professionals to identify services and procedures for which they bill
public or private health insurance programs. The codes included in the HCPCS set are maintained by CMS and universally accepted by all
payors. As with any new form of medical treatment involving a procedure, it has been necessary to train the physician office staff and
supply chain staff on new processes for approval and reimbursement for Probuphine and Braeburn has been focused on these activities to
minimize delays in making the product available to patients. These activities necessitated a controlled product distribution process during
the latter part of 2016, prior to receipt and effective date of the J-code, to ensure that the needs of the health care providers and the patients
were being addressed in a timely manner.
Braeburn has continued to devote substantial resources to launch activities, including the establishment of a field sales force and
medical support staff of more than 60 to support the health care providers throughout the entire process. In January 2017, Braeburn
indicated that the field sales force was in place and it was commencing a full commercial launch in the U.S. focusing on more than 80 key
treatment centers across the country to establish ‘sites of excellence’ for the long-term maintenance treatment with Probuphine.
In February 2016, Braeburn announced that it had sub-licensed the Canadian rights for development and commercialization of
Probuphine to Knight Therapeutics, Inc. (TSX:GUD) and, based on available company information, the product is currently indicated as
being in the regulatory review stage.
We have also made some progress in the efforts to advance potential commercialization of Probuphine outside of the U.S. and Canada.
During the year we interacted with several ex-U.S. companies that expressed interest in commercializing Probuphine in Europe and
elsewhere. A few companies executed confidentiality agreements and commenced technical due-diligence to fully understand the product
and its regulatory status outside the U.S. Completion of any ex-U.S. partnership with one or more of the interested parties will require
regulatory clarity for product approval in Europe. Consequently, in December 2016, we sought scientific advice and met with the U.K. and
German regulatory agencies, and based on feedback from these meetings we submitted an application to the European Medicines Agency,
or EMA, seeking eligibility for Probuphine to follow the centralized review and approval process for its Marketing Authorization
Application or MAA. In early March 2017, we received confirmation from the EMA that Probuphine is eligible for a centralized review
and approval process and we estimate that an MAA could be filed in the fourth quarter of 2017. We have also been granted Small
Manufacturing Entity, or SME, status in Europe, which provides for some monetary benefits during the application process and
commercialization. We will continue to pursue partnerships for Probuphine in Europe and elsewhere during 2017.
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We believe that our ProNeura long term drug delivery platform has the potential to be used in the treatment of other chronic conditions
where maintaining stable, around the clock blood levels of a medication may benefit the patient and improve medical outcomes. We have
two products in early development using the ProNeura platform, an implant designed to provide long-term delivery of ropinirole, a
dopamine agonist approved as a daily dosed oral formulation for the treatment of Parkinson’s disease, and an implant designed to provide
long-term delivery of T3, a synthetic thyroid hormone approved as a daily dosed oral formulation for the treatment of hypothyroidism. In
late January 2016, we received feedback from the FDA on our product development plans for the ropinirole implant which had been
submitted as part of the briefing material to the FDA in December 2015 in support of a pre-Investigational New Drug (“IND”) meeting
request. The required non-clinical studies with the ropinirole implant in support of an IND application were completed in the third quarter
and final reports were completed by December 2016. The IND was submitted to the FDA in January 2017, and in late February 2017,
following its initial review of the IND, we received comments from the FDA requesting additional information. Specifically, in a telephone
communication with Titan, the FDA indicated that it will require final release test data on the ropinirole implant and the applicator used to
insert the implant before clearing the IND. Additionally, the FDA is requesting that we identify a participating Principal Investigator for
the study. We expect to have final test data on the implant and the applicator within the next several weeks, and are in the process of
qualifying the participating clinical sites. We expect to receive the FDA’s written comments in late March. We are working quickly to
provide the FDA with the additional information required, and are hopeful that we will be able to commence the clinical study toward the
end of the second quarter.
Development of the T3 implant product continued during 2016 with non-clinical studies conducted to help optimize the formulation.
We identified refinements to the formulation that will be necessary; however, due to shortage of the active pharmaceutical ingredient, or
API, further investigation had to be temporarily suspended during the fourth quarter of 2016. In early 2017, we obtained the requisite
supply of the API and have commenced work towards the optimization of the T3 implant. Once this work is completed, we will be in a
position to request a pre-IND meeting with the FDA by mid-2017, resources permitting.
Our goal is to further expand our product pipeline, and we are currently evaluating other drugs and disease settings for opportunities to
use the ProNeura platform in potential treatment applications where conventional treatment is limited by variability in blood drug levels and
poor patient compliance.
We operate in only one business segment, the development of pharmaceutical products. We make available free of charge through our
website, www.titanpharm.com, our periodic reports as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
ProNeura Continuous Drug Delivery Platform
Our ProNeura continuous drug delivery system consists of a small, solid rod made from a mixture of ethylene-vinyl acetate, or EVA,
and a drug substance. The resulting product is a solid matrix that is placed subdermally, normally in the inside part of the upper arm in a
simple office procedure, and is removed in a similar manner at the end of the treatment period. The drug substance is released continuously
through the process of dissolution. This results in a steady rate of release generally similar to intravenous administration. We believe that
such long-term, almost linear release characteristics are desirable by avoiding peak and trough level dosing that may pose problems for
many disease settings.
The ProNeura platform was developed to address the need for a simple, practical method to achieve continuous long-term drug
delivery, and, depending on the characteristics of the compound to be delivered, potentially can provide treatment on an outpatient basis
over extended periods of up to 12 months. We believe that the benefits of this technology have been demonstrated by the clinical results to
date with Probuphine, and the development and regulatory process have been affirmed by the FDA approval of this product in May 2016.
We have commenced two product development programs, the first a ropinirole implant for the treatment of Parkinson’s disease and the
second a T3 implant for the treatment of hypothyroidism. We have also been evaluating opportunities to develop this drug delivery platform
for other potential treatment applications in which conventional treatment is limited by variability in blood drug levels and poor patient
compliance and where existing therapeutic compounds have sufficient potency to be effective at low doses.
Our Product Pipeline
Probuphine
We developed Probuphine for the maintenance treatment of opioid dependence. Upon subdermal insertion in a patient, Probuphine is
designed to release medication continuously and maintain a stable, around the clock blood level of the drug buprenorphine, an approved
agent for the treatment of opioid dependence. Probuphine is expected to provide six months of medication following a single treatment and
was approved by the FDA in May 2016 for the maintenance treatment of opioid dependence in clinically stable patients who are receiving
treatment with an oral formulation of buprenorphine at a dose of 8mg/day or less.
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We have licensed development and commercialization rights for the U.S. and Canada to Braeburn and pursuant to the license
agreement, as amended to date, we received a $15 million milestone payment upon FDA approval of the Probuphine NDA and are entitled
to receive royalties on net sales of Probuphine ranging in percentage from the mid-teens to the low twenties. The agreement also provides
for up to $165 million in sales milestones and up to $35 million in regulatory milestones for additional indications, and also entitles us to
low single digit royalties on sales by Braeburn, if any, of other future competing products in the addiction market, such as the one month
depot injection of buprenorphine that Braeburn licensed from Camurus AB for the U.S. and Canadian markets.
We have also made some progress in the efforts to advance potential commercialization of Probuphine outside of the U.S. and
Canada. During the year we interacted with several ex-U.S. companies that expressed interest in commercializing Probuphine in Europe and
elsewhere. A few companies executed confidentiality agreements and commenced technical due-diligence to fully understand the product
and its regulatory status outside the U.S. Completion of any ex-U.S. partnership with one or more of the interested parties will require
regulatory clarity for product approval in Europe. Consequently, in December 2016, we sought scientific advice and met with the U.K.
regulatory agency, MHRA, and the German regulatory agency, BfArM, and based on feedback from these meetings we submitted an
application to the EMA seeking eligibility for Probuphine to follow the centralized review and approval process for its MAA. In early
March 2017, we received confirmation from the EMA that Probuphine is eligible for a centralized review and approval process, and we
estimate that an MAA could be filed in the fourth quarter of 2017. We have also been granted Small Manufacturing Entity, or SME, status
in Europe, which provides for some monetary benefits during the application process and commercialization. We will continue to pursue
partnerships for Probuphine in Europe and elsewhere during 2017.
The goal of any therapy for an addictive disorder is to reduce the use of the addictive substance over time and to engage the patient in
treatment long enough for therapeutic gains to be consolidated. In a clinical study, the effectiveness of a treatment for opioid dependence is
primarily evaluated by testing a patient’s urine samples for the presence of illicit opioids over the treatment period along with self-reports
by the patient of illicit opioid use. The FDA approval of Probuphine was based on the data from six Phase 3 clinical studies as listed below:
· One six month, double blind, double dummy study evaluating Probuphine in comparison to an orally dosed buprenorphine
formulation in clinically stable patients receiving a daily dose of 8mg/day or less. The objective of the study was to show non-
inferiority between the two treatment groups and the primary efficacy analysis was a non-inferiority comparison of the proportions
of treatment responders in each group. A responder was defined as having at least four out of six months free of illicit opioids based
on urine testing and subject self-report. The analyses conducted according to the pre-planned Statistical Analysis Plan indicated that
the primary endpoint of non-inferiority and all secondary endpoints were met. The overall safety and tolerability profiles for each
treatment group were also comparable. The implantation procedures were also generally well tolerated and comparable to
observations from earlier studies with Probuphine.
·
Two six-month, double-blind, placebo-controlled safety and efficacy trials; one of which included an open label, active control
(Suboxone). In both studies, Probuphine demonstrated superiority to placebo implants, and in the second study, established non-
inferiority in comparison to Suboxone; In both placebo-controlled Phase 3 studies of Probuphine, the patients were new to
buprenorphine treatment (no treatment during at least the prior 90 days) and inducted at a dose of 12-16mg/day of Suboxone over a
short period. Every participant was required to provide urine samples three times a week and any missed sample was considered a
positive result (i.e. urine testing positive for illicit opioid). In these studies, the primary effectiveness of the treatment with
Probuphine (i.e. the primary endpoint) was established by comparing the negative urine results between the Probuphine and placebo
arms using a statistical technique, specifically ‘the cumulative distribution function of negative urines’, which basically performs a
comparative analysis on the relative proportions of negative urines between treatment groups over the time period of treatment. The
patients in the Probuphine arm showed statistically significant difference in the negative urines as compared to the placebo arm in
both studies demonstrating that the treatment with Probuphine was successful in reducing their usage of illicit opioids as compared
to the treatment with placebo. These favorable results for Probuphine were also confirmed by a significant difference over the
placebo arm in other secondary measures such as retention in treatment, withdrawal symptoms and craving for opioids, all of which
are monitored by clinicians to see if a treatment is providing benefit to the patients. Results for the first double-blind, placebo-
controlled safety and efficacy study have been published in the Journal of the American Medical Association (JAMA, October
2010) and results of the follow-on randomized three arm study with Probuphine, placebo and sublingual treatment have been
published in the journal Addiction (Addiction, September 2013).
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·
Two six-month, open-label re-treatment safety trials. Patients who completed the controlled studies were eligible for enrollment in
six-month re-treatment studies, which provided data on up to one full year of treatment.
· A pharmacokinetic (relative bioavailability) safety study. The pharmacokinetic safety study has provided important data on the
level of buprenorphine in the blood during the treatment period and gives a good profile of the safety of Probuphine.
Data from some or all of these studies has been presented at several scientific meetings, including the International Society of
Addiction Medicine Annual Meeting, the American Society of Addiction Medicine Annual Meeting, the American College of
Neuropharmacology Annual Meeting and the Annual Scientific Meeting of The College on Problems of Drug Dependence.
ProNeura-Ropinirole for Parkinson’s Disease
Parkinson’s disease, or PD, is a disease of the central nervous system characterized by the loss of dopaminergic neurons, which leads
to increasing activity in the brain region that influences movement and motor function. According to the Parkinson’s Disease Foundation,
more than one million people in the U.S. suffer from PD, and this number is projected to double by 2030. Early stage PD patients are
treated with daily doses of drugs designed to replace dopamine in the brain. However, these therapeutics typically lose their benefits after
several years of chronic treatment, and trigger serious side effect. About one-third of the treated patients develop motor response
fluctuations and/or drug-induced dyskinesias within only 3 to 5 years of treatment, and these symptoms are present in almost all patients
after 10 to 12 years. Clinical and nonclinical research indicates that these motor side effects arise from the pulsatile dopaminergic
stimulation resulting from current oral treatment. Continuous dopaminergic stimulation (CDS) by subcutaneous infusion has been shown to
palliate these motor complications, as well as to delay or prevent the onset of dyskinesias. We believe our ProNeura drug delivery
technology provides a clinically-validated platform to safely and conveniently provide CDS for several months from a single treatment.
Further, the subdermal placement of these implants eliminates many of the device-related complications associated with existing treatment
modalities.
We have previously conducted a non-clinical study in an MPTP Parkinsonian primate model and demonstrated that a sustained non-
fluctuating plasma level of ropinirole could be delivered safely for several months following implantation and could control PD symptoms
without triggering dyskenesias in severely lesioned primates. This data was presented in a poster at the 19th International Congress of
Parkinson's Disease and Movement Disorders in San Diego in June 2015. In December 2015, we submitted briefing material to the FDA on
the development plans for the ropinirole implant in support of a pre- IND meeting request, and in late January 2016 we received feedback
from the FDA on our product development plans. During 2016, we completed the following steps to advance the ropinirole implant
program:
• Optimized the implant formulation of ropinirole and developed a cGMP manufacturing process and produced the ropinirole
implants for the non-clinical toxicology and other studies
•
Implemented the non-clinical study plan to support an IND application and successfully completed all the studies and study reports
by December
• Designed a proof of concept pharmacokinetic clinical study
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•
Prepared all sections of the IND for submission to the FDA
The IND was submitted to the FDA in January 2017, and in late February 2017, in a telephone communication with Titan, the FDA
indicated that it will require final release test data on the ropinirole implant and the applicator used to insert the implant before clearing the
IND. Additionally, the FDA is requesting that we identify a participating Principal Investigator for the study. We expect to receive final
written comments on the IND by late March 2017.We expect to have final test data on the implant and the applicator within the next
several weeks, and are in the process of qualifying the participating clinical sites. We are working quickly to provide the FDA with the
additional information required, and are hopeful that we will be able to commence the clinical study toward the end of the second quarter of
2017.
ProNeura-Triiodothyronine (T3) for hypothyroidism
Hypothyroidism is a disorder that occurs when the thyroid gland does not make enough thyroid hormone to meet the body’s needs.
Thyroid hormone regulates metabolism and affects nearly every organ in the body. It is a disease affecting about 15 million
Americans, mostly women. Symptoms include chronic fatigue, weight gain and obesity, dry skin, impaired mental activity, and depression.
The majority of patients are diagnosed with standard blood tests and receive treatment typically consisting of synthetic prohormone
thyroxine (T4) given as a once-daily oral medication (Synthroid®, Levoxyl®, generics), which in turn is converted in the body to the active
T3. Based upon symptoms and blood tests, it is estimated that as many as 15 percent of hypothyroid patients are not adequately treated with
this therapy, resulting in a persistent deficiency in the primary active form of thyroid hormone, T3, and physicians typically add an oral T3
regimen to the treatment of these patients.
Once-daily synthetic T3 (Cytomel®) is an effective medication for hypothyroidism but can cause potential side effects such as
headache, nervousness, irritability, sweating, and cardiac arrhythmias, which are caused by the peak-and-trough blood-level fluctuations of
T3 associated with standard oral delivery. Continuous delivery of T3 by the oral or parenteral route is highly desirable, but has been
difficult to achieve because of the unique solubility characteristics of the compound. Thus, an implantable T3 product utilizing the
ProNeura platform that more closely replicates normal thyroid physiology and avoids the unwanted side effects associated with the current
pulsatile-release oral formulation could benefit patients and serve a great, unmet medical need.
During 2016 we completed in-vivo non-clinical studies in small and large animal models evaluating implant formulations for drug
release characteristics and the effectiveness of the implant. We identified further refinements that will be necessary; however, shortage of
API led to a temporary suspension of activities during the fourth quarter. We obtained adequate supply of the API in early 2017 and have
commenced work towards the optimization of the T3 implant. Once this work is completed we will be in a position to request a pre-IND
meeting with the FDA by mid-2017, and, resources permitting, continue developing the product with completion of the non-clinical studies
in support of the IND submission in the first half of 2018.
Fanapt® (iloperidone)
Fanapt (iloperidone) is an atypical antipsychotic approved in 2009 by the FDA for the treatment of schizophrenia and in 2014 was
marketed by Novartis in the U.S. On December 31, 2014, Vanda Pharmaceuticals, Inc. (“Vanda”) acquired the rights to Fanapt for the U.S.
and Canada from Novartis and is now marketing Fanapt in the U.S. Vanda already owned the development and commercialization rights to
the oral and depot formulations of this product for the rest of the world, and by acquiring the U.S. and Canadian rights from Novartis,
effectively replaced Novartis in the sublicense agreement with Titan. We transferred the right to royalty revenues related to Fanapt to a
third party in exchange for cash and debt considerations, the proceeds of which we used to advance the development of Probuphine and for
general corporate purposes. The U.S. patent expired in November 2016, and patent coverage on the compound has also expired in the
significant markets outside of the U.S. We do not incur any ongoing expenses nor are we entitled to any royalties associated with this
product.
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License Agreements
In December 2012, we entered into a license agreement (the “Agreement”) with Braeburn pursuant to which we granted Braeburn an
exclusive right and license to commercialize Probuphine in the United States of America and its territories, including Puerto Rico, and
Canada (the “Territory”). Under the Agreement, Braeburn made a non-refundable up-front license fee payment of $15.75 million and
agreed to pay us tiered royalties on a percentage of net sales of Probuphine ranging from the mid-teens to the low twenties. Additionally,
the Agreement provided for us to receive $45 million upon FDA approval of the NDA for Probuphine and at such time ownership of the
NDA will transfer to Braeburn, as well as up to an additional $130 million upon the achievement of specified sales milestones and up to
$35 million in regulatory milestones. We will retain all of the rights to Probuphine outside the Territory. Unless earlier terminated, the
Agreement will expire on the later of (i) the 15th anniversary of the date of product launch in the Territory or (ii) the expiration of the last
to expire patent in the Territory covered by the Agreement (the “Term”). Either party may terminate the Agreement prior to the expiration
of the Term in the event of a material breach by the other party that remains uncured or in the event of the other party’s bankruptcy. We
may terminate the Agreement if, for reasons other than force majeure, regulatory, safety, manufacturing or product quality issues, Braeburn
discontinues commercial sale of the product and fails to resume sales within 30 days following notice or in the event Braeburn or any of its
affiliates or sublicensees commences any legal proceeding seeking to challenge or dispute the validity or ownership of the licensed patents.
Braeburn may terminate the Agreement in the event that Braeburn, notwithstanding good faith efforts to do so, is unable to enter into an
agreement for the supply of EVA or if such a supply agreement is terminated by Braeburn due to a material breach by the supplier or the
supplier fails to provide EVA to Braeburn for a period of at least three months. Braeburn may also terminate the Agreement (i) on a
country by country basis upon six months’ notice following the occurrence of any “significant competition” in such country, as such term
is defined in the Agreement; (ii) immediately upon notice if Braeburn determines in good faith that it is inadvisable to continue
commercialization as a result of any actual or perceived safety issues.
In May 2013, we entered into an amendment to the Agreement (the “Amendment”) primarily to modify certain of the termination
provisions of the Agreement and to provide for us to share in legal and consulting expenses in excess of a specified amount prior to approval
of the NDA.
In July 2013, we entered into a second amendment to the Agreement (the “Second Amendment”) primarily to establish and provide the
parameters for a committee comprised of representatives of Titan and Braeburn responsible for and with the authority to make all decisions
regarding the development and implementation of a strategic plan to seek FDA approval of Probuphine®.
In November 2013, we entered into a stock purchase agreement pursuant to which Braeburn made a $5 million equity investment in
our company and a third amendment to the Agreement (the “Third Amendment”) primarily to modify the amount and timing of the
approval and sales milestone payments payable under the Agreement. The Third Amendment, entitled us to a $15 million payment upon
FDA approval of the NDA and to receive royalties on net sales of Probuphine ranging in percentage from the mid-teens to the low twenties.
The agreement also provides for up to $165 million in sales milestones and $35 in regulatory milestones. In addition, we are entitled to
receive royalties, up to an aggregate of $50 million, on a percentage of sales in the low single digit by Braeburn, if any, of other continuous
delivery treatments for opioid dependence as defined in the Third Amendment and can elect to receive low single digit royalties on sales by
Braeburn, if any, of other products in the addiction market in exchange for a similar reduction in our royalties on Probuphine.
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In February 2016, Braeburn informed us that it has entered in a sublicense agreement with Knight Therapeutics, Inc. (“Knight”), a
specialty pharmaceutical company, whereby Braeburn has granted to Knight the rights to commercialize Probuphine in Canada.
Intellectual Property
Our goal is to obtain, maintain and enforce patent protection for our product candidates, formulations, processes, methods and any
other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in
the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property
protection possible for our current product candidates and any future product candidates, proprietary information and proprietary
technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, patent
protection may not afford us with complete protection against competitors who seek to circumvent our patents.
We also depend upon the skills, knowledge, experience and know-how of our management and research and development personnel,
as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how, which may not be patentable,
and for inventions for which patents may be difficult to enforce, we currently rely and will in the future rely on trade secret protection and
confidentiality agreements to protect our interests. To this end, we require all of our employees, consultants, advisors and other contractors
to enter into confidentiality 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.
