ITEM 1. BUSINESS
EpiCept Corporation (“EpiCept” or the “Company”) is a specialty pharmaceutical company focused on the development and commercialization of topically-delivered prescription pain management therapeutics. EpiCept has six product candidates in clinical development; three in late-stage clinical development that are ready to enter, or have entered, pivotal Phase IIb or Phase III clinical trials, and three that have completed initial Phase II clinical trials. All of its product candidates target moderate-to-severe pain that is influenced, or mediated, by nerve receptors located just beneath the skin’s surface. EpiCept’s product candidates utilize proprietary formulations and several topical delivery technologies to administer FDA approved pain management therapeutics, or analgesics. EpiCept believes using FDA-approved analgesics reduces the risks associated with new drug development, lowers its development costs and speeds time-to-market. EpiCept’s product candidates are designed to provide effective pain relief with fewer adverse side effects than systemically-delivered drugs, which are absorbed into the bloodstream. None of EpiCept’s products has been approved by the FDA or its counterparts in other countries.
EpiCept’s lead late-stage product candidate, EpiCept NP-1 Cream, is a prescription topical analgesic cream containing a patented formulation, the contents of which include two FDA-approved drugs, amitriptyline and ketamine. Amitriptyline is a widely-used antidepressant, and ketamine is an NMDA antagonist that is used as an anesthetic. EpiCept NP-1 Cream is designed to provide effective, long-term relief from the pain of peripheral neuropathies. Peripheral neuropathies are medical conditions caused by damage to the nerves. The initial indication for this product candidate is post-herpetic neuralgia, a specific type of peripheral neuropathy associated with shingles, a condition caused by the herpes zoster virus. EpiCept has completed Phase II clinical trials in the United States and Canada that included 343 subjects and plans to commence a Phase III clinical trial in the United States during 2006.
LidoPAIN SP, EpiCept’s second late-stage product candidate, is a sterile prescription analgesic patch designed to provide sustained topical delivery of lidocaine to a post-surgical or post-traumatic sutured wound while also providing a sterile protective covering for the wound. If approved, EpiCept believes that LidoPAIN SP would be the first sterile prescription analgesic patch on the market. EpiCept has completed a Phase II clinical trial in Germany that included 221 hernia repair subjects and has commenced a Phase III clinical trial in Europe during the fourth quarter of 2004 that will enroll approximately 500 hernia repair subjects. In July 2003, EpiCept entered into an agreement with Adolor Corporation for the development and commercialization of LidoPAIN SP in North America. In September 2005, Adolor initiated a Phase II trial in the United States for which EpiCept received a milestone payment.
EpiCept’s third late-stage product candidate is LidoPAIN BP, a prescription analgesic non-sterile patch designed to provide sustained topical delivery of lidocaine for the treatment of acute or recurrent lower back pain. EpiCept has completed Phase II clinical trials in the United States that included 242 subjects and plans to commence a pivotal Phase IIb clinical trial in the United States during the second half of 2006 that will include at least 400 subjects. In December 2003, EpiCept entered into an agreement with Endo Pharmaceuticals, Inc. for the commercialization of LidoPAIN BP worldwide.
EpiCept has three earlier-stage product candidates in clinical development: (1) EpiCept MP/DP, a topical spray gel matrix containing morphine and lidocaine for the treatment of oral mucositis, an inflammation of the mucosa of the mouth typically resulting from chemotherapy and radiation therapy, and dental pain; (2) LidoPAIN TV, a topical lidocaine patch for the treatment of tinnitus, a constant or intermittent buzzing or ringing noise in the ear; and (3) LidoPAIN HM, a topical anesthetic patch for the treatment of headache pain. EpiCept has completed initial Phase II clinical trials and expects to conduct additional Phase II clinical trials for each of these product candidates.
Recent Developments
Merger with Maxim Pharmaceuticals Inc.
On January 4, 2006, Magazine Acquisition Corp. (“Magazine”), a wholly owned subsidiary of ours, completed its merger with Maxim Pharmaceuticals, Inc. (“Maxim”) pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), among EpiCept, Magazine and Maxim, dated as of September 6, 2005. Maxim is a biopharmaceutical company dedicated to developing innovative cancer therapeutics.
Under the terms of the Merger Agreement, Magazine merged with and into Maxim, with Maxim continuing as the surviving corporation and as a wholly-owned subsidiary of EpiCept. The Merger Agreement provided for EpiCept to issue shares of its common stock to Maxim stockholders in exchange for all of the outstanding shares of Maxim, with Maxim stockholders receiving 0.203969 of a share of EpiCept common stock for each share of Maxim common stock. Our stockholders retained approximately 72%, and the former Maxim stockholders received approximately 28% of outstanding shares of EpiCept’s common stock. EpiCept will account for the merger as an asset acquisition. The transaction valued Maxim at approximately $41.4 million.
On September 5, 2005, our stockholders approved a one-for-four reverse stock split of its common stock, which was contingent upon the completion of the merger with Maxim. The reverse stock split occurred immediately prior to the completion of the merger.
Private Placement
On February 9, 2006, we raised gross proceeds of $11.6 million through a private placement of common stock and common stock purchase warrants. Approximately 4.1 million shares of our common stock were issued at a price of $2.85 per share. In addition, approximately 1 million five year common stock purchase warrants were issued to the investors granting them the right to purchase our common stock at a price of $4.00 per share. The terms of the warrants prohibit their exercise until August 9, 2006. In connection with the private placement, the Company agreed to file a registration statement on Form S-3 to permit the resale of the common stock issued in connection with the transaction and the common stock issuable upon exercise of the warrants.
Pain and Pain Management
Pain occurs as a result of surgery, trauma or disease. It is generally provoked by a harmful stimulus to a pain receptor in the skin or muscle. Pain can range in severity (mild, moderate or severe) and duration (acute or chronic). Acute pain, such as pain resulting from an injury or surgery, is of short duration, generally less than a month, but may last up to three months. Chronic pain is more persistent, extending long after an injury has healed, and typically results from a chronic illness or appears spontaneously and persists for undefined reasons. Examples of chronic pain include chronic lower back pain and pain resulting from bone cancer or advanced arthritis. If treated inadequately, unrelieved acute and chronic pain can slow recovery and healing and adversely affect a person’s quality of life.
IMS Health has estimated that the total U.S. market for prescription analgesics has increased from $5.3 billion in 1998 to $18.9 billion in 2004, representing an approximate 16% compounded annual growth rate. In 2004, analgesics were the third most prescribed class of medications in the United States with approximately 313 million prescriptions written. EpiCept believes that growth in this market has been primarily attributable to:
| • | increased physician recognition of the need for effective pain management; | ||
| • | patient demand for more effective pain treatments; | ||
| • | an aging population, with an increased prevalence of chronic pain conditions, such as cancer, arthritis, neuropathies and lower back pain; | ||
| • | increased number of surgeries; | ||
| • | introduction of new and reformulated branded products; and |
• increased active and healthy lifestyles, resulting in additional sports and fitness related injuries.
Analgesics typically fall into one of three categories:
| • | opioid analgesics or narcotics, such as morphine, codeine, oxycodone (OxyContin®) and tramadol (Ultram®); | ||
| • | non-narcotic analgesics, primarily non-steroidal anti-inflammatory drugs (“NSAID”s), including prostaglandin inhibitors (such as aspirin, acetaminophen and ibuprofen) and inhibitors of the enzyme cycloxygenase-2 (COX-2), so-called COX-2 inhibitors (such as Celebrex); and | ||
| • | adjuvant therapeutics, such as anesthetics (lidocaine), antidepressants (amitriptyline), anticonvulsives and corticosteriods. |
Limitations of Current Therapies
Until recently, analgesics primarily have been delivered systemically and absorbed into the bloodstream where they can then alleviate the pain. Systemic delivery is achieved either orally, via injection or through a transdermal patch. Systemic delivery of analgesics can have significant adverse side effects because the concentration of analgesics in the bloodstream can impact other organs and systems throughout the body.
Adverse side effects of systemically-delivered analgesics are well documented. Systemically-delivered opioid analgesics can cause respiratory distress, nausea, vomiting, dizziness, sedation, constipation, urinary retention and severe itching. In addition, chronic use of opioid analgesics can lead to the need for increased dosing and potential addiction. Concerns about addiction and abuse often influence physicians to prescribe less than adequate doses of opioids or to prescribe opioids less frequently. Systemically-delivered NSAIDs and adjuvant therapeutics can also have significant adverse side effects, including kidney failure, liver dysfunction, gastric ulcers and nausea. In the United States, there are approximately 16,500 NSAID-related deaths each year, and over 103,000 patients are hospitalized annually due to NSAID complications. These adverse side effects may lead doctors to prescribe analgesics less often and at lower doses than may be necessary to alleviate pain. Further, patients may take lower doses for shorter periods of time and opt to suffer with the pain rather than risk the adverse side effects. Systemic delivery of these drugs may also result in significant interactions with other drugs, which is of particular concern when treating elderly patients who typically take multiple pharmaceutical therapies.
Segments
We operate as one business segment. We maintain development operations in the United States and Germany. We recorded revenue in the United States in 2005, 2004 and 2003 of $564,508, $739,485 and $190,972, respectively. We recorded revenue in Germany in 2005, 2004 and 2003 of $263,994, $375,604 and $185,603, respectively. As of December 31, 2005, 2004 and 2003, we had long-lived assets in the United States of $49,724, $93,852 and $104,484, respectively. As of December 31, 2005, 2004 and 2003, we had long-lived assets in Germany of $8,503, $15,181 and $5,651, respectively.
Recent Scientific Developments
Almost every disease and every trauma is associated with pain. Injury or inflammation stimulates the pain receptors, causing electrical pain signals to be transmitted from the pain receptors through nerve fibers into the spinal cord and eventually to the brain. Pain receptors include central pain receptors, such as those found in the brain and spinal cord, and peripheral nerve receptors, also called “nociceptors,” such as those located directly beneath the skin and in joints, eyes and visceral organs. Within the spinal cord, the electrical pain signals are received by a second set of nerve fibers that continue the transmission of the signal up the spinal cord and through the central nervous system into the brain. Within the brain, additional nerve fibers transmit the electrical signals to the “pain center” of the brain. The brain decodes the messages being sent to the central nervous system from the peripheral nervous system, and the signals are perceived as “pain” and pain is “felt.” These messages can be disrupted with pharmaceutical intervention either at the source of the pain, such as the pain receptor, or at the point of receipt of the pain message, in the brain. Topical delivery of analgesics blocks the transmission of pain at the source of the pain message, whereas systemic delivery of analgesics primarily blocks the perception of pain within the brain.
Not until recently has the contribution of peripheral nerve receptors to the perception of pain been well understood. Recent studies have indicated that peripheral nerve receptors can play an important role in both the sensory perception of pain and the transmission of pain impulses. Specifically, certain types of acute and chronic pain depend to some degree on the activation of peripheral pain receptors located beneath the skin’s surface. The topical administration of well-known analgesics can localize drug concentrations at the point where the pain signals originate, resulting in dramatically lower systemic blood levels. We believe this results in a new treatment strategy that provides significant pain relief, with fewer adverse side effects, fewer drug to drug interactions and lower potential for abuse.
EpiCept’s Solution
We are targeting peripheral nerve receptors using topical analgesics as a novel mechanism to effectively treat both acute and chronic pain, without the liabilities of traditional systemically-delivered analgesics. We are developing innovative topically-delivered analgesics using a combination of internally-developed and in-licensed proprietary technologies and know-how to address the unmet medical needs and adverse side effects associated with systemically-delivered analgesics. Our topical delivery technologies and formulations are designed to deliver FDA-approved analgesics safely, effectively and conveniently to the appropriate peripheral nerves while preventing or limiting the amount of drug that enters the bloodstream. We utilize patch, cream and spray gel matrix delivery methods to topically deliver the active ingredients to the pain site. In some instances, we combine existing FDA-approved analgesics to create a new product having a therapeutic profile superior to either one of the standalone analgesics.