In June 2010, the United States Patent and Trademark Office (“USPTO”) issued a patent covering methods of using Probuphine for the
treatment of opiate addiction. Titan is the owner of this patent which claims a method for treating opiate addiction with a subcutaneously
implanted device comprising buprenorphine and EVA, a biocompatible copolymer that releases buprenorphine continuously for extended
periods of time. This patent will expire in April 2024. A U.S. continuation application is currently pending which includes claims related to
Probuphine for the treatment of pain. Related patents covering use of Probuphine with the continuous delivery technology for the treatment
of opiate addiction have also issued in Australia, Canada, India, Japan, Mexico and New Zealand. Further Probuphine applications are
pending in Europe and Hong Kong. Patents covering certain dopamine agonist implants, including ropinirole implant, have already been
issued or allowed in the United States, Europe, Japan, China, Australia, Canada, South Korea, Mexico, New Zealand, South Africa, Israel
and Hong Kong, while prosecution of the patent application continues in India.
We have filed additional patent applications for a heterogeneous implant designed with some unique properties that may provide
benefits to the structural integrity of the implants and potentially enhance drug delivery.
Future court decisions or changes in patent law might materially affect the patents or patent applications, including, but not limited to,
their expiration dates.
Competition
The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Many
companies of all sizes, including major pharmaceutical companies and specialized biotechnology companies, are engaged in the
development and commercialization of therapeutic agents designed for the treatment of the same diseases and disorders that we target.
Many of our competitors have substantially greater financial and other resources, larger research and development staff and more
experience in the regulatory approval process. Moreover, potential competitors have or may have patents or other rights that conflict with
patents covering our technologies.
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With respect to Probuphine, there are no six-month implant formulations of buprenorphine on the market or in development, and the
primary competition it will face will come from Indivior, PLC (formerly the pharmaceutical business of Reckitt Benckiser Group, PLC),
which markets globally a sublingual buprenorphine product (tablet and film formulations) for the treatment of opioid dependence that
currently holds the dominant market share of global sales. Probuphine may also face competition from two additional proprietary daily dose
formulations that have been approved by the FDA in the past two years; the first is a sublingual tablet called Zubsolv marketed by Orexo
and the second is a buccal patch called Bunavail marketed by Bio Delivery Sciences International. Also, during 2013 and 2014, several
generic sublingual tablet formulations of buprenorphine similar to Suboxone and Subutex were approved by the FDA that are expected to
compete in the opioid addiction treatment market. Other forms of buprenorphine are also in development by other companies, including
intramuscular and intradermal one week and one month depot injections which, if approved, will also compete with our product. Braeburn
has licensed rights to certain of such potential products and Titan is entitled to a low single digit royalty on net sales of competing products,
if commercialized. The one-month depot formulations of buprenorphine are in late-stage clinical development for the treatment of opioid
dependence, and are likely to be approved in 2018. Alkermes, Inc. also markets Vivitrol®, a one-month depot injection of naltrexone as a
maintenance treatment for opioid dependent patients who have successfully achieved abstinence.
If successfully developed and approved for commercialization, our ProNeura ropinirole product for PD will face competition primarily
from numerous daily dose dopamine agonist treatments currently in use that provide symptom relief from disease related immobility, as
well as the complications associated with long-term levodopa therapy (e.g. dyskinesias, tolerance). Approved products in the U.S. in
addition to Requip XL®, which is marketed by GlaxoSmithKline, include Apokyn® (US WorldMeds LLC), Parlodel® (Novartis
Pharmaceuticals Inc.), Mirapex ER® (Boehringer Ingelheim Pharmaceuticals Inc.) and Neupro® (UCB Inc.). There is a strong need for
products providing continuous, stable, long term delivery of dopamine and dopamine agonists and the FDA recently approved a product
called Duodopa®, the first and only treatment delivered via catheters directly into the duodenum that is capable of providing 16 continuous
hours of carbidopa and levodopa for treatment of motor fluctuations in advanced PD. Duodopa is marketed globally by Abbvie. Also, we
are aware of products in mid-stage clinical development that are capable of short to medium-term subcutaneous and subdermal delivery of
levodopa/carbidopa using pumps.
If successfully developed and approved for commercialization, our ProNeura T3 product for hypothyroidism will face competition
primarily from the daily dose oral triiodothyronine (T3) liothyronine sodium tablet product; which is marketed by King Pharmaceuticals
(Pfizer) as Cytomel®. Generic liothyronine sodium tablets are also available from Coastal Pharmaceuticals, Mylan, and Sigma
Pharmaceuticals. We are also aware of products in nonclinical development that are being formulated for short to medium-term delivery of
T3.
Manufacturing
The manufacturing of Probuphine has primarily been conducted at DPT Laboratories, Inc., or DPT, and we have expanded the
manufacturing facility at this contract manufacturer to establish commercial scale capability to support the market launch of Probuphine
and ongoing demand. We have entered into a commercial manufacturing agreement with DPT that governs the terms of the production and
supply of Probuphine. During 2016, we have continued to supply and support Braeburn while an agreement between Braeburn and DPT for
the supply of Probuphine is being finalized. We will continue to manufacture Probuphine as needed for ex-US markets.
To date, we have obtained the supply of bupenorphine from Teva Pharmaceuticals, Inc., or Teva, under an arrangement similar to the
one with DPT. We have entered into a commercial supply agreement with Teva; however, we anticipate that as the product is launched
commercially, Braeburn will establish an agreement with Teva for the supply of buprenorphine and our requirements of buprenorphine will
be only for the ex-US markets.
Sales and Marketing
We do not currently have and do not intend to establish any sales and marketing capability. As our licensee, Braeburn will have sole
responsibility for sales and marketing of Probuphine within the United States and, through its sublicensee, Canada. We intend to seek
comparable partnering arrangements for Probuphine outside the Territory, and our current plans are to make similar arrangements for the
commercialization of any additional products we may successfully develop based on our ProNeura technology.
Government Regulation
Government authorities in the United States at the federal, state and local level and in other countries extensively regulate, among
other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drug products. Generally,
before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a
format specific to each regulatory authority, submitted for review and approved by the regulatory authority.
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U.S. drug development
In the United States, the FDA regulates drugs and devices under the Food, Drug and Cosmetics Act, or FDCA, and its implementing
regulations. Drugs and devices are also subject to other federal, state and local statutes and regulations. Products composed of both a drug
product and device product are combination products. If marketed individually, each component would be subject to different regulatory
pathways and reviewed by different centers within the FDA. A combination product, however, is assigned to a center that will have primary
jurisdiction over its regulation based on a determination of the combination product’s primary mode of action, which is the single mode of
action that provides the most important therapeutic action. In the case of some of our product candidates, we expect the primary mode of
action to be attributable to the drug component of the product, which means that the FDA’s Center for Drug Evaluation and Research
would have primary jurisdiction over the premarket development, review and approval. The process of obtaining regulatory approvals and
the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial
time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process,
approval process or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include, among
other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters,
product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution,
disgorgement, or civil or criminal penalties. Additionally, a manufacturer may need to recall a product from the market. Any agency or
judicial enforcement action could have a material adverse effect on us.
· Our product candidates must be approved by the FDA through the New Drug Application, or NDA, process before they may be
legally marketed in the United States. The process required by the FDA before a drug may be marketed in the United States
generally involves the following:
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Completion of extensive nonclinical laboratory tests, animal studies and formulation studies in accordance with applicable
regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations;
Submission to the FDA of an IND application, which must become effective before human clinical trials may begin;
Approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial site before each
trial may be initiated;
Performance of adequate and well-controlled human clinical trials in accordance with applicable IND and other clinical
trial-related regulations, referred to as good clinical practices, or GCPs, to establish the safety and efficacy of the proposed
drug for each proposed indication;
Submission to the FDA of an NDA for a new drug;
A determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;
Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is
produced to assess compliance with cGMP requirements to assure that the facilities, methods and controls are adequate to
preserve the drug’s identity, strength, quality and purity;
Potential FDA audit of the nonclinical study and/or clinical trial sites that generated the data in support of the NDA; and
FDA review and approval of the NDA, including consideration of the views of any FDA advisory committee, prior to any
commercial marketing or sale of the drug in the United States.
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The nonclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be
certain that any approvals for our product candidates will be granted on a timely basis, if at all.
The data required to support an NDA is generated in two distinct development stages: nonclinical and clinical. For new chemical
entities, the nonclinical development stage generally involves synthesizing the active component, developing the formulation and
determining the manufacturing process, as well as carrying out non-human toxicology, pharmacology and drug metabolism studies in the
laboratory, which support subsequent clinical testing. These nonclinical tests include laboratory evaluation of product chemistry,
formulation, stability and toxicity, as well as animal studies to assess the characteristics and potential safety and efficacy of the product.
The conduct of the nonclinical tests must comply with federal regulations, including GLPs. The sponsor must submit the results of the
nonclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical
protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product
to humans. Some nonclinical testing may continue even after the IND is submitted, but an IND must become effective before human
clinical trials may begin. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials.
The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the
proposed clinical trials, including concerns that human research subjects will be exposed to unreasonable health risks, and places the IND
on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before
the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to
safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical
trials to begin, or that, once begun, issues will not arise that could cause the trial to be suspended or terminated.
The clinical stage of development involves the administration of the drug candidate to healthy volunteers or patients under the
supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs,
which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical
trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection
and exclusion criteria and the parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent
amendments to the protocol, must be submitted to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved
by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is
charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating
in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form
that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completion.
There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.
A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the
clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the
FDA in support of an NDA so long as the clinical trial is conducted in compliance with GCP and FDA is able to validate the data through an
onsite inspection if the agency deems it necessary.
Clinical trials
Clinical trials are generally conducted in three sequential phases that may overlap, known as Phase 1, Phase 2 and Phase 3 clinical
trials.
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Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then
multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic
action, side effect tolerability and safety of the drug.
Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired
benefits and provide a preliminary evaluation of efficacy. At the same time, safety and further pharmacokinetic and
pharmacodynamic information is collected, as well as identification of possible adverse effects and safety risks.
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Phase 3 clinical trials generally involve large numbers of patients at multiple sites (from several hundred to several thousand
subjects) and are designed to provide the data necessary to demonstrate the effectiveness of the product for its intended use, its
safety in use and to establish the overall benefit/risk relationship of the product and provide an adequate basis for physician
labeling. Phase 3 clinical trials may include comparisons with placebo and/or comparator treatments.
Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are
used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may
mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. Written IND safety reports
must be submitted to the FDA and the investigators within 15 calendar days for serious and unexpected suspected adverse events, finding
from other studies or animal or in vitro testing that suggests a significant risk for human subjects, and any clinically important increase in
the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Additionally, a sponsor must notify
the FDA of any unexpected fatal or life-threatening suspected adverse reaction within 7 calendar days. Phase 1, Phase 2 and Phase 3
clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a
clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable
health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted
in accordance with the IRB's requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some
clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety
monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points
based on access to certain data from the trial.
Pursuant to the Cures Act, the manufacturer of an investigational drug for a serious disease or condition is required to make available,
such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational
drug. This requirement applies on the later of 60 calendar days after the date of enactment of the Cures Act or the first initiation of a Phase
2 or Phase 3 trial of the investigational drug.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information
about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial
quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of
the drug candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality and purity of the
final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate
that the drug candidate does not undergo unacceptable deterioration over its shelf life.
NDA and FDA review process
The results of the nonclinical studies and clinical trials, together with other detailed information, including extensive manufacturing
information and information on the composition of the drug and proposed labeling, are submitted to the FDA in the form of an NDA
requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA to determine, among other things,
whether a drug is safe and effective for its intended use and whether the product is being manufactured in accordance with cGMP to assure
and preserve the product's identity, strength, quality and purity. FDA approval of an NDA must be obtained before a drug may be offered
for sale in the United States.
In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the
safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration
for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of pediatric data
or full or partial waivers.
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The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an
NDA for filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted
for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under Prescription Drug User
Fee Act, or PDUFA, for drugs that do not contain a new chemical entity the FDA has 10 months from the receipt date in which to complete
its initial review of a standard NDA and respond to the applicant, and six months from the receipt date for a priority NDA. For drugs
containing a new chemical entity, these 10 and six month review timeframes are from the filing date of an NDA. The FDA does not always
meet its PDUFA goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA requests for
additional information or clarification.
After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed
product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and
preserve the product's identity, strength, quality and purity. Before approving an NDA, the FDA will conduct a pre-approval inspection of
the manufacturing facilities for the new product to determine whether they comply with cGMPs. The FDA will not approve the product
unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure
consistent production of the product within required specifications. In addition, before approving an NDA, the FDA may also audit data
from clinical trials to ensure compliance with GCP requirements. Additionally, the FDA may refer applications for novel drug products or
drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and
other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions.
The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making
decisions. The review and evaluation of an NDA by the FDA is extensive and time consuming and may take longer than originally planned
to complete, and we may not receive a timely approval, if at all.
After the FDA evaluates an NDA, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes
commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that
the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter usually describes
all of the specific deficiencies in the NDA identified by the FDA. The Complete Response Letter may require additional clinical data
and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials,
nonclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may resubmit the NDA addressing all of the
deficiencies identified in the letter, withdraw the application, or request an opportunity for a hearing. Even if such data and information is
submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not
always conclusive and the FDA may interpret data differently than we interpret the same data.
There is no assurance that the FDA will ultimately approve a drug product for marketing in the United States and we may encounter
significant difficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly
limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of
the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling or
may condition the approval of the NDA on other changes to the proposed labeling, development of adequate controls and specifications, or
a commitment to conduct post-marketing testing or clinical trials and surveillance to monitor the effects of approved products. For
example, the FDA may require Phase 4 testing which involves clinical trials designed to further assess a drug's safety and efficacy and may
require testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA also may
place other conditions on approvals including the requirement for a risk evaluation and mitigation strategy, or REMS, to assure the safe use
of the drug. A REMS could include medication guides, physician communication plans, or elements to assure safe use, such as restricted
distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict
the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance
with regulatory requirements or if problems occur following initial marketing. As a condition to the FDA's approval of Probuphine,
Braeburn was required to put the Probuphine REMS in place.
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505(b)(2) Approval process
Section 505(b)(2) of the FDCA provides an alternate regulatory pathway to FDA approval for new or improved formulations or new
uses of previously approved drug products. Specifically, Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent
Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Amendments, and permits the filing of an NDA where at least
one or more of the investigations relied upon by the applicant for approval were not conducted by or for the applicant and for which the
applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. The applicant may
rely upon the FDA's prior findings of safety and effectiveness for a previously approved product or on published scientific literature, in
support of its application. The FDA may also require 505(b)(2) applicants to perform additional trials to support the changes from the
previously approved drug and to further demonstrate the new drug's safety and effectiveness. The FDA may then approve the new product
candidate for all or some of the labeled indications for which the referenced product has been approved, as well as for any new indication
sought by the Section 505(b)(2) applicant.
Expedited development and review programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain
criteria. Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition
and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the
product and the specific indication for which it is being studied. Any product submitted to the FDA for marketing, including under the Fast
Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review. A
product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy
exists or offers a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products.
Additionally, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or
more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may
demonstrate substantial improvement over existing therapies on one or more clinical development. Fast Track designation, priority review,
and breakthrough designation do not change the standards for approval but may expedite the development or approval process.
Pediatric trials
The Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012, amended the
FDCA to require that a sponsor who is planning to submit a marketing application for a drug that includes a new active ingredient, new
indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, that
includes within 60 days of an end-of-Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include
an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant
endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric
assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information.
Post-marketing requirements
Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the
FDA, including, among other things, monitoring and recordkeeping activities, reporting to the FDA of adverse experiences with the
product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements and complying
with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on
promoting drugs for uses or in patient populations that are not described in the drug's approved labeling (known as "off-label use"),
limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet.
Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or
the PDMA, a part of the FDCA.
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In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA.
The FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMP. We rely, and
expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with
cGMP regulations. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to
register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with cGMP and other laws. Discovery of previously unknown problems with a product or the failure
to comply with applicable FDA requirements can have negative consequences, including adverse publicity, judicial or administrative
enforcement, warning letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal
penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product's approved labeling,
including the addition of new warnings and contraindications, and also may require the implementation of other risk management
measures.
Also, new government requirements, including those resulting from new legislation, may be established, or the FDA's policies may
change, which could delay or prevent regulatory approval of our products under development. Changes in statutes, regulations, or the
interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing
arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional
record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
Orange book listing
Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing
authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy.
A Section 505(b)(2) NDA is an application in which the applicant, in part, relies on investigations that were not conducted by or for the
applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were
conducted. Section 505(j) establishes an abbreviated approval process for a generic version of approved drug products through the
submission of an Abbreviated New Drug Application, or ANDA. An ANDA provides for marketing of a generic drug product that has the
same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics and intended use, among other
things, to a previously approved product. Limited changes must be preapproved by the FDA via a suitability petition. ANDAs are termed
"abbreviated" because they are generally not required to include nonclinical and clinical data to establish safety and efficacy. Instead,
generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator
drug through in vitro, in vivo, or other testing. The generic version must deliver the same amount of active ingredients into a subject's
bloodstream in the same amount of time as the innovator drug and can often be substituted by pharmacists under prescriptions written for
the reference listed drug.
In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain
patents having claims that cover the applicant's product and method of use. Upon approval of an NDA, each of the patents listed in the
application for the drug is then published in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange
Book. These products may be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.
Any applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2)
NDA referencing a drug listed in the Orange Book must make patent certifications to the FDA that (1) no patent information on the drug or
method of use that is the subject of the application has been submitted to the FDA; (2) the patent has expired; (3) the date on which the
patent has expired and approval will not be sought until after the patent expiration; or (4) the patent is invalid or will not be infringed upon
by the manufacture, use, or sale of the drug product for which the application is submitted. The last certification is known as a paragraph
IV certification. Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except where the ANDA
or 505(b)(2) NDA applicant challenges a listed patent through a paragraph IV certification or if the applicant is not seeking approval of a
patented method of use. If the applicant does not challenge the listed patents or does not indicate that it is not seeking approval of a
patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the
referenced product have expired.
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Federal law provides a period of five years following approval of a drug containing no previously approved active ingredients during
which ANDAs for generic versions of those drugs cannot be submitted, unless the submission contains a Paragraph IV challenge to a listed
patent, in which case the submission may be made four years following the original product approval. Federal law provides for a period of
three years of exclusivity during which the FDA cannot grant effective approval of an ANDA based on the approval of a listed drug that
contains previously approved active ingredients but is approved in a new dosage form, route of administration or combination, or for a new
use; the approval of which was required to be supported by new clinical trials conducted by, or for, the applicant.
U.S. marketing exclusivity
Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The
FDCA provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, if new clinical investigations, other
than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the
application, for example for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the
modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from
approving abbreviated new drug applications, or ANDAs, for drugs containing the active agent for the original indication or condition of
use. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company for
another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator
drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval.
However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the
patents listed with the FDA by the innovator NDA holder. Three-year and five-year exclusivity will not delay the submission or approval
of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the
nonclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy. Pediatric exclusivity is
another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity
periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be
granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued "Written Request" for such a trial.
Drug enforcement administration regulation
Because Probuphine is subject to the Controlled Substances Act, or CSA, Braeburn must comply with various requirements set forth by
that legislation, as amended, its implementing regulations and as enforced by the DEA. The CSA imposes various registration, record-
keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls,
prescription and order form requirements and restrictions on prescription refills for certain kinds of pharmaceutical products. A principal
factor for determining the particular requirements of the CSA applicable to a product, if any, is its actual or potential abuse profile. A
product may be listed as a Schedule I, II, III, IV or V controlled substance, with Schedule I presenting the highest perceived risk of abuse
and Schedule V presenting the least. The active ingredient in our product, buprenorphine, is a Schedule III controlled substance and under
various restrictions, including, but not limited to, mandatory written prescriptions and a labeling statement informing patients that selling or
giving away Probuphine is against the law. In addition, under the Drug Addiction Treatment Act, which amended the CSA, use of
Probuphine in the treatment of opioid addiction is limited to physicians who meet certain qualifying requirements, and who have notified
the Secretary of Health and Human Services, or HHS, of their intent to prescribe or dispense the product for the treatment of opioid
addiction and have been assigned a unique identification number that must be included on every prescription. The HHS regulates the
number of patients that physicians can treat with buprenorphine for opioid addiction and recently increased this number from a maximum
of 100 patients to 275 patients for qualified physicians.
Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance.
The registration is specific to the particular location, activity and controlled substance schedule. For example, separate registrations are
needed for import and manufacturing, and each registration will specify which schedules of controlled substances are authorized. Separate
registrations also are required for separate facilities.
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The DEA typically inspects a facility to review its security measures prior to issuing a registration and on a periodic basis. Required
security measures include background checks on employees and physical control of inventory through measures such as vaults and
inventory reconciliations. Records must be maintained for the handling of all controlled substances, and periodic reports made to the DEA.
Failure to maintain compliance with applicable DEA requirements can result in administrative, civil or criminal enforcement action. The
DEA may seek civil penalties, refuse to renew necessary registrations or initiate administrative proceedings to revoke those registrations. In
some circumstances, violations could result in criminal proceedings.
Other regulatory matters
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory
authorities in addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, other divisions of the
Department of Health and Human Services including the Office of the Inspector General, the United States Department of Justice, the
Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the
Environmental Protection Agency and state and local regulatory authorities. In the United States, sales, marketing and scientific/educational
programs must also comply with state and federal fraud and abuse laws. These laws include the federal Anti-Kickback Statute, which makes
it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit,
receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a
particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law
are punishable by up to five years in prison, criminal fines, administrative civil money penalties and exclusion from participation in federal
healthcare programs. In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, or collectively the ACA, among other things, amended the intent requirement of the federal Anti-Kickback
Statute. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. Moreover, the ACA
provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created new federal criminal statutes that prohibit
among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program,
including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services. Like the federal Anti-Kickback Statute a person or entity does not need to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have
presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that
was not provided as claimed or is false or fraudulent. Also, many states have similar fraud and abuse statutes or regulations that may be
broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs.