EpiCept’s Products
We have six product candidates in clinical development; three in late-stage clinical development that ready to enter, or have entered, pivotal Phase IIb or Phase III clinical trials, and three that have completed initial Phase II clinical trials. The following table summarizes the current status of our principal development programs and product candidates:
| Product | Topical Dosage Form | Initial Indication | Clinical Status | Next Steps | Marketing Rights | |||||
EpiCept NP-1 |
Cream | Post-herpetic neuralgia |
Phase II completed |
Initiate Phase III during 2006 |
EpiCept | |||||
LidoPAIN SP |
Sterile patch | Surgical incision pain |
Phase III initiated in Germany |
Adolor has ongoing Phase II in United States |
Adolor in North America; EpiCept outside of North America EpiCept retains right to negotiate future co-promotion agreement | |||||
LidoPAIN BP |
Patch (non-sterile) | Acute or recurrent lower back pain |
Phase IIa completed |
Initiate pivotal Phase IIb clinical trial during second half of 2006 | Endo worldwide; EpiCept retains right to negotiate future co-promotion agreement | |||||
EpiCept MP/DP |
Spray gel matrix | Oral mucositis;
Dental pain |
Phase II | Continue Phase II development |
EpiCept | |||||
LidoPAIN TV |
Patch (non-sterile) | Tinnitus | Phase II in Europe |
Continue Phase II development |
EpiCept | |||||
LidoPAIN HM |
Patch (non-sterile) | Headache | Phase II | Continue Phase II development |
EpiCept |
The clinical trials for our current portfolio of product candidates have included over 2,300 patients in 21 clinical trials, including over 660 patients in six clinical trials for EpiCept NP-1; over 570 patients in four clinical trials for LidoPAIN SP; and over 720 patients in five clinical trials for LidoPAIN BP.
We conduct our clinical trials in pain centers throughout North America and in Europe. There are various ways in which to assess a subject’s severity of pain. Pain is a subjective phenomenon, and each person has a different pain threshold. We utilize various types of validated pain assessment scales in its clinical trials that are self-administered by each subject in the form of questionnaires. The first is the numerical pain scale, or “11-point numerical pain scale,” which is generally a number line from 0 (no pain) to 10 (worst possible pain). The subject is asked how much pain he or she feels at a given moment or over a period of time and is asked to rank it based on the 11-point numerical pain scale. A second pain assessment tool we often utilize is the McGill Pain Questionnaire, which is a two part questionnaire that asks the subject to rate both type and intensity of pain experienced. We
analyze the data from these studies in a number of ways, including a responder analysis. In this type of analysis, subjects serve as their own control and are required to demonstrate a clinically-significant level of response depending upon the structure of the particular clinical trial.
We utilize various statistical analyses to evaluate the data from our clinical trials. We commonly utilize the “area under the curve” analysis as a measure of efficacy. The term “area under the curve” is a recognized statistical analytical tool that refers to the measurement of the total sum of pain that a patient experiences over a particular period of time. We also use statistical analyses to estimate the probability that a positive effect is actually produced by the product candidate. This probability is expressed as a “p-value,” which refers to the likelihood that the difference measured between the drug group and the placebo group occurred just “by chance.” For example, when a P-value is reported as “p<0.05,” the probability that the drug produced an effect just by chance is less than 5%. A p-value of 0.05 or less is generally considered to be statistically significant.
Peripheral Neuropathy and Post-Herpetic Neuralgia
Peripheral neuropathy is a medical condition caused by damage to the nerves in the peripheral nervous system. The peripheral nervous system includes nerves that run from the brain and spinal cord to the rest of the body. According to Datamonitor’s study “Stakeholder Insight: Neuropathic Pain,” published in February 2004, peripheral neuropathy affects over 15 million people in the United States and is associated with conditions that injure peripheral nerves, including herpes zoster, or shingles, diabetes, HIV and AIDS and other diseases. It can also be caused by trauma or may result from surgical procedures. Peripheral neuropathy is usually first felt as tingling and numbness in the hands and feet. Symptoms can be experienced in many ways, including burning, shooting pain, throbbing or aching. Peripheral neuropathy can cause intense chronic pain that, in many instances, is debilitating.
Post-herpetic neuralgia (“PHN”) is one type of peripheral neuropathic pain associated with herpes zoster, or shingles, that exists after the rash has healed. According to Datamonitor, PHN affects over 100,000 people in the United States each year. PHN causes pain on and around the area of skin that was affected by the shingles rash. Most people with PHN describe their pain as “mild” or “moderate.” However, the pain can be severe in some cases. PHN pain is usually a constant, burning or gnawing pain but can be an intermittent sharp or stabbing pain. Current treatments for PHN have limited effectiveness, particularly in severe cases and can cause significant adverse side effects. The initial indication for EpiCept’s EpiCept NP-1 product candidate is for the treatment of peripheral neuropathy in PHN patients.
There are currently three FDA-approved treatments for post-herpetic neuralgia: Neurontin ® (gabapentin), Lidoderm ® (lidocaine patch 5%) and Lyrica ® (pregabalin). Neurontin generated sales of approximately $2.7 billion in the United States in 2004. According to the Scott-Levin Physician Drug and Diagnosis Audit, approximately 55% of the 5.1 million prescriptions for Neurontin relate to some form of neuropathic pain. Some patients also receive Tegretol (carbamazepine) to manage the symptoms of peripheral neuropathy. However, these drugs only work in some patients, and Neurontin may have significant side adverse effects, such as drowsiness. Often the use of these medications is combined with topical analgesics such as the Lidoderm patch and over-the-counter topical analgesic creams that provide minimal relief with a short duration of action. Lidoderm generated sales of approximately $300 million in the United States in 2004, much of which EpiCept believes was attributable to patients with PHN. Lyrica was approved for the treatment of neuralgia in December 2004.
EpiCept NP-1. EpiCept NP-1 is a prescription topical analgesic cream containing a patented formulation, the contents of which include two FDA-approved drugs, amitriptyline (a widely-used antidepressant) and ketamine (an NMDA antagonist that is used as an anesthetic). EpiCept NP-1 is designed to provide effective, long-term relief from the pain caused by peripheral neuropathies. EpiCept believes that EpiCept NP-1 can be used in conjunction with systemically-delivered analgesics, such as Neurontin. The cream contains a 4% concentration of amitriptyline and a 2% concentration of ketamine. Since each of these ingredients has been shown to have significant analgesic effects and because NMDA antagonists, such as ketamine, have demonstrated the ability to enhance the analgesic effects of amitriptyline, EpiCept believes the combination is a good candidate for the development of a new class of analgesics.
We intend to selectively seek a partner or strategic alliance to enable us to maintain financial and operational flexibility while retaining significant economic and commercial rights to this product candidate.
EpiCept NP-1 is a white vanishing cream that is applied twice daily and is quickly absorbed into the applied area. EpiCept believes the topical delivery of its patented combination represents a fundamentally new approach for the treatment of pain associated with peripheral neuropathy. In addition, we believe that the topical delivery of its product candidate will significantly reduce the risk of adverse side effects and drug to drug interactions associated with the systemic delivery of the active ingredients. The results of our clinical trials to date have demonstrated the safety of the cream for use for up to one year and a potent analgesic effect in subjects with both post-herpetic neuralgia and other types of peripheral neuropathy, such as those with diabetic, traumatic and surgical causes.
We believe EpiCept NP-1, if approved, would offer the following favorable attributes:
| • | analgesic effect comparable to levels provided when using systemically-delivered analgesics; | ||
| • | additive therapy to systemically-delivered analgesics, such as Neurontin; | ||
| • | minimal adverse side effects, including reduced drowsiness; | ||
| • | ease of application and suitability for self-administration; | ||
| • | low potential for abuse; | ||
| • | good patient compliance; | ||
| • | no drug to drug interactions; and, | ||
| • | potential to treat a broad range of peripheral neuropathic conditions. |
Clinical Development. We have completed two Phase II clinical trials, one initiated in Canada in October 2001 and one initiated in the United States in February 2002.
Placebo-controlled Factorial Trial. This four center Canadian Phase II clinical trial in Ontario and Nova Scotia (Dalhousie University) was a placebo-controlled factorial trial, i.e., a trial that evaluates the individual components of a drug product that contains more than one active ingredient as compared to the effects of the combination, designed to demonstrate that the use of the combination of amitriptyline and ketamine was more effective than either drug alone. A factorial trial is a clinical trial in which the active ingredients in combination are compared with each drug used alone and by a placebo control. The trial included 92 subjects with a history of diabetic, post surgical or traumatic neuropathy or PHN. The trial tested a low-dose formulation of EpiCept NP-1, consisting of a 2% concentration of amitriptyline and a 1% concentration of ketamine, applied three times daily for three weeks. Subjects were allowed to continue their current pain medications (other than Lidoderm) as long as they did not alter their dosage level or frequency. Subjects who entered the trial had to have a score of at least 4 on the 11-point numerical pain scale. We completed the analysis of data from this clinical trial in February 2004.
We assessed several end points in this clinical trial, including mean daily pain severity as measured on the 11-point numerical pain scale, pain relief, a responder analysis and changes in the responses to the McGill Pain Questionnaire. While none of the results was statistically significant, the results of the responder analysis were the most compelling. In the responder analysis, subjects were required to show at least a 30% reduction in their pain as compared to placebo for the duration of the study. The results indicated a desirable rank order of the combination being more effective than either amitriptyline or ketamine alone or placebo. The cream was well-tolerated by a majority of the subjects, and no significant adverse reactions were observed. Based on a review of our Phase II clinical trial results, the FDA concurred in our End of Phase II meeting that we design our Phase III clinical trial as a responder analysis.
Dose-Response Clinical Trial. In the United States, we conducted a Phase II placebo-controlled dose-response clinical trial in subjects recruited from 21 pain centers to determine an effective clinical dose of EpiCept NP-1. The trial included 251 subjects with post-herpetic neuralgia who had been suffering significant pain for at least three months. We tested two dosage formulations, one containing a 4% concentration of amitriptyline and a 2% concentration of ketamine, which we refer to as “high-dose” and one
containing a 2% concentration of amitriptyline and a 1% concentration of ketamine, which we refer to as “low-dose,” as compared to placebo. Subjects were allowed to continue on their current pain medications as long as they did not alter their dosage level or frequency. Subjects who entered the trial had to have a score of at least 4 on the 11-point numerical pain scale. All subjects initially received the high-dose formulation twice daily for seven days. Responders, which were defined in the initial phase of this clinical trial as those experiencing a one point or greater drop on the 11-point numerical pain scale for three or more days, were then randomized into one of three study arms (high-dose, low-dose or placebo). Each study arm applied the applicable formulation of EpiCept NP-1 or placebo twice daily for an additional 14 days. We completed the analysis of the data from this clinical trial in August 2003.
The primary endpoint was the baseline average daily pain score compared to the average daily pain score at day 21, measured on the 11-point numerical pain scale. We measured the score for a 14 day period beginning on the day the subjects were randomized. The clinical trial’s primary objective was to determine if the subjects in either the high-dose or low-dose groups experienced better analgesia as reflected by lower pain intensity scores over the length of the trial. Secondary endpoints included pain relief, sleep quality and patient global satisfaction, all measured on the 11-point numerical scale.
The clinical trial results indicated that the high-dose formulation of EpiCept NP-1 met the primary endpoint for the trial and resulted in a statistically significant reduction in pain intensity and increase in pain relief as compared to placebo. We also observed a dose-related effect, i.e. the subjects receiving the high-dose formulation had more favorable results than the subjects receiving the low-dose formulation. In addition, the subjects receiving the high-dose formulation reported better sleep quality and greater overall satisfaction than subjects receiving placebo. In addition, we observed a greater number of “responders,” which for purposes of the responder analysis conducted during the 14-day period were defined as subjects with a two or more point drop in average daily pain scores on the 11-point numerical pain scale. No significant adverse reactions were observed other than skin irritation and rash, which were equivalent to placebo.