Additionally, to the extent that any of our product candidates, if approved, are sold in a foreign country, we may be subject to similar
foreign laws.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their
implementing regulations, including the final omnibus rule published on January 25, 2013, mandates, among other things, the adoption of
uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy
and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards
to protect such information. Among other things, HITECH makes HIPAA's security standards directly applicable to business associates,
defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection
with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed
against covered entities and business associates, and gave state attorneys general new authority to file civil actions for damages or
injunctions in federal courts to enforce the federal HIPAA laws and seek attorney's fees and costs associated with pursuing federal civil
actions. In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are
more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and
criminal penalties.
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If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be
subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual
damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from
participation in federal and state healthcare programs and individual imprisonment, any of which could adversely affect our ability to
operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it,
could cause us to incur significant legal expenses and divert our management's attention from the operation of our business.
European Union drug development
In the European Union, our future products may also be subject to extensive regulatory requirements. As in the United States,
medicinal products can only be marketed if a marketing authorization from the competent regulatory agencies has been obtained.
Similar to the United States, the various phases of nonclinical and clinical research in the European Union are subject to significant
regulatory controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory
framework, setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed
and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the current
regime, before a clinical trial can be initiated it must be approved in each of the EU countries where the trial is to be conducted by two
distinct bodies: the National Competent Authority, or NCA, and one or more Ethics Committees, or ECs. Under the current regime all
suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA
and ECs of the Member State where they occurred.
The EU clinical trials legislation is currently undergoing a revision process mainly aimed at harmonizing and streamlining the clinical
trials authorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials and increasing their
transparency.
European Union drug review and approval
In the European Economic Area, or EEA, which is comprised of the 28 Member States of the European Union plus Norway, Iceland
and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types
of marketing authorizations:
The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the
Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the
entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal
products, orphan medicinal products and medicinal products containing a new active substance indicated for the treatment of AIDS, cancer,
neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new
active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or
which are in the interest of public health in the EU.
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National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective
territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been
authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual
Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved
simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is
submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant
as the Reference Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the
product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the
Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to
public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in
all the Member States (i.e., in the RMS and the Member States Concerned).
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the
EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and
efficacy.
Rest of the world regulation
For other countries outside of the European Union and the United States, such as countries in Eastern Europe, Latin America or Asia,
the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all
cases the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical
principles that have their origin in the Declaration of Helsinki. If we fail to comply with applicable foreign regulatory requirements, we
may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
Reimbursement
Sales of Probuphine and any other product candidates we may successfully will depend, in part, on the extent to which such products
are covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. In
the United States no uniform policy of coverage and reimbursement for drug products exists. Accordingly, decisions regarding the extent of
coverage and amount of reimbursement to be provided for any products will be made on a payor by payor basis. As a result, the coverage
determination process is often a time-consuming and costly process that will require our licensees to provide scientific and clinical support
for the use of our product to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.
Third-party payors are increasingly reducing reimbursements for medical products and services. Additionally, the containment of
healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S.
government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs,
including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls
and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further
limit our ability to generate royalty revenue. If third-party payors do not consider our products to be cost-effective compared to other
available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not
be sufficient to allow our products to be sold on a profitable basis. Decreases in third-party reimbursement for our products or a decision by
a third-party payor to not cover our products could reduce physician usage of the products and have a material adverse effect on our results
of operations and financial condition.
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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D
program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in
prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B,
Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each
drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D
prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily
all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a
pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products
for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will
likely be lower than the prices that might otherwise be obtained. Moreover, while the MMA applies only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any
reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.
Reimbursement for injectable and implantable medications that are administered by a healthcare provider generally require a J-Code
for the drug itself. Braeburn submitted its application for a permanent J-Code for Probuphine in June 2016. On November 1, 2016, the U.S.
Centers for Medicare & Medicaid Services, or CMS, released a final rule that assigned a specific J-Code for Probuphine beginning January
1, 2017. Separate reimbursement codes are required for the Probuphine insertion and removal procedures. Braeburn’s initial request for
interim "G" fee codes to cover reimbursement for the insertion and removal procedures was declined. While there are codes that can be
used in the interim, Braeburn is addressing several strategies to address the reimbursement for the multiple implant insertion and removal
pertaining to Probuphine. The timeline for the creation of the various procedural reimbursement pathways will vary based on the required
governmental process or market needs for accurately tracking and reimbursing for the delivery of Probuphine and related procedural
services.
In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The
requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its
member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to
control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may
instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There
can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable
reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price
structures of the United States and generally prices tend to be significantly lower.
Affordable Care Act and other reform initiatives
In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and
regulatory changes and proposed changes regarding the healthcare system directed at broadening the availability of healthcare, improving
the quality of healthcare, and containing or lowering the cost of healthcare.
For example, in March 2010, the ACA, was enacted in the United States. The ACA includes measures that have significantly changed,
and are expected to continue to significantly change, the way healthcare is financed by both governmental and private insurers. Many of the
details regarding the implementation of the ACA are yet to be determined, and at this time, it remains unclear the full effect that the ACA
would have on our business. There have been judicial and Congressional challenges to the ACA, and we expect such challenges and
amendments to continue in the future. Other legislative changes have been proposed and adopted in the United States since the ACA was
enacted and there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing
practices.
We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal, state and foreign legislative and
regulatory developments are likely, and we expect ongoing initiatives to increase pressure on drug pricing. Such reforms could have an
adverse effect on anticipated revenues from product candidates and may affect our overall financial condition and ability to develop
product candidates.
Employees
As of December 31, 2016, we had 14 full-time employees.
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Item 1A. Risk Factors
We are dependent on the successful commercialization of Probuphine to fund our research and development programs and achieve
value for our shareholders.
At December 31, 2016, we had cash and cash equivalents of approximately $14.0 million, which we believe is sufficient to fund our
planned operations through the first quarter of 2018. Our ability to fund our research and development programs and achieve value for our
shareholders depends in large part on the commercial success of Probuphine. Since the approval of Probuphine by the FDA in May 2016,
Braeburn has been engaged in implant training, physician outreach, payment and reimbursement discussions and sales and marketing
efforts associated with the launch of this new product. To date, however, the ramp up of sales of Probuphine has been slower than was
generally anticipated and there can be no assurance that Braeburn will be successful in its commercialization efforts or that Probuphine will
ever achieve substantial sales revenues. If we are unable to generate ample royalty revenue from Probuphine, we will be unable to fund our
research and development programs without additional financing, which may not be available on acceptable terms, and our business will be
materially harmed.
We are solely reliant on the efforts of Braeburn to commercialize Probuphine in the U.S.
Under an exclusive license covering the United States and Canada, Braeburn will be solely responsible for the marketing, manufacture
and commercialization of Probuphine in the Territory and, accordingly, the timing and amount of any royalty revenues or sales milestones
we receive from this product will be wholly dependent upon Braeburn’s ability to successfully launch and commercialize this product.
Braeburn is an early stage company and has not previously commercialized any product. Our ability to generate revenues in the Territory
from any additional indications for Probuphine, including chronic pain, depends on Braeburn’s ability to successfully develop, obtain
regulatory approvals for and commercialize the product for additional indications. We do not have control over the amount and timing of
resources that Braeburn will dedicate to these efforts. We will be similarly dependent on the development, regulatory and marketing efforts
of third parties with respect to revenues, if any, from sales of Probuphine outside the Territory. To date, we have not entered into any
collaborative arrangements or granted any rights with respect to Probuphine in the rest of the world.
We will also depend on our ability to develop new collaborative relationships with third parties and potentially to acquire or in-license
additional products and technologies for the development of new product candidates.
Our dependence on third party collaborators and license agreements subjects us to a number of risks, including:
•
our collaborators may not comply with applicable regulatory guidelines with respect to developing or commercializing our
products, which could adversely impact sales or future development of our products;
• we and our collaborators could disagree as to future development plans and our collaborators may delay, fail to commence
or stop future clinical trials or other development; and
•
there may be disputes between us and our collaborators, including disagreements regarding the license agreements, that
may result in the delay of or failure to achieve developmental, regulatory and commercial objectives that would result in
milestone or royalty payments and/or the delay or termination of any future development or commercialization of our
products.
In addition, collaborators may, to the extent permitted by our agreements, develop products that divert resources from our products,
preclude us from entering into collaborations with their competitors or terminate their agreements with us prematurely. For example,
Braeburn has obtained an exclusive license from Camurus for its long-acting bupenorphine injectables under development, which, if
approved, could in the future divert resources from Probuphine. Moreover, disagreements could arise with our collaborators or strategic
partners over rights to our intellectual property and our rights to share in any of the future revenues from products or technologies resulting
from use of our technologies, or our activities in separate fields may conflict with other business plans of our collaborators.
Initiation of our ProNeura for PD clinical trial has been delayed and there can be no assurance that the IND will ultimately be cleared
by the FDA.
Following its initial review of the IND for our ProNeura for PD program, the FDA informed us that it will require additional
information, including data on the ropinirole implant and applicator, before clearing the IND that would enable the initiation of our clinical
trial. We expect it will take several weeks to provide the FDA with the information it has requested and we do not know how long it may
be before we can initiate the clinical study or if the FDA will ultimately clear the IND. If we are unable to pursue the ProNeura for PD
program, our business and prospects will be adversely impacted.
Our ProNeura development programs are at very early stages and will require substantial additional resources that may not be available
to us.
To date, we have conducted limited research and development activities based on our ProNeura delivery system beyond Probuphine.
We will require substantial additional funds to support our research and development activities, and the anticipated costs of preclinical
studies and clinical trials, regulatory approvals and eventual commercialization of ProNeura for PD or hypothyroidism or any therapeutic
based on our ProNeura platform technology. If we are unable to generate sufficient revenues from royalties from the sale of Probuphine or
other payments under our license agreement with Braeburn, we will need to seek additional sources of financing, which may not be
available on favorable terms, if at all. If we do not succeed in raising the requisite financing on acceptable terms, we may be unable to
initiate clinical trials or obtain approval of any product candidates from the FDA and other regulatory authorities. In addition, we could be
forced to discontinue product development, forego sales and marketing efforts and forego attractive business opportunities.
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To the extent we raise additional capital through the sale of equity securities, the issuance of those securities could result in dilution to
our stockholders. In addition, if we obtain debt financing, a substantial portion of our operating cash flow may be dedicated to the payment
of principal and interest on such indebtedness, thus limiting funds available for our business activities. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization
efforts or curtail our operations. In addition, we may be required to obtain funds through arrangements with collaborative partners or others
that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or
commercialize ourselves or license rights to technologies, product candidates or products on terms that are less favorable to us than might
otherwise be available.
Our ProNeura programs for PD or hypothyroidism are at a very early stage and we may not be able to successfully develop these
products or any other product based on our ProNeura drug delivery technology.
Our ability to successfully develop any future product candidates based on our ProNeura drug delivery technology is subject to the
risks of failure and delay inherent in the development of new pharmaceutical products, including: delays in product development, clinical
testing, or manufacturing; unplanned expenditures in product development, clinical testing, or manufacturing; failure to receive regulatory
approvals; emergence of superior or equivalent products; inability to manufacture on its own, or through any others, product candidates on
a commercial scale; and failure to achieve market acceptance.
Because of these risks, our research and development efforts may not result in any commercially viable products. If a significant
portion of these development efforts are not successfully completed, required regulatory approvals are not obtained or any approved
products are not commercially successfully, our business, financial condition, and results of operations may be materially harmed.
Our development and commercialization strategy for ProNeura depends, in part, upon the FDA’s prior findings regarding the safety
and efficacy of the active drug incorporated into the implant based on data not developed by us, but upon which the FDA may rely in
reviewing our NDA submissions.
The current strategy for our ProNeura development programs is based, in part, on the expectation that the products we develop will be
eligible for approval through the regulatory pathway under Section 505(b)(2) of the FDCA. Section 505(b)(2) of the FDCA allows an NDA
to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of an approved drug
product, which could expedite our development programs by potentially decreasing the amount of clinical data that would need to be
generated in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated,
we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for product
approval. If this were to occur, the time and financial resources required to obtain FDA approval for any additional ProNeura products, and
complications and risks associated with regulatory approval, would likely substantially increase. Moreover, inability to pursue the Section
505(b)(2) regulatory pathway may result in new competitive products reaching the market more quickly than those we have under
development, which would adversely impact our competitive position and prospects. Even if we are able to utilize the Section 505(b)(2)
regulatory pathway, there is no guarantee that this regulatory pathway will ultimately lead to accelerated product development or earlier
approval. Moreover, notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years,
some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its
interpretation of Section 505(b)(2), or if the FDA’s interpretation is successfully challenged in court, this result could delay or even prevent
the FDA from approving any Section 505(b)(2) NDAs that we submit. Such a result could require us to conduct additional testing and
costly clinical trials, which could substantially delay or prevent the approval and launch of any new ProNeura products.
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Clinical trials required for new product candidates are expensive and time-consuming, and their outcome is uncertain.
In order to obtain FDA approval to market a new drug product based on our ProNeura drug delivery technology, we must demonstrate
proof of safety and effectiveness in humans. To meet these requirements, we must conduct “adequate and well controlled” clinical trials.
Conducting clinical trials is a lengthy, time-consuming, and expensive process. The length of time may vary substantially according to the
type, complexity, novelty, and intended use of the product candidate, and often can be several years or more per trial. Delays associated
with products for which we are directly conducting clinical trials may cause us to incur additional operating expenses. The commencement
and rate of completion of clinical trials may be delayed by many factors, including, for example: inability to manufacture sufficient
quantities of qualified materials under cGMP, for use in clinical trials; slower than expected rates of patient recruitment; failure to recruit a
sufficient number of patients; modification of clinical trial protocols; changes in regulatory requirements for clinical trials; the lack of
effectiveness during clinical trials; the emergence of unforeseen safety issues; delays, suspension, or termination of the clinical trials due to
the institutional review board responsible for overseeing the study at a particular study site; and government or regulatory delays or
“clinical holds” requiring suspension or termination of the trials.
The results from early clinical trials are not necessarily predictive of results obtained in later clinical trials. Accordingly, even if we
obtain positive results from early clinical trials, we may not achieve the same success in future clinical trials. Clinical trials may not
demonstrate statistically significant safety and effectiveness to obtain the requisite regulatory approvals for product candidates.
The failure of clinical trials to demonstrate safety and effectiveness for the desired indications could harm the development of that
product candidate and other product candidates. This failure could cause us to abandon a product candidate and could delay development
of other product candidates. Any delay in, or termination of, our clinical trials would delay the filing of our NDAs with the FDA and,
ultimately, our ability to commercialize our product candidates and generate product revenues. Any change in, or termination of, our
clinical trials could materially harm our business, financial condition, and results of operations.
If Probuphine or any other product candidate that we may successfully develop does not achieve broad market acceptance among
physicians, patients, healthcare payors and the medical community, the revenues that it generates from their sales will be limited.
If Probuphine or any other product candidate we may in the future develop receives regulatory approval, it may not gain market
acceptance among physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our product
candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market
acceptance of any approved products will depend on a number of factors, including:
•
•
•
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•
•
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•
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the efficacy and safety as demonstrated in clinical trials;
the clinical indications for which the product is approved;
acceptance by physicians, operators of hospitals and clinics and patients of the product as a safe and effective product;
the potential and perceived advantages of the product over alternative treatments;
the safety of the product in broader patient groups, including its use outside of approved indications;
the cost of treatment in relation to alternative treatments;
the availability of adequate reimbursement and pricing by third parties and government authorities;
the prevalence and severity of adverse events;
the effectiveness of sales and marketing efforts; and
unfavorable publicity relating to the product.
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If any approved product candidate does not achieve an adequate level of acceptance by physicians, hospitals and clinics, healthcare
payors and patients, we may not generate significant revenue from such products.
We must comply with extensive government regulations.
The research, development, manufacture labeling, storage, record-keeping, advertising, promotion, import, export, marketing and
distribution of pharmaceutical products are subject to an extensive regulatory approval process by the FDA in the U.S. and comparable
health authorities in foreign markets. The process of obtaining required regulatory approvals for drugs is lengthy, expensive and uncertain.
Approval policies or regulations may change and the FDA and foreign authorities have substantial discretion in the pharmaceutical
approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and
expense invested in clinical development of product candidates, regulatory approval is never guaranteed. Regulatory approval may entail
limitations on the indicated usage of a drug, which may reduce the drug’s market potential. Even if regulatory clearance is obtained, post-
market evaluation of the products, if required, could result in restrictions on a product’s marketing or withdrawal of the product from the
market, as well as possible civil and criminal sanctions. Of the large number of drugs in development, only a small percentage successfully
complete the regulatory approval process and are commercialized.
25
We face risks associated with third parties conducting preclinical studies and clinical trials of our products; as well as our
dependence on third parties to manufacture any products that we may successfully develop.
We depend on third-party laboratories and medical institutions to conduct preclinical studies and clinical trials for our products and
other third-party organizations to perform data collection and analysis, all of which must maintain both good laboratory and good clinical
practices. We also depend upon third party manufacturers for the production of any products we may successfully develop to comply with
current Good Manufacturing Practices of the FDA, which are similarly outside our direct control. If third party laboratories and medical
institutions conducting studies of our products fail to maintain both good laboratory and clinical practices, the studies could be delayed or
have to be repeated. Similarly, if the manufacturers of any products we develop in the future fail to comply with current Good
Manufacturing Practices of the FDA, we may be forced to cease manufacturing such product until we have found another third party to
manufacture the product.
We face risks associated with product liability lawsuits that could be brought against us.
The testing, manufacturing, marketing and sale of human therapeutic products entail an inherent risk of product liability claims. We
currently have a limited amount of product liability insurance, which may not be sufficient to cover claims that may be made against us in
the event that the use or misuse of our product candidates causes, or merely appears to have caused, personal injury or death. In the event
we are forced to expend significant funds on defending product liability actions, and in the event those funds come from operating capital,
we will be required to reduce our business activities, which could lead to significant losses. Adequate insurance coverage may not be
available in the future on acceptable terms, if at all. If available, we may not be able to maintain any such insurance at sufficient levels of
coverage and any such insurance may not provide adequate protection against potential liabilities. Whether or not a product liability
insurance policy is obtained or maintained in the future, any claims against us, regardless of their merit, could severely harm our financial
condition, strain our management and other resources or destroy the prospects for commercialization of the product which is the subject of
any such claim.
We may be unable to protect our patents and proprietary rights.
Our future success will depend to a significant extent on our ability to:
•
•
obtain and keep patent protection for our products and technologies on an international basis;
enforce our patents to prevent others from using our inventions;
• maintain and prevent others from using our trade secrets; and
•
operate and commercialize products without infringing on the patents or proprietary rights of others.
We cannot assure you that our patent rights will afford any competitive advantages, and these rights may be challenged or
circumvented by third parties. Further, patents may not be issued on any of our pending patent applications in the U.S. or abroad. Because
of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before a potential
product can be commercialized, any related patent may expire or remain in existence for only a short period following commercialization,
reducing or eliminating any advantage of the patent. If we sue others for infringing our patents, a court may determine that such patents are
invalid or unenforceable. Even if the validity of our patent rights is upheld by a court, a court may not prevent the alleged infringement of
our patent rights on the grounds that such activity is not covered by our patent claims.
In addition, third parties may sue us for infringing their patents. In the event of a successful claim of infringement against us, we may
be required to:
•
•
•
pay substantial damages;
stop using our technologies and methods;
stop certain research and development efforts;
26
•
•
develop non-infringing products or methods; and
obtain one or more licenses from third parties.
If required, we cannot assure you that we will be able to obtain such licenses on acceptable terms, or at all. If we are sued for
infringement, we could encounter substantial delays in development, manufacture and commercialization of our product candidates. Any
litigation, whether to enforce our patent rights or to defend against allegations that we infringe third party rights, will be costly, time
consuming, and may distract management from other important tasks.
We also rely in our business on trade secrets, know-how and other proprietary information. We seek to protect this information, in part,
through the use of confidentiality agreements with employees, consultants, advisors and others. Nonetheless, we cannot assure you that
those agreements will provide adequate protection for our trade secrets, know-how or other proprietary information and prevent their
unauthorized use or disclosure. To the extent that consultants, key employees or other third parties apply technological information
independently developed by them or by others to our proposed products, disputes may arise as to the proprietary rights to such information,
which may not be resolved in our favor.
We face intense competition.
Competition in the pharmaceutical and biotechnology industries is intense. We face, and will continue to face, competition from
numerous companies that currently market, or are developing, products for the treatment of the diseases and disorders we have targeted.
Many of these entities have significantly greater research and development capabilities, experience in obtaining regulatory approvals and
manufacturing, marketing, financial and managerial resources than we have. We also compete with universities and other research
institutions in the development of products, technologies and processes, as well as the recruitment of highly qualified personnel. Our
competitors may succeed in developing technologies or products that are more effective than the ones we have under development or that
render our proposed products or technologies noncompetitive or obsolete. In addition, our competitors may achieve product
commercialization or patent protection earlier than we will.
If Braeburn is unable to achieve and maintain adequate levels of coverage and reimbursement for Probuphine on reasonable pricing
terms, or we or our collaborators fail to do so for any of our other product candidates for which we may receive regulatory approval,
their commercial success may be severely limited.
Successful sales of Probuphine or any other product we may successfully develop will depend on the availability of adequate coverage
and reimbursement from third-party payors, as well as the ease of use and transparency of such processes and systems once in place.
Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of
the costs associated with their prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as
Medicare and Medicaid, and commercial payors are critical to new product acceptance. Third-party payors, whether governmental or
commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no
uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement
for drug products can differ significantly from payor to payor. Coverage decisions may depend upon clinical and economic standards that
disfavor new drug products such as ours when more established or lower cost therapeutic alternatives are already available or subsequently
become available. Decisions regarding the extent of coverage and amount of reimbursement to be provided for products and product
candidates that we develop will be made on a plan-by-plan basis. As a result, the coverage determination process is often a time-consuming
and costly process that may require us or our partners to provide scientific and clinical support for the use of our products to each payor
separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained.
Reimbursement for injectable and implantable drug products that require administration by a healthcare provider generally requires a
drug code, and separate reimbursement codes are required for the injection, insertion and removal procedures, as applicable. Braeburn has
obtained a drug code for Probuphine, but its application for a procedure code was recently denied. The lack of a drug code or procedure
code that covers our product or describes the procedures performed using our products, or a change to an existing code that describes such
procedures, may adversely affect reimbursement for our products and these procedures, including lower reimbursement rates, denials and
delays in reimbursement if pre-authorization is required. Even if coverage is approved, the resulting reimbursement payment rates might
not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage
is provided and reimbursement is adequate to cover a significant portion of the cost of our products.
In addition, the market for our products may depend on access to third-party payors' drug formularies, or lists of medications for which
third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to
downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their
formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available.
Also, regional healthcare authorities and individual hospitals are increasingly using competitive bidding procedures to determine what
pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce
demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial
condition and prospects.
Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and
in international markets. Third-party coverage and reimbursement for Probuphine or any of our product candidates for which we may
receive regulatory approval may not be available or adequate in either the United States or international markets, which could have a
material adverse effect on our business, results of operations, financial condition and prospects.
Health care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could hinder or
prevent the commercial success of our products.
In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect
our future results of operations and the future results of operations of our potential customers. For example, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 established a new Part D prescription drug benefit, which became effective January 1,
2006. Under the prescription drug benefit, Medicare beneficiaries can obtain prescription drug coverage from private sector plans that are
permitted to limit the number of prescription drugs that are covered in each therapeutic category and class on their formularies. If our
products are not widely included on the formularies of these plans, our ability to market our products may be adversely affected.
Furthermore, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce healthcare
costs. In March 2010, the Patient Protection and Affordable Health Care Act of 2010, as amended by the Health Care and Education
Affordability Reconciliation Act of 2010, or collectively ACA”), was signed into law,which includes measures to significantly change the
way health care is financed by both governmental and private insurers.
27
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget
Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit
Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to
reach required goals, thereby triggering the legislation's automatic reduction to several government programs. This includes aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year. On January 2, 2013, President Obama signed into law the
American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, including hospitals,
imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to
providers from three to five years. These laws may result in additional reductions in Medicare and other health care funding, which could
have a material adverse effect on our customers and accordingly, our financial operations.
Additionally, individual states have become increasingly aggressive in passing legislation and implementing regulations designed to
control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access, and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries and bulk
purchasing. Legally-mandated price controls on payment amounts by third-party payors or other restrictions could harm our business,
results of operations, financial condition and prospects.
In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what
pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce
demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial
condition and prospects.
Additionally, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state
legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid
programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for prescription
drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our
products and generate revenues. In addition, legislation has been introduced in Congress that, if enacted, would permit more widespread
importation or re-importation of pharmaceutical products from foreign countries into the United States, including from countries where the
products are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could lead to a decision to
decrease our prices to better compete, which, in turn, could adversely affect our business, results of operations, financial condition and
prospects. It is also possible that other legislative proposals having similar effects will be adopted.
Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over
time and can be affected by many factors, such as the emergence of new information, including on other products, changing policies and
agency funding, staffing and leadership. We cannot be sure whether future changes to the regulatory environment will be favorable or
unfavorable to our business prospects.
We may not be able to retain our key management and scientific personnel, and a loss of certain key personnel could significantly
hinder our ability to move forward with our business plan.
As a company with a limited number of personnel, we are highly dependent on the services of our executive management and scientific
staff, in particular Sunil Bhonsle, our President and Chief Executive Officer, Marc Rubin, our Executive Chairman and Katherine Beebe our
Executive Vice President and Chief Development Officer. The loss of one or more of such individuals could substantially impair ongoing
research and development programs and could hinder our ability to obtain corporate partners. Our success depends in large part upon our
ability to attract and retain highly qualified personnel. We compete in our hiring efforts with other pharmaceutical and biotechnology
companies, as well as universities and nonprofit research organizations, and we may not be successful in our efforts to attract and retain
personnel.
28
Our net operating losses and research and development tax credits may not be available to reduce future federal and state income tax
payments.
At December 31, 2016, we had federal net operating loss and tax credit carryforwards of $247.7 million and $8.7 million, respectively,
and state net operating loss and tax credit carryforwards of $124.4 million and $8.5 million, respectively, available to offset future taxable
income, if any. Current federal and state tax laws include substantial restrictions on the utilization of net operating loss and tax credits in the
event of an ownership change and we cannot assure you that our net operating loss and tax carryforwards will continue to be available.
Our stock price has been and will likely continue to be volatile.
Our stock price has experienced substantial fluctuations and could continue to fluctuate significantly due to a number of factors,
including:
•
•
•
•
•
•
•
variations in our anticipated or actual operating results or prospects;
sales of substantial amounts of our common stock;
announcements about us or about our competitors, including introductions of new products;
litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
conditions in the pharmaceutical or biotechnology industries;
governmental regulation and legislation; and
change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations.
We have never paid and do not intend to pay cash dividends. As a result, capital appreciation, if any, will be your sole source of gain.
We have never paid cash dividends on any of our capital stock and we currently intend to retain future earnings, if any, to fund the
development and growth of our business. In addition, the terms of existing and future debt agreements may preclude us from paying
dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Provisions in our certificate of incorporation, our by-laws and Delaware law might discourage, delay or prevent a change in control of
our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our certificate of incorporation, our by-laws and Delaware law may have the effect of deterring unsolicited takeovers or
delaying or preventing a change in control of our company or changes in our management, including transactions in which our stockholders
might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best interests. These provisions include:
•
•
•
the inability of stockholders to call special meetings; and
the ability of our board of directors, or our Board, to designate the terms of and issue new series of preferred stock without
stockholder approval, which could include the right to approve an acquisition or other
change in our control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the
stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board.
29
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three
years, has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the forgoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the
future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you
could receive a premium for your common stock in an acquisition.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties
Our executive offices are located in approximately 9,255 square feet of office space in South San Francisco, California that we occupy
under a five-year operating lease expiring in June 2021. It is our intention to continue to be based in South San Francisco.
Item 3.
Legal Proceedings
We are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened legal or
administrative proceedings against us.
Item 4.
Mine Safety Disclosures.
Not applicable.
30
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Price Range of Securities
Our common stock has been listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “TTNP” since October 2015.
Previously, our common stock traded in the over-the-counter market and was quoted through the Over-The-Counter Bulletin Board
(“OTCBB”) under the symbol “TTNP” since June 2010. The following table sets forth, for the periods indicated, the high and low sale
prices for our common stock as reported by the NASDAQ and OTCBB. Quotations on the OTCBB reflect inter-dealer prices, as adjusted
for the reverse stock split, without retail mark-up, mark-down or commissions, and may not represent actual transactions. For current price
information, stockholders are urged to consult publicly available sources.
Fiscal 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$
$
$
$
$
$
$
$
6.10 $
6.17 $
7.41 $
4.91 $
5.29 $
4.59 $
4.92 $
3.92 $
3.80
4.80
4.76
2.98
3.77
3.59
3.76
2.54
(b) Approximate Number of Equity Security Holders
At March 10, 2017, there were 21,198,879 shares of our common stock outstanding held by 127 holders of record. The number of
record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and registered clearing agencies.
(c) Dividends
We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends to
stockholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board and will be
dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board deems relevant.
31
(d)
The following table sets forth aggregate information regarding our equity compensation plans in effect as of December 31, 2016:
Equity Compensation Plan Information
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders(1)(2)
(3)(4)
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrant and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans
(c)
1,249,343 $
752,848 $
2,002,191 $
5.69
5.65
5.67
1,882,000
—
1,882,000
(1) Includes 204,375 shares underlying options granted to employees and consultants who are not officers or directors of Titan under our
2001 Employee Non-Qualified Stock Option Plan.
(2) Includes 79,546 shares underlying non-qualified stock options exercisable at $13.20 per share granted to Dr. Rubin in October 2007 that
vested over 48 months from the grant date.
(3) In May 2009, we granted 111,819 and 56,364 non-qualified stock options outside of our stock option plans to Dr. Rubin and Mr.
Bhonsle, respectively, at an exercise price of $4.34 that vested over 48 months from the grant date.
(4) Includes 300,744 non-qualified stock options and restricted share awards granted to employees, directors and consultants under our 2014
Incentive Plan. For a description of the 2014 Plan, see note 12 to the financial statements.
32
Performance Graph
The information contained in the Performance Graph shall not be deemed to be “soliciting material” or “filed” with the SEC or
subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a
document filed under the Securities Act or the Exchange Act.
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total stockholder
return of (i) the NYSE MKT Index, (ii) the NASDAQ Composite Index and (iii) the NASDAQ Biotechnology Index. The graph assumes
$100 invested on December 31, 2011 and assumes dividends reinvested. Measurement points are at the last trading day of the fiscal years
ended December 31, 2012, 2013, 2014, 2015 and 2016. The stock price performance on the following graph is not necessarily indicative of
future stock price performance.
AMONG TITAN PHARMACEUTICALS, INC., NYSE MKT INDEX, NASDAQ COMPOSITE INDEX AND
NASDAQ BIOTECHNOLOGY INDEX
COMPARE CUMULATIVE TOTAL RETURN
33
Item 6.
Selected Financial Data.
The selected financial data presented below summarizes certain financial data which has been derived from and should be read in
conjunction with our financial statements and notes thereto included in the section beginning on page F-1. See also “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Statement of Operations Data:
Total revenue
Operating expenses:
Research and development
General and administrative
Other income (expense), net
Net income (loss) applicable to common
stockholders
Basic net income (loss) per common share
Diluted net income (loss) per common share
Shares used in computing:
$
$
$
2016
2015
Years Ended December 31,
2014
(in thousands, except per share data)
2013
2012
$
15,065 $
1,671 $
3,646 $
10,481 $
7,117
6,126
4,596
792
5,135 $
0.25 $
0.20 $
4,675
3,755
(4,520)
(11,279) $
(0.56) $
(0.56) $
4,075
3,046
1,072
(2,403) $
(0.14) $
(0.20) $
17,057
17,060
8,309
3,063
10,602
9,711 $
0.65 $
0.53 $
14,927
15,029
10,610
4,877
(6,810)
(15,180)
(1.26)
(1.26)
12,093
12,093
Basic net income (loss) per common share
Diluted net income (loss) per common share
20,744
21,459
20,053
20,053
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Total stockholders’ equity (deficit)
2016
2015
As of December 31,
2014
(in thousands)
2013
2012
$
14,006 $
12,973
18,667
13,191
7,857 $
7,391
13,287
6,990
15,470 $
12,921
20,851
8,611
11,798 $
5,974
18,423
5,760
18,102
2,042
24,827
(23,128)
34
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements”
within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You can identify forward-looking
statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar
expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are
inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those
described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation,
those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect actual outcomes. Please see “Note Regarding Forward-Looking Statements” at the
beginning of this Annual Report on Form 10-K.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial
statements and the related notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K.
Overview
We are a pharmaceutical company developing proprietary therapeutics for the treatment of serious medical disorders. Our product
development programs utilize our proprietary long-term drug delivery platform, ProNeura™, and focus primarily on innovative treatments
for select chronic diseases for which steady state delivery of a drug provides an efficacy and/or safety benefit.
Probuphine®, our first product candidate based on the ProNeura platform, was approved by the FDA on May 26, 2016 for the
maintenance treatment of opioid dependence in patients who are stable on low to moderate doses of daily sublingual buprenorphine
treatment. We have licensed development and commercialization rights of Probuphine for the U.S. and Canadian markets to Braeburn and
pursuant to the license agreement as amended to date, we received a $15 million milestone payment upon FDA approval of the Probuphine
NDA, and are entitled to receive royalties on net sales of Probuphine ranging in percentage from the mid-teens to the low twenties based on
a tiered structure. The agreement also provides for up to an additional $165 million in sales milestones and $35 million in regulatory
milestones on Probuphine. Additionally, in certain circumstances the agreement entitles us to a low single digit royalty, up to an aggregate
of $50 million, on net sales by Braeburn, if any, of other future competing products in the addiction market, e.g. a monthly depot injection.
Braeburn commenced commercialization activities in support of Probuphine product launch immediately following FDA approval
starting with implementation at the end of May 2016 of the REMS directed training program for qualified health care providers. During the
second half of 2016, Braeburn was engaged in training qualified health care providers in the implant insertion and removal procedures,
physician outreach, payment and reimbursement discussions with third party payors and sales and marketing efforts associated with the
launch including hiring personnel for a field sales force. In 2016, more than 2,500 health care providers from all 50 states and Puerto Rico
were certified to provide Probuphine to their patients. However, as previously indicated, the adoption of the product by health care
providers has been gradual resulting in limited sales.
In January 2017, Braeburn announced that the Centers for Medicare & Medicaid Services (CMS) had granted a Healthcare Common
Procedure Coding System (HCPCS) code, or permanent J-code, for Probuphine, as the first six-month buprenorphine implant for the
maintenance treatment of opioid addiction. The new J-code (J0570) became effective January 1, 2017 and coincided with the activation of
a Braeburn field force. Braeburn continues to work to obtain additional codes to further facilitate reimbursement of Probuphine insertion
and removal procedures.
35
We believe that our ProNeura long term drug delivery platform has the potential to be used in the treatment of other chronic conditions
where maintaining stable, around the clock blood levels of a medication may benefit the patient and improve medical outcomes. We have
two products in early development using the ProNeura platform, an implant designed to provide long-term delivery of ropinirole, a
dopamine agonist approved as a daily dosed oral formulation for the treatment of Parkinson’s disease, and an implant designed to provide
long-term delivery of T3, a synthetic thyroid hormone approved as a daily dosed oral formulation for the treatment of hypothyroidism.
The non-clinical development work related to the ropinirole implant, including the toxicology studies, was completed in the fourth
quarter of 2016 and the IND was submitted to the FDA in January 2017. In late February 2017, in a telephone conversation, we received
comments from the FDA following its initial review of the IND requesting additional information related to final test results for the
ropinirole implant and the applicator, as well as the name of the Principal Investigator. We have been asked to hold the initiation of the
clinical study and we expect to receive the FDA’s written comments by late March. We are working quickly to provide the FDA with the
additional information required and are hopeful that we will be able to commence the clinical study toward the end of the second quarter,
although there is no assurance that the FDA will clear the IND within that timeframe, if at all.
Development of the T3 implant product continued during 2016 with non-clinical studies designed to optimize the formulation. We
identified refinements to the formulation that will be necessary; however, due to shortage of the API, further investigation had to be
temporarily suspended during the fourth quarter of 2016. In early 2017, we obtained the requisite supply of the API and have commenced
work towards the optimization of the T3 implant. Once this work is completed, we will be in a position to request a pre-IND meeting with
the FDA by mid-2017, resources permitting.
Our goal is to further expand the product pipeline, and we are currently evaluating other drugs and disease settings for opportunities to
use the ProNeura platform in potential treatment applications where conventional treatment is limited by variability in blood drug levels and
poor patient compliance.
We operate in only one business segment, the development of pharmaceutical products.
Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes.
Actual results could differ materially from those estimates. We believe the following accounting policies for the years ended December 31,
2016 and 2015 to be applicable:
Revenue Recognition
We generate revenue principally from collaborative research and development arrangements, technology licenses, and government
grants. Consideration received for revenue arrangements with multiple components is allocated among the separate units of accounting
based on their respective selling prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if
available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available.
The applicable revenue recognition criteria are then applied to each of the units.
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) transfer of
technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably
assured. For each source of revenue, we comply with the above revenue recognition criteria in the following manner:
•
•
Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees or royalty
payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are
recognized when the technology is transferred or accessed, provided that the technology transferred or accessed is not
dependent on the outcome of our continuing research and development efforts.
Royalties earned are based on third-party sales of licensed products and are recorded in accordance with contract terms when
third-party results are reliably measurable and collectability is reasonably assured.
• Government grants, which support our research efforts in specific projects, generally provide for reimbursement of approved
costs as defined in the notices of grants. Grant revenue is recognized when associated project costs are incurred.
•
Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements
for specific research and development spending, and various milestone and future product royalty payments. If the delivered
technology does not have stand-alone value, the amount of revenue allocable to the delivered technology is deferred. Non-
refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are
recognized as revenue when received, and are deferred if we have continuing performance obligations and have no evidence of
fair value of those obligations. Cost reimbursements for research and development spending are recognized when the related
costs are incurred and when collections are reasonably expected. Payments received related to substantive, performance-based
“at-risk” milestones are recognized as revenue upon achievement of the clinical success or regulatory event specified in the
underlying contracts, which represent the culmination of the earnings process. Amounts received in advance are recorded as
deferred revenue until the technology is transferred, costs are incurred, or a milestone is reached.
36
Share-Based Payments
We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards
is estimated at the grant date based on the fair value of the award and is recognized as expense, net of estimated pre-vesting forfeitures,
ratably over the vesting period of the award.
We use the Black-Scholes option pricing model to estimate the fair value method of our awards. Calculating stock-based compensation
expense requires the input of highly subjective assumptions, including the expected term of the share-based awards, stock price volatility,
and pre-vesting forfeitures. We estimate the expected term of stock options granted for the years ended December 31, 2016 and 2015 based
on the historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules
and the expectations of future employee behavior. We estimate the volatility of our common stock at the date of grant based on the
historical volatility of our common stock. The assumptions used in calculating the fair value of stock-based awards represent our best
estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and
we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are
required to estimate the expected pre-vesting forfeiture rate and only recognize expense for those shares expected to vest. We estimate the
pre-vesting forfeiture rate based on historical experience. If our actual forfeiture rate is materially different from our estimate, our stock-
based compensation expense could be significantly different from what we have recorded in the current period.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue
and expense for tax and financial statement purposes.
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our current tax exposure under the most recent tax laws and assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and
negative, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. If it is not more likely than not that we will recover our deferred tax assets, we will
increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be
recoverable.
Clinical Trial Accruals
We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by CROs and clinical
sites. These costs are recorded as a component of research and development expenses. Under our agreements, progress payments are
typically made to investigators, clinical sites and CROs. We analyze the progress of the clinical trials, including levels of patient
enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates
must be made and used in determining the accrued balance in any accounting period. Actual results could differ from those estimates under
different assumptions. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. The
actual clinical trial costs for the Probuphine studies conducted in the past three years have not differed materially from the estimated
projection of expenses.
37
Warrants Issued in Connection with Equity Financing
We generally account for warrants issued in connection with equity financings as a component of equity, unless there is a deemed
possibility that we may have to settle warrants in cash. For warrants issued with deemed possibility of cash settlement, we record the fair
value of the issued warrants as a liability at each reporting period and record changes in the estimated fair value as a non-cash gain or loss
in the Statements of Operations and Comprehensive Income (Loss).
Liquidity and Capital Resources
As of December 31:
Cash and cash equivalents
Working capital
Current ratio
Years Ended December 31:
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
2016
2015
(in thousands)
2014
$
$
$
$
$
14,006 $
12,973 $
3.7:1
7,857 $
7,391 $
2.5:1
6,293 $
(171) $
27 $
(7,466) $
(133) $
(14) $
15,470
12,921
2.9:1
(5,865)
(18)
9,555
We have funded our operations since inception primarily through the sale of our securities and the issuance of debt, as well as with
proceeds from warrant and option exercises, corporate licensing and collaborative agreements, the sale of royalty rights and government-
sponsored research grants. At December 31, 2016, we had working capital of approximately $13.0 million compared to working capital of
approximately $7.4 million at December 31, 2015.
Our operating activities provided approximately $6.3 million of cash during the year ended December 31, 2016. This consisted
primarily of the net income for the period of approximately $5.1 million, approximately $0.4 million related to depreciation and
amortization, non-cash charges of approximately $1.0 million related to share-based compensation expenses and approximately $0.6
million related to net changes in other operating assets and liabilities. This was offset in part by approximately $0.8 million related to non-
cash gains resulting from changes in the fair value of warrants. Uses of cash in operating activities were primarily to fund product
development programs and administrative expenses.
Net cash used in investing activities of approximately $171,000 during the year ended December 31, 2016 was primarily related to
purchases of equipment.
Our financing activities provided approximately $27,000 during the year ended December 31, 2016 which was primarily related to
proceeds from the exercise of stock options.
In May 2016, the FDA approved our Probuphine NDA and pursuant to our license agreement with Braeburn, as amended to date, we
received a $15 million milestone payment and subsequently transferred the NDA to Braeburn.
In September 2016, we entered into an agreement with Cantor Fitzgerald & Co. to enable us to sell up to $20 million of shares in an at-
the-market offering (the “ATM”). To date, we have elected not to sell any shares pursuant to the ATM given our current financial position
and the market price of our stock.
At December 31, 2016, we had cash and cash equivalents of approximately $14.0 million, which we believe is sufficient to fund our
planned operations through the first quarter of 2018. We will require additional funds, either through payments from Braeburn under the
license agreement or through other financing arrangements, to advance our current ProNeura development programs to later stage clinical
studies and to complete the regulatory approval process necessary to commercialize any products we might develop.