After the completion of the two Phase II trials, we conducted open label trials in which participants in the clinical trials could continue to use the low-dose formulation for a period of up to one year. The low-dose formulation was well-tolerated and detectable blood concentration levels of the active ingredients were insignificant, which is indicative of the safety and potential long term efficacy of the product.
The results of its Phase II clinical trials helped us decide to use the high-dose formulation of EpiCept NP-1 in its Phase III clinical trials.
Current Clinical Initiatives. EpiCept held an End of Phase II meeting with the FDA in April 2004 to discuss the Phase II clinical trial results and the protocols for its planned Phase III clinical trials. In that meeting, the FDA accepted our stability data and manufacturing plans for the combination product, as well as toxicology data on ketamine from studies conducted by others and published literature. The FDA also confirmed that the proposed New Drug Application, (“NDA”) would qualify for a Section 505(b)(2) submission (for details on this submission process, see “Item 1. Business — Government Regulation — United States — Section 505(b)(2) Drug Applications” below). In addition, the FDA approved our Phase III clinical trial protocol and indicated that a second factorial Phase III clinical trial would be required. The FDA also requested that we conduct an additional pharmacokinetic trial to assess dermal absorption of ketamine and outlined the parameters for long-term safety studies for the high-dose formulation. The pharmacokinetic clinical trial will involve applying the cream twice daily and measuring blood concentration levels of amitriptyline and ketamine over 48 hours.
We will work with the FDA to develop an appropriate toxicology program for amitriptyline and ketamine where existing data is not available. We initiated a supplemental toxicology study in the third quarter of 2004 related to the application of EpiCept NP-1 on the skin. The duration of the study and the number and types of animals to be tested will be determined during further discussions with the FDA.
In addition, we plan to commence our Phase III clinical trial in the United States during 2006 with at least 800 subjects with PHN. The enrollment of these subjects could take up to one year to complete. This Phase III clinical trial will test the high-dose formulation against each component used alone and by a placebo control. We expect to utilize primarily the same endpoints that we used in its Phase II clinical trial conducted in the United States. A responder analysis based on pain intensity and pain relief, as well as sleep and patient global satisfaction, will be assessed over the eight-week duration of the clinical trial.
Surgical Pain
According to Datamonitor’s study “Postoperative Pain,” published in April 2004, there are over 53 million surgical procedures conducted annually in the United States. Traditional post-surgical pain treatment usually begins with the application of a local anesthetic at the surgical incision site during the surgery. The pain relief provided by the anesthetic applied during surgery typically wears off within the first two hours. Pain relief is then provided by a combination of oral or injectible narcotic analgesics and NSAIDs, with accompanying adverse side effects and drug to drug interactions.
LidoPAIN SP. LidoPAIN SP is a sterile prescription analgesic patch designed to provide sustained topical delivery of lidocaine to a post-surgical or post-traumatic sutured wound while also providing a sterile protective covering for the wound. The LidoPAIN SP patch contains a 10% concentration of lidocaine and is intended to be applied as a single administration over one to three days. LidoPAIN SP can be targeted for use following both inpatient and ambulatory surgical procedures, including among others: hernia repair, plastic surgery, puncture wounds, biopsy, cardiac catheterization and tumor removal.
Currently, there is no marketed product similar to LidoPAIN SP, and we believe that we would be the first sterile prescription analgesic patch on the market. If approved, we believe LidoPAIN SP would offer the following favorable attributes:
| • | safety and ease of use; | ||
| • | sterility on a sutured wound; | ||
| • | reduced need for systemically-delivered narcotic analgesics and NSAIDs; | ||
| • | single administration for one to three days; | ||
| • | minimal adverse side effects, including no observed nausea or vomiting; | ||
| • | additive therapy to systemically-delivered analgesics; | ||
| • | no drug to drug interactions; and | ||
| • | no wound healing interference. |
Clinical Development. In December 2001, we initiated a randomized, double-blind, placebo-controlled Phase II clinical trial in 221 subjects who underwent hernia repair. We conducted the clinical trial in nine surgical centers in Germany. Subjects were randomized to receive two different doses of lidocaine, 9.5% and 3.5%, or placebo, in a patch applied once each day for two days. Subjects were not allowed to take any supplemental analgesics. We completed the analysis of this clinical trial in January 2003.
The primary endpoint was subject pain self-assessment at various intervals during the 48-hour period following the subject’s surgery and the secondary endpoint was the number of “rescues,” i.e. subjects receiving systemically-delivered analgesics to alleviate pain. The results of this trial indicate that the 9.5% formulation of LidoPAIN SP provided a statistically significant analgesic effect in the subjects. A dose-related response was also observed, with subjects receiving the higher dose reporting a greater reduction in pain and fewer rescues. No significant adverse reactions were observed.
Current Clinical Initiatives. We initiated dosing for a Phase III clinical trial in Europe during the fourth quarter of 2004. The clinical trial is a randomized, double-blind, placebo-controlled trial in which approximately 500 subjects who underwent hernia repair will receive one LidoPAIN SP patch or a placebo patch, for 48 hours. The primary endpoint is self-assessed pain intensity at various times from 4 to 24 hours. The secondary endpoints include pain intensity over the 48-hour duration of the study, global satisfaction and the use of rescue medications. We believe that this clinical trial will be adequate for European registration, but we anticipate that we will need to conduct additional clinical trials in Europe in order to broaden the product labeling. We remain responsible for continuing and completing its ongoing dermal sensitivity study for LidoPAIN SP, but Adolor is responsible for further clinical trials and managing the approval process in North America under our strategic alliance with them. Adolor has announced that it has initiated a Phase II clinical trial and that it plans to conduct Phase III clinical trials in the United States.
Back Pain
In the United States, 80% of the U.S. population will experience significant back pain at some point. Back pain ranks second only to headaches as the most frequent pain people experience. It is the leading reason for visits to neurologists and orthopedists and the
second most frequent reason for physician visits overall. Both acute and chronic back pain are typically treated with NSAIDs, muscle relaxants or opioid analgesics. All of these drugs can subject the patient to systemic toxicity, significant adverse side effects and drug to drug interactions.