38
The following table sets forth the aggregate contractual cash obligations as of December 31, 2016 (in thousands):
Contractual obligations
Operating leases
Total contractual cash obligations
Results of Operations
Total
< 1 year
Payments Due by Period
1-3 years
3-5 years
5 years+
$
$
1,326 $
1,326 $
277 $
277 $
586 $
586 $
463 $
463 $
—
—
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
License revenues were approximately $15.1 million and $1.7 million for the years ended December 31, 2016 and 2015, respectively.
License revenues for the year ended December 31, 2016 reflect approximately $65,000 from the recognition of royalties earned on net sales
of Probuphine and approximately $15.0 million from the recognition of the milestone payment earned upon FDA approval of our
Probuphine NDA in May 2016. License revenues for the year ended December 31, 2015 reflect the amortization of the upfront license fee
received from Braeburn in December 2012.
Research and development expenses for 2016 were approximately $6.1 million compared to approximately $4.7 million in 2015, an
increase of approximately $1.4 million, or 30%. The increase in research and development costs was primarily associated with increases in
external research and development expenses related to the support of our ProNeura product development programs, employee related
expenses and other research and development expenses. These increases were partially offset by the reimbursement by our development
partner, Braeburn, of approximately $1.1 million of expenses related to Probuphine. External research and development expenses include
direct expenses such as CRO charges, investigator and review board fees, patient expense reimbursements, expenses for NDA preparation
and contract manufacturing expenses. During 2016, external research and development expenses relating to our product development
programs were approximately $3.5 million compared to approximately $1.5 million in 2015. Other research and development expenses
include internal operating costs such as clinical research and development personnel-related expenses, clinical trials related travel expenses,
and allocation of facility and corporate costs. As a result of the risks and uncertainties inherently associated with pharmaceutical research
and development activities described elsewhere in this document, we are unable to estimate the specific timing and future costs of our
clinical development programs or the timing of material cash inflows, if any, from our product candidates. However, we anticipate that our
research and development expenses will increase in connection with our current ProNeura development program and any other ProNeura
technology based product development activities we may pursue.
General and administrative expenses for 2016 were approximately $4.6 million compared to approximately $3.8 million in 2015, an
increase of approximately $0.8 million, or 21%. The increase in general and administrative expenses was primarily related to increases in
non-cash stock-based compensation and employee-related costs of approximately $0.5 million, legal and professional fees of approximately
$0.2 million and a contractual fee obligation in connection with payments received under the Probuphine license of approximately $0.2
million. This was partially offset by decreases of approximately $0.1 million in other administrative expenses.
Net other income for the year ended December 31, 2016 was approximately $0.8 million, compared to net other expense of
approximately $4.5 million in 2015. Net other income in 2016 consisted primarily of $0.8 million related to non-cash gains on changes in
the fair value of warrant liabilities. Net other expense in 2015 consisted primarily of $4.5 million related to non-cash losses on changes in
the fair value of warrant liabilities.
Our net income applicable to common stockholders for the year ended December 31, 2016 was approximately $5.1 million, or
approximately $0.25 per share, compared to our net loss applicable to common stockholders of approximately $11.3 million, or
approximately $0.56 per share, for the comparable period in 2015.
39
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
License revenues of approximately $1.7 million and $3.6 million for the years ended December 31, 2015 and 2014, respectively,
reflect the amortization of the upfront license fee received from Braeburn in December 2012.
Research and development expenses for 2015 were approximately $4.7 million compared to approximately $4.1 million in 2014, an
increase of approximately $0.6 million, or 15%. The increase in research and development costs was primarily associated with increases in
external research and development expenses related to the support of our Probuphine and ProNeura-ropinirole product development
programs, employee related expenses and other research and development expenses. External research and development expenses include
direct expenses such as CRO charges, investigator and review board fees, patient expense reimbursements, expenses for NDA preparation
and contract manufacturing expenses. During 2015, external research and development expenses relating to our product development
programs were approximately $1.5 million compared to approximately $0.9 million in 2014. Other research and development expenses
include internal operating costs such as clinical research and development personnel-related expenses, clinical trials related travel expenses,
and allocation of facility and corporate costs.
General and administrative expenses for 2015 were approximately $3.8 million compared to approximately $3.0 million in 2014, an
increase of approximately $0.8 million, or 27%. The increase in general and administrative expenses was primarily related to increases in
non-cash stock-based compensation and employee-related costs of approximately $0.4 million, legal and professional fees of approximately
$0.2 million, board fees of approximately $0.1 million and travel related expenses of approximately $0.1 million.
Net other expense for the year ended December 31, 2015 was approximately $4.5 million, compared to net other income of
approximately $1.1 million in 2014. Net other expense in 2015 consisted primarily of $4.5 million related to non-cash losses on changes in
the fair value of warrant liabilities. Net other income in 2014 consisted primarily of $1.1 million related to non-cash gains on changes in
the fair value of warrant liabilities.
Our net loss applicable to common stockholders for the year ended December 31, 2015 was approximately $11.3 million, or
approximately $0.56 per share, compared to our net loss applicable to common stockholders of approximately $2.4 million, or
approximately $0.14 per share, for the comparable period in 2014.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and we have never established any special purpose entities.
We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We held no marketable securities at December 31, 2016 and 2015.
Item 8.
Financial Statements and Supplementary Data.
The response to this item is included in a separate section of this Report. See “Index to Financial Statements” on Page F-1.
Item 9.
Changes and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures : Our principal executive and financial officers reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by
this Annual Report on Form 10-K. Based on that evaluation, our principal executive and financial officers concluded that our disclosure
controls and procedures are effective in timely providing them with material information relating to the Company, as required to be
disclosed in the reports we file under the Exchange Act.
40
(b) Management’s Annual Report on Internal Control Over Financial Reporting:
Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer
and principal financial officer, and effected by our Board, management and other personnel, 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:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
our assets;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance
with authorization of our management and directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our
assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by
collusion or improper management overrides. Due to such limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.
Management has used the framework set forth in the report entitled Internal Control—Integrated Framework published by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), known as COSO, to evaluate the effectiveness
of the Company’s internal control over financial reporting. Based on this assessment, management has concluded that our internal control
over financial reporting was effective as of December 31, 2016.
Our independent registered public accounting firm, OUM & CO. LLP, that has audited the Company’s financial statements contained
in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of
December 31, 2016. The attestation report appears on page F-3 of this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting : There were no changes in our internal control over financial reporting (as
defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Securities Act) during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.
41
Item 10.
Directors; Executive Officers and Corporate Governance
PART III
Set forth below are the name, age and position and a brief account of the business experience of each of our executive officers and
Age
62
67
71
62
76
73
54
Office
Director Since
Executive Chairman of the Board
Chief Executive Officer, President and
Director
Director
Director
Director
Director
Director
November 2007
February 2004
November 2014
January 2017
May 2002
November 2014
January 2017
directors:
Name
Marc Rubin (1)
Sunil Bhonsle
Joseph A. Akers (2)(3)
Rajinder Kumar
M. David MacFarlane (2)(3)
James R. McNab, Jr. (2)(4)
Scott A. Smith
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
Marc Rubin, M.D. served as our President and Chief Executive from October 2007 until December 2008 and was re-engaged as our
Executive Chairman in May 2009. Until February 2007, Dr. Rubin served as Head of Global Research and Development for Bayer
Schering Pharma, as well as a member of the Executive Committee of Bayer Healthcare and the Board of Management of Bayer Schering
Pharma. Prior to the merger of Bayer Pharmaceuticals and Schering AG in June 2006, Dr. Rubin was a member of the Executive Board of
Schering AG since joining the Company in October 2003, as well as Chairman of Schering Berlin Inc. and President of Berlex
Pharmaceuticals, a division of Schering AG. From 1990 until August 2003, Dr. Rubin was employed by GlaxoSmithKline where he held
positions of increasing responsibility in global clinical and commercial development overseeing programs in the United States, Europe,
Asia and Latin America. From 2001 through 2003, he was Senior Vice President of Global Clinical Pharmacology & Discovery Medicine.
Dr. Rubin holds an M.D. from Cornell University Medical College. Dr. Rubin currently serves on the board of directors of Curis Inc. and
Galectin Therapeutics. Based on Dr. Rubin’s position as our Executive Chairman, his extensive senior management experience and service
on boards of directors in the biotechnology and pharmaceutical industries and his medical background, our Board believes that Dr. Rubin
has the appropriate set of skills to serve as a member of the Board.
Sunil Bhonsle served as our Executive Vice President and Chief Operating Officer from September 1995 until December 2008 and
was re-engaged as our President in May 2009. Mr. Bhonsle was appointed as our Chief Executive Officer in November 2015. Mr. Bhonsle
served in various positions, including Vice President and General Manager — Plasma Supply and Manager — Inventory and Technical
Planning, at Bayer Corporation from July 1975 until April 1995. Mr. Bhonsle holds an M.B.A. from the University of California at
Berkeley and a B.Tech. in chemical engineering from the Indian Institute of Technology. Based on Mr. Bhonsle’s position as our principal
executive officer and his substantial experience in the pharmaceutical industry, particularly in the areas of clinical development and
manufacturing, our Board believes that Mr. Bhonsle has the appropriate set of skills to serve as a member of the Board.
Joseph A. Akers was employed in various capacities by Bayer Corporation, Bayer Healthcare and certain related entities, including as
president of the Hematology/Cardiology Business Unit from 2004 to 2007, president and chief executive officer of Bayer Business and
Corporate Services from July 2002 through 2003 and executive vice president and chief administrative and financial officer from 1999 to
July 2002. Mr. Akers received a B.S. in marketing and an M.B.A. in finance from the University of California at Berkeley. Based on Mr.
Akers’ extensive management experience in the pharmaceutical industry, particularly in the areas of administration and finance, our Board
believes that Mr. Akers has the appropriate set of skills to serve as a member of the Board.
42
Rajinder Kumar, Ph.D. has served as the Chairman and Chief Executive Officer of MeRaD Pharmaceutical Ltd. in Cambridge U.K.
since May 2009. He has also served as President and Chief Medical Officer of Vitas Pharma in Hyderabad, India since he founded such
company in 2010. For the decade prior to joining MeRaD, he served in various executive capacities with Dr. Reddy’s Labs, Ranbaxy
Laboratories Limited, Synaptic Pharmaceutical LLP and Glaxo SmithKline Beecham. Dr. Kumar is a member of scientific advisory boards
in neuroscience, anti-infectives and metabolic disorders He received a B.S. in Human Biology from the University of London, a Masters in
Ethology from the University of Birmingham, a MBChB in Medicine from the University of Dundee and an advanced diploma in
Psychological Medicine from The Royal College of Surgeons and Physicians in Ireland. Based on Dr. Kumar’s management experience in
the pharmaceutical industry, our Board believes that Dr. Kumar has the appropriate set of skills to serve as a member of the Board.
M. David MacFarlane, Ph.D. served as Vice President and Responsible Head of Regulatory Affairs of Genentech, Inc. from 1989
until his retirement in August 1999. Prior to joining Genentech, Inc., he served in various positions with Glaxo Inc., last as Vice President of
Regulatory Affairs. Based on Dr. MacFarlane’s management experience in the pharmaceutical industry, particularly in the area of clinical
and regulatory affairs, our Board believes that Dr. MacFarlane has the appropriate set of skills to serve as a member of the Board.
James R. McNab, Jr. has served since 1998 as chief executive officer and chairman of Palmetto Pharmaceuticals, Inc., a privately-
held drug discovery company he founded. He has been a chairman of the board of directors of Curis, Inc. (Nasdaq:CRIS), an oncology
focused biotechnology company, since May 2002. Since 2009, Mr. McNab has served as executive chairman of FirstString Research, Inc.,
a privately-held biopharmaceutical company, and as chief executive officer of JT Pharmaceuticals, Inc., a privately-held drug discovery
company. Mr. McNab has co-founded several privately-held companies, including Sontra Medical Corporation, a drug delivery company,
and Parker Medical Associates, a manufacturer and worldwide supplier of orthopedic and sports-related products. He received a B.A. in
economics from Davidson College and an M.B.A. from the University of North Carolina at Chapel Hill. Based on Mr. McNab’s extensive
management experience in the pharmaceutical industry, our Board believes that Mr. McNab has the appropriate set of skills to serve as a
member of the Board.
Scott A. Smith has served in various management capacities with Celgene Corporation since 2008, including as President,
Inflammation and Immunology since August 2014. Effective April 2017, he will become President and Chief Operating Officer. From
2003 to 2008, he served in various executive capacities with Biovail Pharmaceuticals, Inc. and prior thereto spent 16 years Pharmacia &
Upjohn Company. Mr. Smith holds a BSc in Chemistry and Biology and an HBSc in Pharmacology and Toxicology from the University of
Western Ontario and a Masters in International Management from the American Graduate School of International Management in Arizona.
Based on Mr. Smith’s extensive management experience in the pharmaceutical industry, our Board believes that Mr. Smith has the
appropriate set of skills to serve as a member of the Board.
As indicated above, each of our directors has extensive management and operational experience in one or more facets of the
pharmaceutical industry, including research, product development, clinical and regulatory affairs, manufacturing and sales and marketing,
providing our company with the leadership needed by a biotechnology company in all stages of its development.
Directors serve until the next annual meeting or until their successors are elected and qualified. Officers serve at the discretion of the
Board, subject to rights, if any, under contracts of employment. See “Item 6. Executive Compensation—Employment Agreements.”
Board Leadership Structure
Currently, our principal executive officer and chairman of the Board positions are held separately by Sunil Bhonsle and Marc Rubin,
respectively.
43
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our executive officers, directors and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Such executive officers, directors, and greater than 10% beneficial
owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all
filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were complied with during 2016.
Code of Ethics
We adopted a Code of Business Conduct and Ethics (the “Code”) in February 2013 that applies to all directors, officers and employees.
The Code was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 and is available on our
website at www.titanpharm.com. A copy of our code of ethics will also be provided to any person without charge, upon written request sent
to us at our offices located at 400 Oyster Point Blvd, Suite 505, South San Francisco, California 94080.
Changes in Director Nomination Process for Stockholders
None.
44
Item 11.
Executive Compensation
Overview
During 2016, the compensation packages of Dr. Rubin, our Executive Chairman, and Sunil Bhonsle, our Chief Executive Officer and
President continued to reflect our current level of operations and resources. The key objectives for 2016 were to support the review by the
FDA of the Probuphine NDA, and if approved, support Braeburn in the commercial launch of the product. This compensation discussion
describes the material elements of compensation awarded to, earned by, or paid to each of our executive officers who served as named
executive officers during the year ended December 31, 2016. This compensation discussion focuses on the information contained in the
following tables and related footnotes and narrative for primarily the last completed fiscal year; however, we also describe compensation
actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation
disclosure.
Compensation Program Objectives and Philosophy
Our Compensation Committee currently oversees the design and administration of our executive compensation program. It reviews and
approves all elements of compensation for each of our named executive officers taking into consideration recommendations from our
principal executive officer (for compensation other than his own), as well as competitive market guidance. We define our competitive
markets for executive talent to be the pharmaceutical and biotechnology industries in northern California. To date, we have utilized the
Radford Biotechnology Surveys, a third party market specific compensation survey, and, when applicable, other independent third-party
compensation consultants to benchmark our executive compensation.
The principal elements of our executive compensation program have historically been base salary, annual cash incentives, long-term
equity incentives in the form of stock options or restricted stock awards, other benefits and perquisites, post-termination severance and
acceleration of stock option vesting for certain named executive officers upon termination and/or a change in control. Our other benefits
and perquisites have consisted of life, health and disability insurance benefits, and a qualified 401(k) savings plan. Our philosophy has been
to position the aggregate of these elements at a level that is competitive within the industry and commensurate with our size and
performance recognizing operational needs and limited financial resources during this period.
Base Salaries
During 2016, the base salary of our named executives was reflective of the availability of resources and level of continuing operations.
Dr. Rubin received an annual salary of $295,000 and Mr. Bhonsle received an annual salary of $395,000.
As we continue to evaluate the strategic alternatives for us going forward and our related human resource requirements, our
Compensation Committee will continue to review appropriate base salaries for our executive officers. In making its determination, the
Compensation Committee will consider the time commitment necessary and the roles our executives will play in implementing our plans.
Long-term Equity Incentives
We provide the opportunity for our named executive officers and other executives to earn a long-term equity incentive award. Long-
term incentive awards provide employees with the incentive to stay with us for longer periods of time, which in turn, provides us with
greater stability. Equity awards also are less costly to us in the short term than cash compensation. We review long-term equity incentives
for our named executive officers and other executives annually.
Historically, for our named executive officers, our stock option grants were of a size and term determined and approved by the
Compensation Committee in consideration of the range of grants in the Radford Survey, generally falling within the 50-75% range outlined
in the survey. We have traditionally used stock options as our form of equity compensation because stock options provide a relatively
straightforward incentive for our executives, result in less immediate dilution of existing stockholders’ interests and, prior to our adoption
of FAS 123(R), resulted in less compensation expense for us relative to other types of equity awards. All grants of stock options to our
employees are granted with exercise prices equal to or greater than the fair market value of our common stock on the respective grant dates.
For a discussion of the determination of the fair market value of these grants, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting Policies and the Use of Estimates.”
45
We do not time stock option grants to executives in coordination with the release of material non-public information. Our stock option
grants have a 10-year contractual exercise term. In general, the option grants are also subject to the following post-termination and change
in control provisions:
Event
• Termination by us for Reason Other than
Cause, Disability or Death
Award Vesting
Exercise Term
• Forfeit Unvested Options
• Earlier of: (1) 90 days or (2)
• Termination for Disability, Death or
• Forfeit Unvested Options
Retirement
Remaining Option Period
• Earlier of: (1) 2 years or (2)
Remaining Option Period
• Termination for Cause
• Forfeit Vested and Unvested
• Expire
Options
• Other Termination
• Forfeit Unvested Options
• Earlier of: (1) 90 days or (2)
Remaining Option Period
• Change in Control
• Accelerated*
• *
*
The Compensation Committee may provide that, in the event of a change in control, any outstanding awards that are unexercisable or
otherwise unvested will become fully vested and immediately exercisable. If there is a termination of employment, the applicable
termination provisions regarding exercise term will apply.
In February 2016, Dr. Rubin and Mr. Bhonsle were granted options to purchase 79,100 shares and 89,100 shares of common stock,
respectively, which vest monthly over 24 months from the grant date.
Compensation Committee Interlocks and Insider Participation
Members of our Compensation Committee of the board of directors are Joseph Akers and M. David MacFarlane. No member of our
Compensation Committee was, or has been at any time in the last 10 years, an officer or employee of Titan or any of our former
subsidiaries.
No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive
officers or directors of the Company or another entity.
The following table shows information concerning the annual compensation for services provided to us by our Chief Executive
Officer, our Chief Financial Officer and our other executive officers for the periods set forth.
SUMMARY COMPENSATION TABLE
46
Name and Principal
Position
Marc Rubin, M.D.
Executive
Chairman
Sunil Bhonsle
Chief Executive
Officer, President
and Principal
Financial Officer
Year
2016
Salary ($)
$
295,000 $
Bonus
($)
Options
Awards
($) (1)
Stock
Awards
($) (1)
All Other
Compensation
($)
Total
Compensation
($)
73,000 $
245,311 $
— $
— $
613,311
2015
2014
2016
2015
2014
210,000
210,000
—
—
473,719
—
—
66,000
—
—
683,719
276,000
395,000
96,000
276,323
—
—
767,323
300,000
300,000
—
—
496,767
—
—
66,000
—
—
796,767
366,000
(1) Amounts shown represent the grant date fair value computed in accordance with FASB ASC 718. The assumptions used by us with
respect to the valuation of option grants and stock awards are set forth in “Titan Pharmaceuticals, Inc. Financial Statements—Notes to
Financial Statements—Note 12—Stock Plans.”
The following table shows information concerning grants of plan based awards to named executive officers during the year ended
GRANTS OF PLAN-BASED AWARDS
December 31, 2016.
Name
Marc Rubin, M.D.
Sunil Bhonsle
Grant
Date
2/02/2016
2/02/2016
Approval
Date(1)
2/01/2016
2/01/2016
Number of
Shares of
Common Stock
Underlying
Awards (#)
Exercise or
Base Price of
Option
Awards
($/Sh)
79,100(3) $
89,100(3) $
— $
— $
Grant Date
Fair Value
of Stock
and Option
Awards($)(2)
245,311
276,323
(1) All grants were approved by the Compensation Committee on the dates indicated.
(2) Valuation assumptions are found under “Titan Pharmaceuticals, Inc. Financial Statements—Notes to Financial Statements—Note 12—
Stock Plans.”
(3) These option grants vest monthly over 24 months from the grant date.
Employee Benefits Plans
The principal purpose of our stock incentive plans is to attract, motivate, reward and retain selected employees, consultants and
directors through the granting of stock-based compensation awards. The stock option plans provides for a variety of awards, including non-
qualified stock options, incentive stock options (within the meaning of Section 422 of the Code), stock appreciation rights, restricted stock
awards, performance-based awards and other stock-based awards.
2001 Stock Option Plan
In August 2001, we adopted the 2001 Employee Non-Qualified Stock Option Plan, or the 2001 NQ Plan, pursuant to which 318,182
shares of common stock were authorized for issuance for option grants to employees and consultants who are not officers or directors of
Titan. The 2001 NQ Plan expired by its terms in August 2011. On December 31, 2016, options to purchase an aggregate of 204,375 shares
of our common stock were outstanding under the 2001 NQ Plan.