LidoPAIN BP. LidoPAIN BP is a prescription analgesic non-sterile patch designed to provide sustained topical delivery of lidocaine for the treatment of acute or recurrent lower back pain of moderate severity of less than three months duration. The LidoPAIN BP patch contains 140 mg of lidocaine in a 19.0% concentration, is intended to be applied once daily and can be worn for a continuous 24-hour period. The patch’s adhesive is strong enough to permit a patient to move and conduct normal daily activities but can be removed easily.
If approved, we believe LidoPAIN BP would offer the following favorable attributes:
| • | safety and ease of use; | ||
| • | reduced need for treatment with NSAIDs, muscle relaxants and narcotic analgesics; | ||
| • | once daily administration; | ||
| • | minimal adverse side effects; and | ||
| • | no drug to drug interactions. |
LidoPAIN BP is designed to treat acute or recurrent lower back pain. As part of our strategic alliance with Endo, we licensed to Endo certain of our patents to enable Endo to develop a patch for the treatment of chronic lower back pain. The significant differences between LidoPAIN BP and Endo’s product, Lidoderm, are as follows:
| • | LidoPAIN BP is designed for 24-hour use whereas Lidoderm is approved for 12-hour use; | ||
| • | LidoPAIN BP is made with a stronger adhesive; | ||
| • | LidoPAIN BP contains a higher concentration of lidocaine (19.0% v. 5.0%); and | ||
| • | LidoPAIN BP is designed to provide earlier onset of action. |
Clinical Development. In May 2001, we initiated a placebo-controlled dose-response Phase IIa clinical trial in the United States. In this clinical trial, we tested two dosage formulations of LidoPAIN BP (70mg or 140mg Lidocaine) compared to placebo. Each patch was applied once daily for three days to 43 subjects with acute lower back pain of at least moderate intensity. Subjects abstained from other analgesics and other therapeutic regimens.
We completed the analysis of this clinical trial in August 2003. The primary endpoint was pain intensity measured by a 5-point numerical pain scale where 0 indicated no pain and 5 indicated severe pain. Pain measurements were made at various times over the three-day duration of the trial. EpiCept assessed a number of secondary endpoints, including pain relief, muscle stiffness and global satisfaction. The trial demonstrated a dose-related statistically significant reduction in back pain intensity and muscle stiffness as well as increase in pain relief from the initiation of the trial.
In January 2002, we initiated a double-blind, placebo-controlled Phase IIb clinical trial in three centers in the United States. In this clinical trial, we tested a LidoPAIN BP patch measuring 150 sq. cm. with a 19.0% concentration of lidocaine. Each patch was applied once daily for three days to 198 subjects with acute lower back pain of at least moderate intensity. Subjects abstained from other analgesics and other therapeutic regimens.
Although the results at two of the three centers in this study did indicate that LidoPAIN BP had a greater analgesic effect as compared to the placebo control, the results at a third center were contradictory. At that center, the trial subjects who received placebo reported an analgesic effect that exceeded the analgesic effect reported by the subjects receiving LidoPAIN BP. After the trial, our consultant concluded that the unusually large placebo effect reported at this center most likely resulted because many of the subjects may have been concerned that a failure to report an analgesic effect would result in a loss of the stipend offered as
compensation for participation in the trial. Due to the results reported at this center, this clinical trial did not demonstrate a statistically significant analgesic effect.
Current Clinical Initiatives. Based on the results from the Phase I and Phase II clinical trials, we are designing a new pivotal Phase IIb clinical trial, which it expects to commence in the second half of 2006. Our new trial will be designed to address the issues raised in previous Phase IIb clinical trial. The trial will be longer and will have more stringent enrollment criteria. Under our strategic alliance with Endo, we remain responsible for the development of LidoPAIN BP, including all clinical trials and regulatory submissions. EpiCept has requested an End of Phase II meeting with the FDA.
Other Product Candidates
EpiCept MP/DP
EpiCept MP/DP is a spray gel matrix of morphine and lidocaine for the treatment of oral mucositis and dental pain. A spray gel matrix is a liquid spray that solidifies upon contact with a warm surface. Oral mucositis is an inflammation of the mucosa of the mouth that ranges from redness to severe ulceration and typically results from chemotherapy and radiation therapy. It is anticipated that other clinical uses will be considered to expand upon the initial indications being studied. The FDA cleared EpiCept’s IND for EpiCept MP/DP in July 2001, and we completed a Phase IIa clinical trial on dental pain subjects in Europe in April 2002. Preliminary results have indicated that the product is well tolerated and provided a longer duration of pain relief compared to lidocaine by itself. We intend to continue dose ranging and dose optimization trials.
LidoPAIN TV
LidoPAIN TV is a topical lidocaine patch applied to the periauricular skin region (behind the ear) for the treatment of tinnitus. This product releases doses of lidocaine into nerve endings located behind the ear. Tinnitus is characterized by a constant or intermittent hissing, buzzing or ringing noise in the ear that affects over 50 million Americans. There are many causes of tinnitus, including defects in nerve conduction, however, there are no currently approved treatments. We completed a European Phase II clinical trial in subjects with tinnitus in May 2002. Subjects utilizing the LidoPAIN TV patch perceived a beneficial effect as compared to subjects given the placebo patch.
LidoPAIN HM
LidoPAIN HM is a topical lidocaine patch applied to the forehead for the treatment of headaches. LidoPAIN HM releases analgesic doses of lidocaine directly into the trigeminal nerve, a nerve located in the face and forehead, stimulating the coverings (meninges) of the brain, which is believed to be a cause of migraine pain. The FDA cleared EpiCept’s IND for LidoPAIN HM in January 2001, and we completed a Phase II clinical trial for LidoPAIN HM in headache subjects. Our initial pilot study indicated that the patch was well tolerated and demonstrated statistically significant efficacy of the lidocaine patch over the placebo patch. A second larger study was unable to replicate those results. We intend to continue clinical trials to establish efficacy of this product candidate in various types of headache pain.