2002 Stock Incentive Plan
In July 2002, we adopted the 2002 Stock Incentive Plan, or the 2002 Plan. Under the 2002 Plan, as amended, a total of approximately
1.3 million shares of our common stock were authorized for issuance to employees, officers, directors, consultants, and advisers. The 2002
Plan expired by its terms in July 2012. On December 31, 2016, options to purchase an aggregate of 631,343 shares of our common stock
were outstanding under the 2002 Plan.
2014 Incentive Plan
In February 2014, our Board adopted the 2014 Incentive Plan, or the 2014 Plan, pursuant to which 454,546 shares of our common stock
were authorized for issuance to employees, directors, officers, consultants and advisors. On December 31, 2016, options to purchase
300,744 shares of our common stock were outstanding under the 2014 Plan.
47
2015 Omnibus Equity Incentive Plan
In August 2015, our stockholders approved the 2015 Omnibus Equity Incentive Plan, or the 2015 Plan. The 2015 Plan, as amended in
August 2016, authorized a total of 2.5 million shares of our common stock for issuance to employees, directors, officers, consultants and
advisors. On December 31, 2016, options to purchase 618,000 shares of our common stock were outstanding under the 2015 Plan.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of
December 31, 2016.
Name
Marc Rubin, M.D.
Sunil Bhonsle
Option Awards
Number of
Securities Underlying
Unexercised Awards (#)
Exercisable
Number of
Securities Underlying
Unexercised Awards
(#) Unexercisable
Exercise
Price ($)
79,546
1,364
18,182
2,729
51,818
111,819
27,273
45,455
36,364
45,450
32,958
13,939
909
18,182
1,819
70,910
56,364
36,364
54,546
43,637
45,450
37,125
$
—
—
—
—
—
—
—
—
—
45,450(1)
46,142(1)
—
—
—
—
—
—
—
—
—
45,450(1)
51,975(1)
13.20
8.36
4.34
4.34
4.34
4.34
7.70
6.32
3.30
5.10
5.10
17.21
8.36
4.34
4.34
4.34
4.34
7.70
6.32
3.30
5.10
5.10
Expiration
Date
10/01/2017
5/30/2018
5/17/2019
5/17/2019
5/17/2019
5/17/2019
4/15/2021
1/3/2022
3/16/2025
12/14/2025
02/02/2026
1/3/2017
5/30/2018
5/17/2019
5/17/2019
5/17/2019
5/17/2019
4/15/2021
1/3/2022
3/16/2025
12/14/2025
2/02/2026
(1) These option grants vest monthly over 24 months from the grant date.
There were no option exercises by our named executive officers during 2016.
Pension Benefits
We do not sponsor any qualified or non-qualified defined benefit plans.
48
Nonqualified Deferred Compensation
We do not maintain any non-qualified defined contribution or deferred compensation plans. The Compensation Committee, which is
comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other
employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that
doing so is in our best interests. We sponsor a tax qualified defined contribution 401(k) plan in which Dr. Rubin and Mr. Bhonsle
participated.
Employment Agreements
In September 2016, we entered into new employment agreements with Dr. Rubin and Mr. Bhonsle providing for base annual salaries of
$295,000 and 395,000, respectively. The employment agreements contain the following terms:
·
·
·
·
Bonuses. The executive may, at the sole discretion of the board of directors or the compensation committee, be considered for an
annual bonus of up to 50% of his then base salary, payable in cash or awards under the Company’s equity incentive plan.
Term; Termination. The Employment Agreements have a two-year term but may be terminated by the Company for any reason at
any time. In the event of termination by the Company without cause or by the executive for good reason not in connection with a
change of control, as those terms are defined in such agreements, the executive is entitled to (i) severance for the greater of 12
months or the balance of the term, (ii) a pro rata portion of any annual bonus, (iii) 12 months of COBRA payments, and (iv) the
immediate accelerated vesting of any unvested restricted shares and stock options. In the event such a termination is within 30 days
prior to or six months following a change of control, the executive is entitled to an additional six months of COBRA payments.
Restrictive Covenants. The Employment Agreements contain one-year post-termination noncompetition and non-solicitation
provisions.
Clawback. The Employment Agreements contain a two-year post-termination clawback of benefits provision in the event of a
restatement of financial results upon which such benefits were based.
Summary of Director Compensation
DIRECTOR COMPENSATION
The following table summarizes compensation that our directors earned during 2016 for services as members of our Board.
Fees
Earned or
Paid in
Cash ($)
Stock
Awards ($)
Options
Awards ($)(1)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings ($)
All Other
Compensation
($)
Name
Joseph A. Akers (2)
Victor J. Bauer, Ph.D.
(3)(8)
Eurelio M. Cavalier (4)
M. David MacFarlane,
Ph.D. (5)
James R. McNab, Jr. (6)
Ley S. Smith (7)(8)
$
57,500 $
— $
32,083
57,500
52,083
54,583
32,083
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
Total ($)
57,500
— $
—
—
—
—
—
32,083
57,500
52,083
54,583
32,083
(1) Valuation assumptions are found under “Titan Pharmaceuticals, Inc. Financial Statements—Notes to Financial Statements—Note 12—
Stock Plans.”
(2) The aggregate number of option awards held at December 31, 2016 was 16,819.
(3) The aggregate number of option awards held at December 31, 2016 was 57,279.
(4) The aggregate number of option awards held at December 31, 2016 was 48,192. Mr. Cavalier retired from the Board effective February
28, 2017.
(5) The aggregate number of option awards held at December 31, 2016 was 42,736.
(6) The aggregate number of option awards held at December 31, 2016 was 16,819.
(7) The aggregate number of option awards held at December 31, 2016 was 48,192.
(8) Dr. Bauer and Mr. Smith resigned from their board positions effective August 1, 2016.
49
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth as of March 10, 2017, the number of shares of our common stock beneficially owned by (i) each person
who is known by us to be the beneficial owner of more than five percent of our common stock; (ii) each director and director nominee; (iii)
each of the named executive officers in the Summary Compensation Table; and (iv) all directors and executive officers as a group. As of
March 10, 2017, we had 21,198,879 shares of common stock issued and outstanding.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”) and
generally includes voting or investment power with respect to securities. Unless otherwise indicated, the stockholders listed in the table
have sole voting and investment power with respect to the shares indicated.
Name and Address of Beneficial Owner (1)
Joseph A. Akers
Sunil Bhonsle
Rajinder Kumar, Ph.D.
M. David MacFarlane, Ph.D.
James R. McNab, Jr.
Marc Rubin, M.D.
Scott A. Smith
Robert E. Mead
All executive officers and directors as a group (7) persons
*
Less than one percent.
Shares
Beneficially
Owned (2)
Percent of Shares
Beneficially
Owned
39,819(3)
595,950(4)
1,667(5)
75,011(6)
126,819(7)
664,923(8)
1,667(9)
1,355,220(10)
1,505,855
*
2.8%
*
*
*
3.1
*
6.4%
6.8%
(1) Unless otherwise indicated, the address of such individual is c/o Titan Pharmaceuticals, Inc., 400 Oyster Point Boulevard, Suite 505,
South San Francisco, California 94080.
(2) In computing the number of shares beneficially owned by a person and the percentage ownership of a person, shares of our common
stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 24, 2015 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of each other
person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of common stock.
(3) Includes 26,819 shares issuable upon exercise of outstanding options.
(4) Includes (i) 405,688 shares issuable upon exercise of outstanding options and (ii) 54,684 shares held in a family trust for which he serves
as trustee.
(5) Includes 1,667 shares issuable upon exercise of outstanding options.
(6) Includes 52,736 shares issuable upon exercise of outstanding options.
(7) Includes 26,819 shares issuable upon exercise of outstanding options.
(8) Includes 508,606 shares issuable upon exercise of outstanding options.
(9) Includes 1,667 shares issuable upon exercise of outstanding options.
(10)Derived from a Schedule 13G filed by Mr. Mead. The address of Mr. Mead’s principal business office is 3653 Maplewood Ave., Dallas,
TX 75205.
50
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions.
None.
Independence of Directors
The following members of our Board meet the independence requirements and standards currently established by the NYSE MKT:
Joseph A. Akers, Rajinder Kumar, M. David MacFarlane, James R. McNab, Jr. and Scott A. Smith.
Board Committees
Our Board has established the following three standing committees: audit committee; compensation committee; and nominating and
governance committee, or nominating committee.
The audit committee was formed in compliance with Section 3(a)(58)(A) of the Exchange Act and consists of Joseph A. Akers, M.
David MacFarlane and James R. McNab, Jr., each of whom meets the independence requirements and standards currently established by
the NYSE MKT and the SEC. In addition, the Board has determined that Messrs. Akers and Smith are “audit committee financial experts”
and “independent” as defined under the relevant rules of the SEC and the NYSE MKT. The audit committee assists the Board by
overseeing the performance of the independent auditors and the quality and integrity of Titan’s internal accounting, auditing and financial
reporting practices. The audit committee is responsible for retaining (subject to stockholder ratification) and, as necessary, terminating, the
independent auditors, annually reviews the qualifications, performance and independence of the independent auditors and the audit plan,
fees and audit results, and pre-approves audit and non-audit services to be performed by the auditors and related fees. During the fiscal year
ended December 31, 2016, the audit committee met four times.
The compensation committee makes recommendations to the Board concerning salaries and incentive compensation for our officers,
including our Principal Executive Officer, and employees and administers our stock option plans. The compensation committee consists of
Joseph A. Akers and M. David MacFarlane, each of whom meets the independence requirements and standards currently established by the
NYSE MKT. The compensation committee met one time as a separate committee, and took action by written consent two times during the
fiscal year ended December 31, 2016.
The purpose of the nominating committee is to assist the Board in identifying qualified individuals to become Board members, in
determining the composition of the Board and in monitoring the process to assess Board effectiveness. The nominating committee consists
of and James R. McNab, Jr., who meets the independence requirements and standards currently established by the NYSE MKT. The
nominating committee did not meet as a separate committee, but took action by written consent one time during the fiscal year ended
December 31, 2016.
The charters for the audit, compensation and nominating committees, which have been adopted by our Board, contain detailed
descriptions of the committees’ duties and responsibilities and are available in the Investor Relations section of our website at
www.titanpharm.com.
Role of the Board in Risk Oversight
Our audit committee is primarily responsible for overseeing our risk management processes on behalf of the full Board. The audit
committee receives reports from management at least quarterly regarding our assessment of risks. In addition, the audit committee reports
regularly to the full Board, which also considers our risk profile. The audit committee and the full Board focus on the most significant risks
we face and our general risk management strategies. While the Board oversees our risk management, management is responsible for day-to-
day risk management processes. Our Board expects management to consider risk and risk management in each business decision, to
proactively develop and monitor risk management strategies and processes for day-to-day activities and to effectively implement risk
management strategies adopted by the audit committee and the Board. We believe this division of responsibilities is the most effective
approach for addressing the risks we face and that our Board leadership structure, which also emphasizes the independence of the Board in
its oversight of its business and affairs, supports this approach.
51
Board Meetings
Our business and affairs are managed under the direction of our Board, which is currently composed of eight members. The primary
responsibilities of the Board are to provide oversight, strategic guidance, counseling and direction to our management. During the fiscal
year ended December 31, 2016, the Board met six times and took action by written consent one time and no director attended fewer than
75% of the meetings of the Board and Board committees of which the director was a member.
Item 14.
Principal Accounting Fees and Services.
Aggregate fees billed by OUM & Co. LLP, an independent registered public accounting firm, during the fiscal years ended December
31, 2016 and 2015 were as follows:
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2016
2015
$ 164,688 $ 149,091
—
41,037
32,425
26,000
—
—
$ 231,725 $ 181,516
Audit Fees —This category includes aggregate fees billed by our independent auditors for the audit of our annual financial statements,
audit of management’s assessment and effectiveness of internal controls over financial reporting, review of financial statements included in
our quarterly reports on Form 10-Q and services that are normally provided by the auditor in connection with statutory and regulatory
filings for those fiscal years.
Audit-Related Fees —This category consists of services by our independent auditors that, including accounting consultations on
transaction related matters, are reasonably related to the performance of the audit or review of our financial statements and are not reported
above under Audit Fees.
Tax Fees —This category consists of professional services rendered for tax compliance and preparation of our corporate tax returns
and other tax advice.
All Other Fees —During the years ended December 31, 2016 and 2015, OUM & Co. LLP did not incur any fees for other professional
services.
The audit committee reviewed and approved all audit and non-audit services provided by OUM & Co. LLP and concluded that these
services were compatible with maintaining its independence. The audit committee approved the provision of all non-audit services by
OUM & Co. LLP. Of the total number of hours expended during OUM & Co. LLP’s engagement to audit our financial statements for the
year ended December 31, 2016, none of the hours were attributed to work performed by persons other than permanent, full-time employees
of OUM & Co. LLP.
Pre-Approval Policies and Procedures
In accordance with the SEC’s auditor independence rules, the audit committee has established the following policies and procedures by
which it approves in advance any audit or permissible non-audit services to be provided to us by our independent auditor.
52
Prior to the engagement of the independent auditors for any fiscal year’s audit, management submits to the audit committee for
approval lists of recurring audit, audit-related, tax and other services expected to be provided by the independent auditors during that fiscal
year. The audit committee adopts pre-approval schedules describing the recurring services that it has pre-approved, and is informed on a
timely basis, and in any event by the next scheduled meeting, of any such services rendered by the independent auditor and the related fees.
The fees for any services listed in a pre-approval schedule are budgeted, and the audit committee requires the independent auditor and
management to report actual fees versus the budget periodically throughout the year. The audit committee will require additional pre-
approval if circumstances arise where it becomes necessary to engage the independent auditor for additional services above the amount of
fees originally pre-approved. Any audit or non-audit service not listed in a pre-approval schedule must be separately pre-approved by the
audit committee on a case-by-case basis.
Every request to adopt or amend a pre-approval schedule or to provide services that are not listed in a pre-approval schedule must
include a statement by the independent auditors as to whether, in their view, the request is consistent with the SEC’s rules on auditor
independence.
The audit committee will not grant approval for:
•
•
•
any services prohibited by applicable law or by any rule or regulation of the SEC or other regulatory body applicable to us;
provision by the independent auditors to us of strategic consulting services of the type typically provided by management
consulting firms; or
the retention of the independent auditors in connection with a transaction initially recommended by the independent auditors,
the tax treatment of which may not be clear under the Internal Revenue Code and related regulations and which it is reasonable
to conclude will be subject to audit procedures during an audit of our financial statements.
Tax services proposed to be provided by the auditor to any director, officer or employee of Titan who is in an accounting role or
financial reporting oversight role must be approved by the audit committee on a case-by-case basis where such services are to be paid for
by us, and the audit committee will be informed of any services to be provided to such individuals that are not to be paid for by us.
In determining whether to grant pre-approval of any non-audit services in the “all other” category, the audit committee will consider all
relevant facts and circumstances, including the following four basic guidelines:
• whether the service creates a mutual or conflicting interest between the auditor and us;
• whether the service places the auditor in the position of auditing his or her own work;
• whether the service results in the auditor acting as management or an employee of our company; and
• whether the service places the auditor in a position of being an advocate for our company.
53
PART IV
Item 15.
Exhibits and Financial Statements Schedules.
(a) 1. Financial Statements
An index to Financial Statements appears on page F-1.
2. Schedules
All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information
required is set forth in the financial statements or notes thereto.
54
TITAN PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2016 and 2015
Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014
Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Financial Statements
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Titan Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Titan Pharmaceuticals, Inc. as of December 31, 2016 and 2015, the related statements
of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 Titan
Pharmaceuticals, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2016, 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), Titan
Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated March 16, 2017 expressed an unqualified opinion thereon.
/s/ OUM & CO. LLP
San Francisco, California
March 16, 2017
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Titan Pharmaceuticals, Inc.
We have audited Titan Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Titan 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 Annual Report on Internal Control Over Financial Reporting included in Item 9A of this Form 10-K. Our responsibility is
to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, 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.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Titan Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance
sheets of Titan Pharmaceuticals, Inc. as of December 31, 2016 and 2015, the related statements of operations and comprehensive income
(loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, and our report dated March
16, 2017 expressed an unqualified opinion thereon.
/s/ OUM & CO. LLP
San Francisco, California
March 16, 2017
F-3
TITAN PHARMACEUTICALS, INC.
BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Receivables
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Total Assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued clinical trials expenses
Other accrued liabilities
Total current liabilities
Warrant liability
Total Liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized, none issued and
outstanding at December 31, 2016 and 2015.
Common stock, at amounts paid-in, $0.001 par value per share; 125,000,000 shares authorized,
21,198,879 and 20,059,820 shares issued and outstanding at December 31, 2016 and 2015,
respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to financial statements.
F-4
December 31,
2016
2015
(in thousands, except
share and per share data )
$
$
$
14,006 $
3,587
237
17,830
837
18,667 $
3,015 $
1,387
455
4,857
619
5,476
7,857
4,213
174
12,244
1,043
13,287
4,158
341
354
4,853
1,444
6,297
—
—
297,855
24,300
(308,964)
13,191
18,667 $
297,828
23,261
(314,099)
6,990
13,287
$
TITAN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Revenue:
License revenue
Total revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest income, net
Other income (expense), net
Non-cash gain (loss) on changes in the fair value of warrants
Other income (expense), net
Net income (loss) and comprehensive income (loss) applicable to common
stockholders
Basic net income (loss) per common share
Diluted net income (loss) per common share
Weighted average shares used in computing basic net income (loss) per common
share
Weighted average shares used in computing diluted net income (loss) per common
share
Years ended December 31,
2016
2014
2015
(in thousands, except per share amount)
$
$
$
$
15,065 $
15,065
6,126
4,596
10,722
4,343
37
(70)
825
792
5,135 $
0.25 $
0.20 $
1,671 $
1,671
4,675
3,755
8,430
(6,759)
—
(8)
(4,512)
(4,520)
(11,279) $
(0.56) $
(0.56) $
3,646
3,646
4,075
3,046
7,121
(3,475)
—
(11)
1,083
1,072
(2,403)
(0.14)
(0.20)
20,744
20,053
17,057
21,459
20,053
17,060
See accompanying notes to financial statements.
F-5
TITAN PHARMACEUTICALS, INC
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Additional
Common Stock
Paid-In Accumulated
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
— $
Deficit
(300,417) $
(2,403)
Balances at December 31, 2013
Net loss
Issuance of common stock, net of issuance costs
Issuance of common stock upon vesting of
restricted stock awards, net
Stock-based compensation
Balances at December 31, 2014
Net loss
Reclassification of warrants from liabilities to
stockholders’ equity
Issuance of common stock upon vesting of
restricted stock awards, net
Stock-based compensation
Balances at December 31, 2015
Net income
Issuance of common stock upon exercise of
warrants, net
Issuance of common stock upon exercise of
options, net
Stock-based compensation
Balances at December 31, 2016
Shares
Amount Capital
16,143 $ 284,485 $
21,692 $
3,819
4,747
38
(36)
20,000 289,196
543
22,235
8,646
60
(14)
20,060 297,828
1,026
23,261
1,131
8
27
21,199 $ 297,855 $
1,039
24,300 $
See accompanying notes to financial statements.
F-6
5,760
(2,403)
4,747
(36)
543
8,611
(11,279)
8,646
(14)
1,026
6,990
5,135
—
27
1,039
13,191
(302,820)
(11,279)
—
(314,099)
5,135
—
(308,964) $
— $
TITAN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Non-cash (gain) loss on changes in fair value of warrants
Stock-based compensation
Changes in operating assets and liabilities:
Receivables
Prepaid expenses and other assets
Accounts payable
Other accrued liabilities
Deferred contract revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of furniture and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock from the exercise of stock options
Proceeds from issuance of common stock and warrants, net of issuance costs
Issuance of common stock from the vesting of restricted shares
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Fair value of warrants at the time of reclassification to equity
$
$
See accompanying notes to financial statements.
F-7
2016
Years ended December 31,
2015
(in thousands)
2014
$
5,135 $
(11,279) $
(2,403)
377
(825)
1,039
626
(63)
(1,143)
1,147
—
6,293
(171)
(171)
27
—
—
27
6,149
7,857
14,006 $
358
4,512
1,026
(245)
(29)
(250)
112
(1,671)
(7,466)
(133)
(133)
—
—
(14)
(14)
(7,613)
15,470
7,857 $
353
(1,083)
543
850
59
(710)
172
(3,646)
(5,865)
(18)
(18)
—
9,591
(36)
9,555
3,672
11,798
15,470
— $
8,646 $
—
TITAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The Company
We are a pharmaceutical company developing proprietary therapeutics for the treatment of serious medical disorders. Our product
development programs utilize our proprietary long-term drug delivery platform, ProNeura™, and focus primarily on innovative treatments
for select chronic diseases for which steady state delivery of a drug provides an efficacy and/or safety benefit. We are directly developing
our product candidates and also utilize corporate, academic and government partnerships as appropriate. We operate in only one business
segment, the development of pharmaceutical products. All share and per share amounts give retroactive effect to a 1 for 5.5 reverse stock
split effected in September 2015. See Note 11 “Stockholders’ Equity – Reverse Stock Split.”
The accompanying financial statements have been prepared assuming we will continue as a going concern.
In May 2016, the U.S. Food and Drug Administration (“FDA”) approved our Probuphine New Drug Application (“NDA”) and
pursuant to our license agreement with Braeburn Pharmaceuticals, Inc. (“Braeburn”), as amended to date, we received a $15 million
milestone payment and subsequently transferred the NDA to Braeburn.
At December 31, 2016, we had cash of approximately $14.0 million, which we believe is sufficient to fund our planned operations
through the first quarter of 2018. We will require additional funds, either through payments from Braeburn under the license agreement or
through other financing arrangements, to advance our current ProNeura development programs to later stage clinical studies and to
complete the regulatory approval process necessary to commercialize any products we might develop.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Going concern assessment
With the implementation of FASB's new standard on going concern, Accounting Standard Update, or ASU No. 2014-15, beginning
with year ended December 31, 2016 and all annual and interim periods thereafter, we will assess going concern uncertainty in our financial
statements to determine if we have sufficient cash on hand and working capital, including available borrowings on loans, to operate for a
period of at least one year from the date the financial statements are issued or available to be issued, which is referred to as the “look-
forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable
to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and
nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other
factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in
the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved and we have the
proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
Stock-Based Compensation
We recognize compensation expense using a fair-value based method, for all stock-based payments including stock options and
restricted stock awards and stock issued under an employee stock purchase plan. These standards require companies to estimate the fair
value of stock-based payment awards on the date of grant using an option pricing model. See Note 12 “Stock Plans,” for a discussion of our
stock-based compensation plans. Our non-cash stock-based compensation expense related to employees and non-employee members of our
Board totaled approximately $1.0 million, $1.0 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
F-8
Warrants Issued in Connection with Equity Financing
We generally account for warrants issued in connection with equity financings as a component of equity, unless there is a deemed
possibility that we may have to settle the warrants in cash. For warrants issued with deemed possibility of cash settlement, we record the
fair value of the issued warrants as a liability at each reporting period and record changes in the estimated fair value as a non-cash gain or
loss in the Statements of Operations and Comprehensive Income (Loss).
Cash, Cash Equivalents and Marketable Securities
Our investment policy emphasizes liquidity and preservation of principal over other portfolio considerations. We select investments
that maximize interest income to the extent possible given these two constraints. We satisfy liquidity requirements by investing excess cash
in securities with different maturities to match projected cash needs and limit concentration of credit risk by diversifying our investments
among a variety of high credit-quality issuers and limit the amount of credit exposure to any one issuer. The estimated fair values have been
determined using available market information. We do not use derivative financial instruments in our investment portfolio.
All investments with original maturities of three months or less are considered to be cash equivalents. Marketable securities, consisting
primarily of high-grade debt securities, U.S. government and corporate notes and bonds, and commercial paper, are classified as available-
for-sale at time of purchase and carried at fair value. If the fair value of a security is below its amortized cost and we plan to sell the
security before recovering its cost, the impairment is considered to be other-than-temporary. Other-than-temporary declines in fair value of
our marketable securities are charged against interest income. We had money market funds of approximately $13.7 million and $7.6 million
as of December 31, 2016 and 2015, respectively, included in our cash and cash equivalents. We did not hold any marketable securities as of
December 31, 2016 and 2015.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets
ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the
assets.
Revenue Recognition
We generate revenue principally from collaborative research and development arrangements, technology licenses, and government
grants. Consideration received for revenue arrangements with multiple components is allocated among the separate units of accounting
based on their respective selling prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if
available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available.
The applicable revenue recognition criteria are then applied to each of the units.
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) transfer of
technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably
assured. For each source of revenue, we comply with the above revenue recognition criteria in the following manner:
•
Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees or royalty
payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are
recognized when the technology is transferred or accessed, provided that the technology transferred or accessed is not
dependent on the outcome of our continuing research and development efforts.
F-9
•
Royalties earned are based on third-party sales of licensed products and are recorded in accordance with contract terms when
third-party results are reliably measurable and collectability is reasonably assured. We no longer recognize royalty income
related to the Fanapt royalty payments received from Novartis (see Note 8, “Royalty Liability” for further discussion).
• Government grants, which support our research efforts in specific projects, generally provide for reimbursement of approved
costs as defined in the notices of grants. Grant revenue is recognized when associated project costs are incurred.
•
Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements
for specific research and development spending, and various milestone and future product royalty payments. If the delivered
technology does not have stand-alone value, the amount of revenue allocable to the delivered technology is deferred. Non-
refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are
recognized as revenue when received, and are deferred if we have continuing performance obligations and have no evidence of
fair value of those obligations. Cost reimbursements for research and development spending are recognized when the related
costs are incurred and when collections are reasonably expected. Payments received related to substantive, performance-based
“at-risk” milestones are recognized as revenue upon achievement of the clinical success or regulatory event specified in the
underlying contracts, which represent the culmination of the earnings process. Amounts received in advance are recorded as
deferred revenue until the technology is transferred, costs are incurred, or a milestone is reached.
Research and Development Costs and Related Accrual
Research and development expenses include internal and external costs. Internal costs include salaries and employment related
expenses, facility costs, administrative expenses and allocations of corporate costs. External expenses consist of costs associated with
outsourced clinical research organization activities, sponsored research studies, product registration, patent application and prosecution, and
investigator sponsored trials. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred
by CROs and clinical sites. These costs are recorded as a component of research and development expenses. Under our agreements,
progress payments are typically made to investigators, clinical sites and CROs. We analyze the progress of the clinical trials, including
levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant
judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual results could differ
from those estimates under different assumptions. Revisions are charged to expense in the period in which the facts that give rise to the
revision become known.
Net Income (Loss) Per Share
Basic net income (loss) per share excludes the effect of dilution and is computed by dividing net income (loss) by the weighted-average
number of shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities
or other contracts to issue shares were exercised into shares. In calculating diluted net income (loss) per share, the numerator is adjusted for
the change in the fair value of the warrant liability (only if dilutive) and the denominator is increased to include the number of potentially
dilutive common shares assumed to be outstanding during the period using the treasury stock method.
The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net
income (loss) per common share for the years ended December 31, 2016, 2015 and 2014:
F-10
(in thousands, except per share amounts)
Numerator:
Net income (loss) used for basic earnings per share
Less change in fair value of warrant liability
Net income (loss) used for diluted earnings per share
Denominator:
Basic weighted-average outstanding common shares
Effect of dilutive potential common shares resulting from options
Effect of dilutive potential common shares resulting from warrants
Weighted-average shares outstanding—diluted
Net income (loss) per common share:
Basic
Diluted
Years ended December 31,
2015
2016
2014
$
$
$
$
5,135 $
825
4,310 $
(11,279) $
—
(11,279) $
20,744
141
574
21,459
20,053
—
—
20,053
0.25 $
0.20 $
(0.56) $
(0.56) $
(2,403)
1,083
(3,486)
17,057
3
—
17,060
(0.14)
(0.20)
The table below presents common shares underlying stock options and warrants that are excluded from the calculation of the weighted
average number of shares of common stock outstanding used for the calculation of diluted net income (loss) per common share. These are
excluded from the calculation due to their anti-dilutive effect for the years ended December 31, 2016, 2015 and 2014:
(in thousands)
Weighted-average anti-dilutive common shares resulting from options and awards
Weighted-average anti-dilutive common shares resulting from warrants
Years ended December 31,
2015
2016
2014
1,286
—
1,286
1,346
231
1,577
1,254
425
1,679
Comprehensive Income (Loss)
Comprehensive income and loss for the periods presented is comprised solely of our net income and loss. Comprehensive income for
the year ended December 31, 2016 was $5.1 million. Comprehensive loss for the years ended December 31, 2015 and 2014 was $ 11.3
million and $2.4 million, respectively.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow
issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 31, 2017,
and for interim periods within those years. Early adoption is permitted. We do not expect the amended guidance to have a material impact
on its statements of cash flows.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The standard provides guidance that a
performance target that affects vesting of a share-based payment and that could be achieved after the requisite service condition is a
performance condition. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015. The adoption of this
ASU did not have a significant impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes
nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the
following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with
the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending
adoption of ASU 2014-09 on our financial statements and have not yet determined the method by which we will adopt the standard.
F-11
Subsequent Events
We have evaluated events that have occurred subsequent to December 31, 2016 and through the date that the financial statements are
issued.
Fair Value Measurements
We measure the fair value of financial assets and liabilities based on authoritative guidance which defines fair value, establishes a
framework consisting of three levels for measuring fair value, and requires disclosures about fair value measurements. Fair value is defined
as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of
inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable;
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
Financial instruments, including receivables, accounts payable and accrued liabilities are carried at cost, which we believe
approximates fair value due to the short-term nature of these instruments. The $13.7 million and $7.6 million fair values of money market
funds as of December 31, 2016 and 2015 included in our cash and cash equivalents, are classified as Level 1 and were derived from quoted
market prices as active markets for these instruments exists. Our warrant liabilities are classified within level 3 of the fair value hierarchy
because the value is calculated using significant judgment based on our own assumptions in the valuation of these liabilities.
As a result of the fair value adjustment of the warrant liabilities, during the year ended December 31, 2016 we recorded a non-cash
gain on decreases in the fair value of $825,000 and during the year ended December 31, 2015 we recorded a non-cash loss on increases in
the fair value of $4,512,000 in our Statements of Operations and Comprehensive Income (Loss). See Note 9, “Warrant Liability” for
further discussion on the calculation of the fair value of the warrant liability.
The following table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3
inputs for the years ended December 31, 2016 and 2015 (in thousands):
Fair value, beginning of period
Reclassification of Class A and Underwriter warrants to equity
Change in fair value
Fair value, end of period
F-12
December 31,
2016
2015
$
$
1,444 $
—
(825)
619 $
5,578
(8,646)
4,512
1,444
2. Property and Equipment
Property and equipment consisted of the following at December 31, 2016 and 2015 (in thousands):
Furniture and office equipment
Leasehold improvements
Laboratory equipment
Computer equipment
Less accumulated depreciation and amortization
Property and equipment, net
2016
2015
$
$
388 $
408
2,548
1,135
4,479
(3,642)
837 $
388
408
2,466
1,046
4,308
(3,265)
1,043
Depreciation and amortization expense was $377,000, $358,000 and $353,000 for the years ended December 31, 2016, 2015 and 2014,
respectively.
3. Research and License Agreements
We have entered into various agreements with research institutions, universities, clinical research organizations and other entities for
the performance of research and development activities and for the acquisition of licenses related to those activities. Expenses under these
agreements totaled approximately $3,000 in the years ended December 31, 2015 and 2014.
We have no annual payment requirements to maintain our current licenses after 2015. Certain licenses provide for the payment of
royalties by us on future product sales, if any. In addition, in order to maintain these licenses and other rights during product development,
we must comply with various conditions including the payment of patent-related costs.
4. Agreement with Sanofi-Aventis SA
In 1997, we entered into an exclusive license agreement with Sanofi-Aventis. The agreement gave us a worldwide license to the patent
rights and know-how related to the antipsychotic agent iloperidone, including the ability to develop, use, sublicense, manufacture and sell
products and processes claimed in the patent rights. The license agreement provided that we pay royalties based on net sales. The
underlying patent rights expired in November 2016.
5. Iloperidone Sublicense
In November 1997, we granted Novartis a worldwide sublicense to iloperidone (Fanapt®) in exchange for tiered royalties on net sales
ranging from 8% to 10% and assumption of responsibility for all clinical development, registration, manufacturing and marketing of the
product. Novartis had the right to commercialize Fanapt in the United States and Canada. In June 2004, Novartis transferred all rights to
commercialize Fanapt in the United States and Canada to Vanda Pharmaceuticals, Inc. and in December 2014 assigned the agreement to
Vanda. Our rights under the agreements have not changed. Pursuant to agreements entered into during 2011, we sold substantially all of our
future royalties on the sales of Fanapt ® to a third party and, accordingly, we no longer recognize revenue related to Fanapt. See Note 8,
“Royalty Liability” for further discussion of our royalty liabilities.
6. Braeburn License
In December 2012, we entered into the Agreement with Braeburn granting Braeburn exclusive commercialization rights to Probuphine
in the United States and its territories, including Puerto Rico, and Canada. As part of the Agreement, we received a non-refundable up-front
license fee of $15.75 million (approximately $15.0 million, net of expenses), and would have received $45.0 million upon approval by the
FDA of the NDA as well as up to an additional $130.0 million upon achievement of specified sales milestones and up to $35.0 million in
regulatory milestones for additional indications, including chronic pain. We would have received tiered royalties on net sales of Probuphine
ranging from the mid-teens to the low twenties.
F-13
On May 28, 2013, we entered into the Amendment to the Agreement primarily to modify certain of the termination provisions of the
Agreement. The Amendment gives Braeburn the right to terminate the Agreement in the event that (A) after May 28, 2013, based on
written or oral communications from or with the FDA, Braeburn reasonably determines either that the FDA will require significant
development to be performed before approval of the Probuphine™ NDA can be given, such as, but not limited to, one or more additional
controlled clinical studies with a clinical efficacy endpoint, or substantial post-approval commitments that may materially impact the
product’s financial returns or that the FDA will require one or more changes in the proposed label, which change(s) Braeburn reasonably
determines will materially reduce the authorized prescribed patient base, or (B) the NDA has not been approved by the FDA on or before
June 30, 2014. The Amendment also provides that we will share in legal and consulting expenses in excess of a specified amount prior to
approval of the NDA.
On July 2, 2013, we entered into the Second Amendment to the Agreement primarily to establish and provide the parameters for a
committee comprised of representatives of Titan and Braeburn responsible for and with the authority to make all decisions regarding the
development and implementation of a strategic plan to seek approval from the FDA of Probuphine® for subdermal use in the maintenance
treatment of adult patients with opioid dependence, including development of the strategy for all written and oral communications with the
FDA. The Second Amendment also makes Braeburn the primary contact for FDA communications regarding the Probuphine NDA.
On November 12, 2013, we entered into the stock purchase agreement pursuant to which Braeburn made a $5 million equity
investment in our company and the Third Amendment primarily to modify the amount and timing of the approval and sales milestone
payments payable under the Agreement. Under the Third Amendment, we are entitled to receive a $15 million payment upon FDA
approval of the NDA and royalties on net sales of Probuphine ranging in percentage from the mid-teens to the low twenties. The agreement
also provides for up to $165 million in sales milestones and $35 million in regulatory milestones. In addition, we are entitled to receive a
low single digit royalty, up to an aggregate of $50 million, on sales by Braeburn, if any, of other continuous delivery treatments for opioid
dependence as defined in the Third Amendment and can elect to receive a low single digit royalty on sales by Braeburn, if any, of other
products in the addiction market in exchange for a similar reduction in our royalties on Probuphine.
We have evaluated the revenue components of the agreement, which includes multiple elements, to determine whether the components
of the arrangement represent separate units of accounting. We have determined that the non-refundable, up-front license fee of $15.75
million (approximately $15.0 million, net of expenses) and our costs up to the PDUFA date to be one deliverable which will be accounted
for as a single unit of accounting. This amount was recognized on a straight-line basis over the estimated period during which we expected
to meet the contract deliverables. Based on our understanding of subsequent steps to be performed following the PDUFA date related to the
completion of the transition of production and supply services to Braeburn, we estimated the revenue recognition period from the up-front
payment to be approximately 12 months from the date of the Agreement. Accordingly, we recognized revenue for the up-front payment
ratably from December 14, 2012, the date of the Agreement, through March 31, 2013 at an amount equal to approximately $1.25 million
per month. Following the receipt of the CRL in April 2013, we estimated the revenue recognition period for the up-front payment would be
approximately 18 months from the date of the Agreement. Accordingly, we recognized the remaining revenue from the up-front payment
ratably from April 1, 2013 through September 30, 2013 at an amount equal to approximately $733,000 per month. Following our meeting
with the FDA in November 2013 and subsequent discussions in which an agreement in principle with respect to a path forward was reached
with the FDA, we estimated the revenue recognition period for the up-front payment to be approximately 30 months from the date of the
Agreement. Accordingly, we recognized the remaining revenue from the up-front payment ratably from September 30, 2013 at an amount
equal to approximately $304,000 per month. As of December 31, 2016, we have recognized approximately $15.0 million in license revenue
related to the up-front payment. Internal and external research and development costs related to this product will be expensed in the period
incurred.
F-14
Under the Agreement, we received a $15.0 million milestone payment from Braeburn following the achievement of FDA approval of
the product NDA. As such, upon receipt of FDA approval our obligation was fulfilled and we recognized the $15.0 million regulatory
milestone payment from Braeburn in accordance with the milestone method of revenue recognition. We will be reimbursed by Braeburn
for any development services and activities performed by us at Braeburn’s request.
The Agreement also provides for a development committee. The duties of the development committee are to periodically report to each
other, exchange information, and confer with and review the clinical development of the product and matters pertaining to regulatory
approval. The development committee has no authority to approve or direct either party to take action, approve or withhold approval for
any plan, budget, timeline or strategies, amend, modify or waive compliance with the Agreement, create new obligations or alter, increase
or expand, or waive compliance with the Agreement, create new obligations not specified in the Agreement, or alter, increase or expand, or
waive compliance by a party with obligations under the Agreement. The development committee can be disbanded upon mutual agreement
of the parties and shall automatically disband six years after the NDA transfer date. Based on the above, we have determined that
participation in the development committee is perfunctory and inconsequential, and is not considered a separate deliverable in the
Agreement.
7. Commitments and Contingencies
Lease Commitments
We lease our facilities under an operating lease that expires in June 2021. Rent expense was $257,000, $211,000, and $209,000 for
years ended December 31, 2016, 2015, and 2014, respectively.
The following is a schedule of future minimum lease payments at December 31, 2016 (in thousands):
2017
2018
2019
2020
2021 and thereafter
Legal Proceedings
There are no ongoing legal proceedings against our company.
F-15
$
$
277
287
299
308
155
1,326
8. Royalty Liability
On March 28, 2013, we amended the agreements with Deerfield terminating our option to repurchase the royalty rights. As a result, we
recognized a gain on the extinguishment of the royalty liability of approximately $9.0 million, which was recorded in other income,
because we are no longer required to account for it as a liability. Additionally, we will no longer recognize royalty income related to the
Fanapt royalty payments received from Novartis.
9. Warrant Liability
On March 15, 2011, in connection with the facility agreement, we issued Deerfield six-year warrants to purchase 1,090,910 shares of
our common stock at an initial exercise price of $8.64 per share. As a result of our April 2012 sale of equity, and pursuant to the terms of
the Deerfield Warrants, the exercise price of the Deerfield Warrants was adjusted to $6.88 per share. The Deerfield Warrants contain a
provision where the warrant holder has the option to receive cash, equal to the Black-Scholes fair value of the remaining unexercised
portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various
merger, acquisition or stock transfer activities). Due to this provision, ASC 480, Distinguishing Liabilities from Equity requires that these
warrants be classified as liabilities. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation
model, and the changes in the fair value are recorded in the Statements of Operations and Comprehensive Income (Loss). The Lattice
model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity.
On February 6, 2013, the facility agreement was amended to provide that the exercise price of the Deerfield Warrants could be
satisfied through a reduction in the principal amount of our outstanding indebtedness to Deerfield. In February and March 2013, Deerfield
exercised all of the Deerfield Warrants resulting in a $7.5 million reduction in the amount owed to Deerfield.
On April 9, 2012, in connection with subscription agreements with certain institutional investors for the purchase and sale of 1,185,034
shares of our common stock, we issued (i) six-year warrants (“Series A Warrants”) to purchase 1,185,034 shares of common stock at an
exercise price of $6.32 per share and (ii) six-month warrants to purchase 1,185,034 shares of common stock at an exercise price of $4.67
per share which expired in October 2012. As a result of our public offering in October 2014 and anti-dilution provisions contained in the
outstanding Series A Warrants, the exercise price of such warrants was reduced from $6.32 to $4.89 per share. The Series A Warrants
contain a provision where the warrant holder has the option to receive cash, equal to the Black Scholes fair value of the remaining
unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include
various merger, acquisition or stock transfer activities). Due to this provision, ASC 480, Distinguishing Liabilities from Equity requires that
these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the
changes in the fair value are recorded in the Statements of Operations and Comprehensive Income (Loss). The Lattice model provides for
assumptions regarding volatility and risk-free interest rates within the total period to maturity.
During the year ended December 31, 2013, Series A Warrants to purchase 201,639 shares of common stock were exercised resulting in
gross proceeds of approximately $1,275,000. The remaining Series A Warrants to purchase 983,395 shares of common stock will expire in
April 2018.
The key assumptions used to value the Series A Warrants were as follows:
Assumption
Expected price volatility
Expected term (in years)
Risk-free interest rate
Dividend yield
Weighted-average fair value of warrants
F-16
December 31,
2016
62%
1.27
0.94%
0.00%
0.63
$
In October 2014, we completed an underwritten public offering (the “2014 Offering”) of units consisting of one share of common stock
and 0.75 of a warrant (“Class A Warrant”). The Class A Warrants entitle the holders thereof to purchase an aggregate of 2,863,643 shares
of our common stock at an initial exercise price of $3.30 per share of common stock.
We agreed to hold a stockholders meeting no later than August 31, 2015 in order to seek stockholder approval for an amendment to our
certificate of incorporation to either (i) increase the number of shares of common stock we are authorized to issue or (ii) effect a reverse
split of the common stock, in either case in an amount sufficient to permit the exercise in full of the Class A Warrants in accordance with
their terms. Failure to effect an increase in our authorized shares of common stock or effect a reverse split of our common stock prior to
October 9, 2015 would have required us to pay liquidated damages in the aggregate amount of $2,500,000. In September 2015, we effected
a 1-for-5.5 reverse split of our common stock (the “Reverse Split”), which was within the range approved by our stockholders at the annual
meeting held on August 24, 2015.
We also agreed to issue to the underwriter warrants to purchase 114,546 shares of common stock (the “Underwriter Warrants”). The
Underwriter Warrants have an exercise price per share of $3.30 and may be exercised on a cashless basis. The Underwriter Warrants are not
redeemable by us. The Underwriter Warrants are substantially the same form as the Class A Warrants included in the units except that they
do not include certain liquidated damages rights contained in the Class A Warrants and will expire on the fifth anniversary of the date of
effectiveness of the registration statement.