EpiCept’s Strategy
Our objective is to address unmet medical needs in pain management by developing a broad portfolio of topically-delivered prescription analgesics for the treatment of moderate-to-severe pain where existing treatments are ineffective or cause significant adverse side effects. To achieve this objective, the key elements of our strategy are to:
| • | Focus our development efforts on topically-delivered analgesics targeting peripheral nerve receptors. We intend to leverage our pain management expertise by developing proprietary products that target peripheral nerve receptors as a novel mechanism to effectively treat both acute and chronic pain, with fewer adverse side effects than conventional oral, injectable or transdermal pain therapeutics. We are developing new patent-protected products for conditions that can be treated by blocking the ability of peripheral nerve receptors to transmit pain messages to the brain. | ||
| • | Focus our development efforts on FDA-approved drugs. All of our product candidates utilize several proprietary formulations and topical delivery technologies to administer FDA-approved analgesics. We believe using FDA-approved analgesics reduces the risks associated with new drug development, lowers development costs and speeds time-to-market. |
• Opportunistically enter into development and commercialization alliances for our products. We plan to market products for which it obtains regulatory approval through co-marketing, co-promotion, licensing and distribution arrangements with third-party collaborators. We may also consider contracting with a third party professional pharmaceutical sales organization to perform the marketing function for its products. Where appropriate, we plan to retain certain rights to the development and commercialization of its product candidates and build our own internal sales and marketing capabilities in order to retain a greater share of any potential revenues. We believe that our current approach allows us maximum flexibility of selecting the marketing method that will optimize market penetration and commercial acceptance of our products and enable us to avoid developing a large internal sales and marketing organization.
EpiCept’s Strategic Alliances
EpiCept has established strategic alliances with Adolor with respect to EpiCept’s LidoPAIN SP product candidate for the treatment of pain associated with surgical incisions and with Endo with respect to EpiCept’s LidoPAIN BP product candidate for the treatment of lower back pain. These strategic alliances are designed to provide EpiCept with operating capital and supplement EpiCept’s development and marketing capabilities. EpiCept intends to selectively pursue additional strategic alliances as appropriate.
Adolor
In July 2003, EpiCept entered into a license agreement with Adolor under which EpiCept granted Adolor the exclusive right to commercialize a sterile topical patch containing an analgesic alone or in combination, including without limitation, LidoPAIN SP, throughout North America. Upon the execution of the Adolor agreement, EpiCept received a non-refundable payment of $2.5 million, which has been deferred and is being recognized as revenue ratably over the estimated product development period. In September 2005, the Company received a milestone payment of $0.5 million from Adolor in connection with Adolor’s initiation of a U.S. Phase II trial of LidoPAIN SP. Under the Adolor agreement, Adolor is obligated to pay the Company additional non-refundable payments of up to $14.5 million that become due upon the achievement of various milestones relating to product development and regulatory approval. Under the agreement, EpiCept will also receive royalties from Adolor based on the net sales of licensed products in North America. These royalties are payable on a country-by-country basis until EpiCept’s last patent covering the licensed product expires or the tenth anniversary of the first commercial sale of licensed product, whichever is later. Under the agreement, Adolor is obligated to pay EpiCept a one time bonus payment of up to $5.0 million upon the achievement of specified net sales milestones of licensed product. The future amount of milestone payments the Company is eligible to receive from Adolor is $19.5 million. There is no certainity that any of these milestones will be achieved or any royalty earned.
Under the terms of the agreement, Adolor is responsible for conducting further clinical trials and completing the approval process in North America. Adolor is responsible for the supply and manufacture of LidoPAIN SP for commercial use in North America or, at its option, may subcontract these responsibilities to third parties. In October 2004, EpiCept and Adolor entered into an amendment to the license agreement to facilitate their respective clinical development activities. The amendment provided that EpiCept and Adolor would coordinate their independent pre-clinical and clinical activities with respect to the LidoPAIN SP product. In addition, EpiCept agreed to provide Adolor with clinical trial data generated from EpiCept’s clinical trial conducted in Europe and to permit Adolor to use such data for development, regulatory and commercialization of licensed products. Adolor, in turn, agreed to provide EpiCept with certain data generated by Adolor relating to the lidocaine patches manufactured by Corium International, Inc. and to permit EpiCept to use such data for the development, regulatory and commercialization of sterile lidocaine patches. Lastly, the amendment permits EpiCept to enter into an agreement with Corium pursuant to which Corium will manufacture and supply EpiCept’s clinical and commercial supplies of sterile lidocaine patches for use outside North America. EpiCept has not yet entered into any manufacturing or supply agreement with Corium.
At EpiCept’s option, within 30 days after Adolor’s first filing of an NDA (or foreign equivalent) for LidoPAIN SP or similar product, EpiCept has the right to negotiate with Adolor regarding a co-promotion arrangement in any country in North America in which such filing has been made. However, neither EpiCept nor Adolor is under any obligation to enter into any such arrangement.
The Adolor license terminates on a country-by-country and licensed product-by-licensed product basis upon the expiration of the royalty obligations in the particular country. Adolor may also terminate the agreement upon 120 days advance written notice to EpiCept, and either Adolor or EpiCept may terminate the agreement upon an uncured material breach by the other or, subject to the relevant bankruptcy laws, upon a bankruptcy event of the other.
Endo
In December 2003, EpiCept entered into a license agreement with Endo under which EpiCept granted Endo (and its affiliates) the exclusive (including as to EpiCept and its affiliates) worldwide right to commercialize LidoPAIN BP. EpiCept also granted Endo worldwide rights to use certain of EpiCept’s patents for the development of certain other non-sterile, topical lidocaine patches, including Lidoderm, Endo’s non-sterile topical lidocaine-containing patch for the treatment of chronic lower back pain. Upon the execution of the Endo agreement, EpiCept received a non-refundable payment of $7.5 million, and EpiCept may receive payments of up to $52.5 million upon the achievement of various milestones relating to product development, regulatory approval and commercial success for both EpiCept’s LidoPAIN BP product and Endo’s own back pain product, so long as, in the case of Endo’s product candidate, EpiCept’s patents provide protection thereof. EpiCept will also receive royalties from Endo based on the net sales of LidoPAIN BP. These royalties are payable until generic equivalents to the LidoPAIN BP product are available or until expiration of the patents covering LidoPAIN BP, whichever is sooner. EpiCept is also eligible to receive milestone payments from Endo of up to approximately $30.0 million upon the achievement of specified regulatory and net sales milestones of Lidoderm, Endo’s chronic lower back pain product candidate, so long as EpiCept’s patents provide protection thereof. The future amount of milestone payments the Company is eligible to receive under the Endo agreement is $82.5 million. There is no certainty that any of these milestones will be achieved or any royalty earned.