At the time these warrants were issued, we did not have adequate authorized and unissued common shares to be able to satisfy the
exercise of these warrants. ASC 480, Distinguishing Liabilities from Equity requires that these warrants be classified as liabilities. The fair
values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the
Statements of Operations and Comprehensive Income (Loss). The Lattice model provides for assumptions regarding volatility and risk-free
interest rates within the total period to maturity. On September 29, 2015, we effected the Reverse Split, which permits the exercise in full
of the Class A Warrants in accordance with their terms and, accordingly, the associated warrant liability was reclassified to stockholders’
equity.
10. Guarantees and Indemnifications
As permitted under Delaware law and in accordance with our Bylaws, we indemnify our officers and directors for certain events or
occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the
officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, we have a director and
officer insurance policy that limits our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair
value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of
December 31, 2016.
In the normal course of business, we have commitments to make certain milestone payments to various clinical research organizations
in connection with our clinical trial activities. Payments are contingent upon the achievement of specific milestones or events as defined in
the agreements, and we have made appropriate accruals in our financial statements for those milestones that were achieved as of December
31, 2016. We also provide indemnifications of varying scope to our CROs and investigators against claims made by third parties arising
from the use of our products and processes in clinical trials. Historically, costs related to these indemnification provisions were immaterial.
We also maintain various liability insurance policies that limit our exposure. We are unable to estimate the maximum potential impact of
these indemnification provisions on our future results of operations.
F-17
11. Stockholders’ Equity (Deficit)
Reverse Stock Split
On September 29, 2015, pursuant to prior stockholder authorization, our Board effected the Reverse Split of the outstanding shares of
our common stock at a ratio of one (1) share for every five and one-half (5.5) shares outstanding, so that every five and one-half (5.5)
outstanding shares of common stock before the Reverse Split represents one (1) share of common stock after the Reverse Split. Pursuant to
their respective terms, the number of shares underlying our outstanding options and warrants was reduced by the Reverse Split ratio.
All share and per share amounts in the accompanying financial statements have been restated for all periods presented to give
retroactive effect to the Reverse Split. The shares of common stock retained a par value of $0.001 per share.
Common Stock
In May and June 2016, 1,072,307 shares of common stock were issued upon the cashless net exercise of 2,016,075 Class A Warrants in
accordance with their terms. There were 847,569 Class A Warrants outstanding at December 31, 2016.
In May and June 2016, 58,569 shares of common stock were issued upon the cashless net exercise of 114,546 Underwriter Warrants in
accordance with their terms. There were no remaining Underwriter Warrants outstanding at December 31, 2016.
In October 2014, we completed the 2014 Offering. Net proceeds were approximately $9.6 million after deducting underwriting
discounts, commissions and other related expenses. As a result of the 2014 Offering, and pursuant to the terms of the existing Series A
Warrants, the exercise price of the Series A Warrants (See Note 9, “Warrant Liability” for further discussion) was adjusted to $4.89 per
share.
As of December 31, 2016, warrants to purchase shares of common stock consisted of the following (in thousands, except per share
price):
Date Issued
04/13/2012
10/08/2014
Expiration Date
04/13/2018
10/08/2020
$
$
Exercise Price
Outstanding at
December 31, 2016
983
848
1,831
4.89
3.30
Shares Reserved for Future Issuance
As of December 31, 2016, shares of common stock reserved by us for future issuance consisted of the following (in thousands):
Stock options outstanding
Shares issuable upon the exercise of warrants
12. Stock Plans
2,002
1,831
3,833
In August 2015, our stockholders approved the 2015 Omnibus Equity Incentive Plan, or the 2015 Plan. The 2015 Plan, as amended in
August 2016, authorized a total of 2,500,000 shares of our common stock for issuance to employees, directors, officers, consultants and
advisors. On December 31, 2016, options to purchase 618,000 shares of our common stock were outstanding under the 2015 Plan.
In February 2014, our Board adopted the 2014 Incentive Plan, or the 2014 Plan, pursuant to which 454,546 shares of our common
stock were authorized for issuance to employees, directors, officers, consultants and advisors. On December 31, 2016, options to purchase
300,744 shares of our common stock were outstanding under the 2014 Plan. Upon receipt of stockholder approval of the 2015 Plan, the
2014 Plan was terminated.
F-18
In May 2009, we granted 111,819 and 56,364 non-qualified stock options outside of our stock option plans to Dr. Rubin and Mr.
Bhonsle, respectively, at an exercise price of $4.34 that vested over 48 months from the grant date.
In October 2007, we granted 79,546 non-qualified stock options outside of our stock option plans to Dr. Rubin, at an exercise price of
$13.20 per share that vested over 48 months from the grant date.
In July 2002, we adopted the 2002 Stock Incentive Plan (“2002 Plan”). The 2002 Plan, as amended in 2005, authorized a total of
approximately 1.3 million shares of our common stock for issuance to employees, officers, directors, consultants, and advisers. The
exercise prices of options granted under the 2002 Plan were 100% of the fair market value of our common stock on the date of grant. The
2002 Plan expired by its terms in July 2012. On December 31, 2016, options to purchase an aggregate of 631,343 shares of our common
stock were outstanding under the 2002 Plan.
In August 2001, we adopted the 2001 Employee Non-Qualified Stock Option Plan (“2001 NQ Plan”) pursuant to which 318,182
shares of common stock were authorized for issuance for option grants to employees and consultants who are not officers or directors of
Titan. The exercise prices of options granted under the 2001 NQ Plan were 100% of the fair market value of our common stock on the date
of grant. The 2001 Stock Option Plan expired by its terms in August 2011. On December 31, 2016, options to purchase an aggregate of
204,375 shares of our common stock were outstanding under the 2001 NQ Plan.
Activity under our stock plans, as well as non-plan activity, is summarized below (shares in thousands):
Balance at December 31, 2013
Increase in shares reserved
Options granted
Options cancelled and forfeited
Options expired
Awards granted
Awards issued
Balance at December 31, 2014
Increase in shares reserved
Options granted
Options expired
Awards issued
Termination of option plan
Balance at December 31, 2015
Increase in shares reserved
Options granted
Options exercised
Options expired
Balance at December 31, 2016
Shares or
Awards Available
For Grant
Number of
Options and
Awards
Outstanding
Weighted Average
Exercise Price
—
455
(60)
—
—
(113)
—
282
1,364
(700)
—
—
(32)
914
1,136
(168)
—
—
1,882
1,223 $
—
60 $
(5) $
(75) $
113 $
(47) $
1,269 $
—
700 $
(20) $
(66) $
— $
1,883 $
—
168 $
(8) $
(41) $
2,002 $
7.21
—
3.47
9.13
11.66
—
—
6.40
—
4.46
13.27
—
—
5.83
—
5.10
3.37
10.85
5.67
Options to purchase approximately 1.7 million and 1.4 million shares were exercisable at December 31, 2016 and 2015,
respectively. The options outstanding at December 31, 2016 have been segregated into five ranges for additional disclosure as follows
(options in thousands):
F-19
Range of Exercise
Prices
$2.47 - $4.06
$4.07 - $4.72
$4.73 - $5.41
$5.42 - $6.54
$6.55 - $17.21
$2.47 - $17.21
Options Outstanding
Weighted
Average
Remaining
Life (Years)
Options Exercisable
Weighted
Average
Exercise Price
3.34
4.34
5.10
6.31
9.60
5.67
Number
Exercisable
306 $
411 $
325 $
303 $
364 $
1,709 $
Weighted
Average
Exercise Price
3.34
4.34
5.10
6.31
9.60
5.77
7.88 $
2.37 $
8.99 $
4.97 $
2.55 $
5.68 $
Number
Outstanding
306
411
618
303
364
2,002
We use the Black-Scholes-Merton option-pricing model with the following assumptions to estimate the stock-based compensation
expense for the years ended December 31, 2016, 2015 and 2014:
Weighted-average risk-free interest rate
Expected dividend payments
Expected holding period (years)(1)
Weighted-average volatility factor(2)
Estimated forfeiture rates for options granted
Years Ended December 31,
2015
2014
2016
1.53%
—
6.53
0.92
29%
1.88%
—
6.48
1.16
30%
2.04%
—
6.46
1.65
31%
(1) Expected holding period is based on historical experience of similar awards, giving consideration to the contractual terms of the stock-
based awards, vesting schedules and the expectations of future employee behavior.
(2) Weighted average volatility is based on the historical volatility of our common stock.
(3) Estimated forfeiture rates are based on historical data.
During the year ended December 31, 2016, options to purchase 168,000 shares were granted to employees, directors and consultants.
Based upon the above methodology, the weighted-average fair value of options and awards granted during the years ended December 31,
2016, 2015 and 2014 was $3.10, $3.67 and $3.52, respectively.
The following table summarizes the stock-based compensation expense and impact on our basic and diluted loss per share for the
years ended December 31, 2016, 2015 and 2014:
(in thousands, except per share amounts)
Research and development
General and administrative
Total stock-based compensation expenses
Increase in basic net income (loss) per share
Increase in diluted net income (loss) per share
Years Ended December 31,
2015
2016
2014
386 $
653
1,039 $
(0.05) $
(0.05) $
341 $
685
1,026 $
(0.05) $
(0.05) $
245
298
543
(0.03)
(0.03)
$
$
$
$
No tax benefit was recognized related to stock-based compensation expense since we have incurred operating losses and we have
established a full valuation allowance to offset all the potential tax benefits associated with our deferred tax assets.
F-20
The following table summarizes option activity for the year ended December 31, 2016:
(in thousands, except per share
amounts)
Outstanding at January 1, 2016
Granted
Exercised
Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
5.83
5.10
3.37
10.85
5.67
5.77
5.68 $
5.12 $
203
203
Shares
1,883 $
168
(8)
(41)
2,002 $
1,709 $
As of December 31, 2016, there was approximately $704,000 of total unrecognized compensation expense related to non-vested
stock options. This expense is expected to be recognized over a weighted-average period of 0.88 years.
There were no outstanding stock awards at December 31, 2016.
13. Income Taxes
As of December 31, 2016, we had net operating loss carryforwards for federal income tax purposes of approximately $247.7 million
that expire at various dates through 2035, and federal research and development tax credits of approximately $8.7 million that expire at
various dates through 2035. We also had net operating loss carryforwards for California income tax purposes of approximately $124.4
million that expire at various dates through 2035 and state research and development tax credits of approximately $8.5 million which do not
expire. Approximately $12.4 million of federal and state net operating loss carryforwards represent stock option deductions arising from
activity under our stock option plans, the benefit of which will increase additional paid in capital when realized.
Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the
event of an ownership change of a corporation. We have performed a change in ownership analysis through December 31, 2016 and all of
our net operating loss and tax credit carryforwards are available to offset future taxable income, if any.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and operating loss and credit carryforwards. Significant
components of our deferred tax assets are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Research credit carryforwards
Other, net
Deferred revenue
Total deferred tax assets
Valuation allowance
Net deferred tax assets
December 31,
2016
2015
$
$
87,267 $
14,322
2,637
—
104,226
(104,226)
— $
91,365
13,884
3,417
—
108,666
(108,666)
—
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $4.4
million during 2016, increased by $2.7 million during 2015 and increased by $0.5 million during 2014.
Under ASC 718, the deferred tax asset for net operating losses as of December 31, 2016 excludes deductions for excess tax benefits
related to stock based compensation.
F-21
The provision for income taxes consists of state minimum taxes due. The effective tax rate of our provision (benefit) for income taxes
differs from the federal statutory rate as follows (in thousands):
Year Ending December 31,
2015
2016
2014
Computed at 34%
State taxes
Book gains (losses) not currently benefited
Other
Revaluation of warrant liability
Research and development credits
Net operating loss carryforward expirations
Total
$
$
1,758 $
(187)
(4,439)
659
(280)
(252)
2,741
— $
(3,840) $
(268)
2,740
(20)
1,534
(146)
—
— $
(839)
592
454
235
(346)
(97)
—
(1)
We had no unrecognized tax benefits or any amounts accrued for interest and penalties for the three year period ended December 31,
2016. Our policy is to recognize interest and penalties related to income taxes as a component of income tax expense.
We file tax returns in the U.S. federal jurisdiction and some state jurisdictions. We are subject to the U.S. federal and state income tax
examination by tax authorities for such years 1998 through 2016, due to net operating losses that are being carried forward for tax
purposes.
14. Quarterly Financial Data (Unaudited)
2016
Total revenue
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
2015
Total revenue
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands, except per share amount)
15,004 $
11,928 $
0.58 $
0.55 $
760 $
(2,281) $
(0.11) $
(0.11) $
26 $
(2,620) $
(0.12) $
(0.12) $
— $
(1,807) $
(0.09) $
(0.09) $
35
(2,327)
(0.11)
(0.15)
—
(2,294)
(0.11)
(0.11)
$
$
$
$
$
$
$
$
— $
(1,846) $
(0.09) $
(0.09) $
911 $
(4,897) $
(0.24) $
(0.24) $
F-22
(b) Exhibits
No.
Description
3.1(1)
Amended and Restated Certificate of Incorporation of the Registrant, as amended 7
3.1(2)
Certificate of Amendment to the Restated Certificate of Incorporation dated September 24, 2015 18
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5*
10.6*
10.7
10.8
10.9
10.10
10.11
By-laws of the Registrant 1
Certificate of Designations of Junior Participating Preferred Stock of Titan Pharmaceuticals, Inc. 10
Form of Series A Warrant 11
Form of Class A Warrant 17
Form of Underwriter Warrant 17
2001 Non-Qualified Employee Stock Option Plan 2
2002 Stock Option Plan 3
Lease for the Registrant’s facilities, amended as of October 1, 2004 4
Amendments to lease for Registrant’s facilities dated May 21, 2007 and March 12, 2009 7
License Agreement between the Registrant and Sanofi-Aventis SA effective as of December 31, 1996 5
Sublicense Agreement between the Registrant and Novartis Pharma AG dated November 20, 1997 6
Amendment to lease for Registrant’s facilities dated June 15, 2010 8
Royalty Purchase Agreement, dated November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P.,
Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Amended and Restated Royalty Agreement, dated November 14, 2011 by and among the Company, Deerfield Private Design
Fund II, L.P., Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Cash Management Agreement, dated November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P.,
Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Paying Agent Agreement, dated November 14, 2011, by and among the Company, Deerfield Management Company, L.P. and
U.S. Bank National Association 9
10.12
Agreement, dated as of November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield
Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund
International Limited 9
55
10.13*
License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn Pharmaceuticals Sprl, dated December 14, 2012
12
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
14.1
Amendment dated May 28, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 13
Second Amendment dated July 2, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 14
Third Amendment dated November 12, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 15
Stock Purchase Agreement dated November 12, 2013 by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 15
2014 Incentive Plan 16
Titan Pharmaceuticals, Inc. Amended and Restated 2015 Omnibus Equity Incentive Plan 19
Controlled Equity OfferingSM Sales Agreement, dated September 1, 2016, between the Company and Cantor Fitzgerald & Co.
20
Employment Agreement between the Company and Sunil Bhonsle dated September 29, 2016 21
Employment Agreement between the Company and Marc Rubin dated September 29, 2016 21
Code of Business Conduct and Ethics 17
56
23.1
31.1
Consent of OUM & Co., LLP, Independent Registered Public Accounting Firm
Certification of the Principal Executive and Financial Officer pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of
1934
32.1
Certification of the Principal Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (File No. 33-99386).
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.
Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1996.
Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (File No. 333-42367).
Incorporated by reference from the Registrant’s Registration Statement on Form 10.
Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2010.
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 17, 2011.
(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on December 21, 2011.
(11) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on April 10, 2013.
(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A filed on February 28, 2013.
57
(13) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated May 29, 2013.
(14) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated July 5, 2013.
(15) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated November 13, 2013.
(16) Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013.
(17) Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012.
(18) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated September 28, 2015.
(19) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated August 3, 2016.
(20) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated September 1, 2016.
(21) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated October 3, 2016.
* Confidential treatment has been granted with respect to portions of this exhibit.
58
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2017
TITAN PHARMACEUTICALS, INC.
SIGNATURES
By:
Name: Sunil Bhonsle
Title: President and Chief Executive Officer
/S/ SUNIL BHONSLE
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in
the capacities and on the dates stated.
Title
Executive Chairman
Date
March 16, 2017
President, Chief Executive Officer and Director
(principal executive officer and principal financial officer)
March 16, 2017
Signature
/s/ Marc Rubin, M.D.
Marc Rubin, M.D.
/s/ Sunil Bhonsle
Sunil Bhonsle
/s/ Joseph A. Akers
Joseph A. Akers
/s/ Rajinder Kumar, Ph.D.
Rajinder Kumar, Ph.D.
/s/ M. David MacFarlane, Ph.D.
M. David MacFarlane, Ph.D.
/s/ James R. McNab, Jr.
James R. McNab, Jr.
/s/ Scott A. Smith
Scott A. Smith
Director
Director
Director
Director
Director
/s/ Brian E. Crowley
Brian E. Crowley
Vice President, Finance
(principal accounting officer)
59
March 13, 2017
March 10, 2017
March 16, 2017
March 16, 2017
March 9, 2017
March 16, 2017
No.
EXHIBIT INDEX
Exhibits
Description
3.1(1)
Amended and Restated Certificate of Incorporation of the Registrant, as amended 7
3.1(2)
Certificate of Amendment to the Restated Certificate of Incorporation dated September 24, 2015 18
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
By-laws of the Registrant 1
Certificate of Designations of Junior Participating Preferred Stock of Titan Pharmaceuticals, Inc. 10
Form of Series A Warrant 11
Form of Class A Warrant 17
Form of Underwriter Warrant 17
2001 Non-Qualified Employee Stock Option Plan 2
2002 Stock Option Plan 3
Lease for the Registrant’s facilities, amended as of October 1, 2004 4
Amendments to lease for Registrant’s facilities dated May 21, 2007 and March 12, 2009 7
10.5*
License Agreement between the Registrant and Sanofi-Aventis SA effective as of December 31, 1996 5
10.6*
Sublicense Agreement between the Registrant and Novartis Pharma AG dated November 20, 1997 6
10.7
10.8
10.9
10.10
10.11
Amendment to lease for Registrant’s facilities dated June 15, 2010 8
Royalty Purchase Agreement, dated November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P.,
Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Amended and Restated Royalty Agreement, dated November 14, 2011 by and among the Company, Deerfield Private Design
Fund II, L.P., Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Cash Management Agreement, dated November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P.,
Deerfield Special Situations Fund, L.P. and Horizon Sante TTNP SARL 9
Paying Agent Agreement, dated November 14, 2011, by and among the Company, Deerfield Management Company, L.P. and
U.S. Bank National Association 9
10.12
Agreement, dated as of November 14, 2011, by and among the Company, Deerfield Private Design Fund II, L.P., Deerfield
Private Design International II, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International
Limited 9
10.13*
License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn Pharmaceuticals Sprl, dated December 14, 2012
12
60
10.14
10.15
10.16
10.17
Amendment dated May 28, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 13
Second Amendment dated July 2, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 14
Third Amendment dated November 12, 2013 to License Agreement by and between Titan Pharmaceuticals, Inc. and Braeburn
Pharmaceuticals Sprl 15
Stock Purchase Agreement dated November 12, 2013 by and between Titan Pharmaceuticals, Inc. and Braeburn Pharmaceuticals
Sprl 15
10.18
2014 Incentive Plan 16
10.19
Titan Pharmaceuticals, Inc. Amended and Restated 2015 Omnibus Equity Incentive Plan 19
10.20
Controlled Equity OfferingSM Sales Agreement, dated September 1, 2016, between the Company and Cantor Fitzgerald & Co. 20
10.21
Employment Agreement between the Company and Sunil Bhonsle dated September 29, 2016 21
10.22
Employment Agreement between the Company and Marc Rubin dated September 29, 2016 21
14.1
Code of Business Conduct and Ethics 17
23.1
Consent of OUM & Co., LLP, Independent Registered Public Accounting Firm
31.1
Certification of the Principal Executive and Financial Officer pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of
1934
32.1
Certification of the Principal Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(1)
(2)
(3)
(4)
Incorporated by reference from the Registrant’s Registration Statement on Form SB-2 (File No. 33-99386).
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.
61
(5)
(6)
(7)
(8)
(9)
Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1996.
Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (File No. 333-42367).
Incorporated by reference from the Registrant’s Registration Statement on Form 10.
Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2010.
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on November 17, 2011.
(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on December 21, 2011.
(11) Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on April 10, 2013.
(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A filed on February 28, 2013.
(13) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated May 29, 2013.
(14) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated July 5, 2013.
(15) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated November 13, 2013.
(16) Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013.
(17) Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012.
(18) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated September 28, 2015.
(19) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated August 3, 2016.
(20) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated September 1, 2016.
(21) Incorporated by reference from the Registrant’s Current Report on Form 8-K dated October 3, 2016.
* Confidential treatment has been granted with respect to portions of this exhibit.
62
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-171181 and 333-207950)
and Form S-3 (File Nos. 333-173457 and 333-208286) of our reports dated March 16, 2017, relating to the financial statements and
effectiveness of internal control over financial reporting of Titan Pharmaceuticals, Inc. appearing in the Company’s Annual Report on Form
10-K for the year ended December 31, 2016.
Exhibit 23.1
/s/ OUM & CO. LLP
San Francisco, California
March 16, 2017
Exhibit 31.1
I, Sunil Bhonsle, certify that:
1. I have reviewed this Annual Report on Form 10-K of Titan Pharmaceuticals, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to me by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
my supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 16, 2017
/s/ Sunil Bhonsle
Name: Sunil Bhonsle
Title:
President
(Principal Executive Officer and Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with this annual report on Form 10-K of Titan Pharmaceuticals, Inc. (the “Company”) for the period ended
December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the
Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2017
/s/ Sunil Bhonsle
Name: Sunil Bhonsle
Title:
President
(Principal Executive Officer and Principal Financial Officer)