EpiCept remains responsible for continuing and completing the development of LidoPAIN BP, including conducting all clinical trials (and supplying the clinical products necessary for those trials) and the preparation and submission of the NDA in order to obtain regulatory approval for LidoPAIN BP. EpiCept may subcontract with third parties for the manufacture and supply of LidoPAIN BP. Endo is conducting Phase II clinical trials for its Lidoderm patch and remains responsible for continuing and completing the development, including conducting all clinical trials (and supplying the clinical products necessary for those trials) in connection with that product candidate.
In the event that EpiCept has obtained regulatory approval of LidoPAIN BP in a particular country and Endo fails to commercialize LidoPAIN BP in that country within three years from the date on which EpiCept receives final regulatory approval in the United States, then the license granted to Endo relating to the commercialization of LidoPAIN BP in that country terminates, and EpiCept will have the right to commercialize or license the product in that country. In that event, EpiCept will be required to pay Endo a royalty on the net sales of LidoPAIN BP in any such country.
At EpiCept’s option, within 30 days after EpiCept’s first filing of an NDA (or foreign equivalent) for LidoPAIN BP, EpiCept has the right to negotiate a co-promotion arrangement with Endo in any country in which such filing has been made. However, neither EpiCept nor Endo is under any obligation to enter into any such arrangement.
The license terminates upon the later of the conclusion of the royalty term, on a country-by-country basis, and the expiration of the last applicable EpiCept patent covering licensed Endo product candidates on a country-by-country basis. Either Endo or EpiCept may terminate the agreement upon an uncured material breach by the other or, subject to the relevant bankruptcy laws, upon a bankruptcy event of the other.
Manufacturing
EpiCept has no in-house manufacturing capabilities. EpiCept intends to outsource all of its manufacturing activities for the foreseeable future. EpiCept believes that this strategy will enable it to direct operational and financial resources to the development of its product candidates rather than diverting resources to establishing a manufacturing infrastructure.
EpiCept has entered into arrangements with qualified third parties for the formulation and manufacture of its clinical supplies. EpiCept intends to enter into additional written supply agreements in the future and is currently in negotiations with several potential suppliers. EpiCept generally purchases its supplies from its current suppliers pursuant to purchase orders. EpiCept plans to use a single, separate third party manufacturer for each of its product candidates that it is responsible for manufacturing. In some cases, the responsibility to manufacture product, or to identify suitable third party manufacturers, may be assumed by EpiCept’s licensees. For example, under the Adolor agreement, Adolor is responsible for the manufacture of the commercial supply of LidoPAIN SP in North America. EpiCept may source LidoPAIN SP for marketing outside of North America from Adolor or Adolor’s third party supplier. Alternatively, EpiCept can separately arrange for other third party suppliers to manufacture the commercial supply of LidoPAIN SP outside North America. Pursuant to the October 2004 amendment to the Adolor agreement, Adolor has agreed to permit EpiCept to enter into an agreement with Corium pursuant to which Corium would manufacture and supply EpiCept’s clinical and commercial
supplies of sterile lidocaine patches for EpiCept’s use outside North America. EpiCept has not yet entered into any manufacturing or supply agreement with Corium.
EpiCept cannot assure you that its current manufacturers can successfully increase their production to meet full commercial demand. EpiCept believes that there are several manufacturing sources available to it, including its current manufacturers, which can meet EpiCept’s commercial supply requirements on commercially reasonable terms. EpiCept will continue to look for and secure the appropriate manufacturing capabilities and capacity to ensure commercial supply at the appropriate time.
Sales and Marketing
EpiCept does not currently have internal sales or marketing capabilities. In order to commercially market its product candidates if it obtains regulatory approval, EpiCept must either develop an internal sales and marketing infrastructure or collaborate with third parties with sales and marketing expertise. EpiCept has retained full rights to commercialize EpiCept NP-1 worldwide. EpiCept has granted Adolor exclusive commercialization rights for LidoPAIN SP in North America but has also retained the right to negotiate with Adolor a co-promotion agreement for LidoPAIN SP in North America. In addition, EpiCept has granted Endo exclusive worldwide marketing and commercialization rights for LidoPAIN BP but has also retained the right to negotiate with Endo co-promotion rights for LidoPAIN BP worldwide. EpiCept will likely market its products in international markets outside of North America through collaborations with third parties. EpiCept intends to make decisions regarding internal sales and marketing of its product candidates on a product-by-product and country-by-country basis.
Intellectual Property
EpiCept’s commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of its technologies and drug candidates as well as successfully defending these patents against third-party challenges. EpiCept has various composition of matter and use patents, which have claims directed to its product candidates or methods of their use. EpiCept’s patent policy is to retain and secure patents for the technology, inventions and improvements related to its core portfolio of product candidates. EpiCept currently owns nineteen issued U.S. patents, seven issued foreign patents, and seventeen pending U.S. and foreign patent applications. EpiCept also relies on trade secrets, technical know-how and continuing innovation to develop and maintain its competitive position.
The following is a summary of the patent position relating to EpiCept’s three late-stage product candidates:
EpiCept NP-1 — EpiCept owns a U.S. patent with claims directed to a formulation containing a combination of amitriptyline and ketamine, which can be used as a treatment for the topical relief of pain, including neuropathic pain, that expires in August 2021. EpiCept also has a license to additional patents, which expire in September 2015 and May 2018, and which have claims directed to topical uses of tricyclic antidepressants, such as amitriptyline, and NMDA antagonists, such as ketamine, as treatments for relieving pain, including neuropathic pain. Additional foreign patent applications are pending related to EpiCept NP-1 in many major pharmaceutical markets outside the United States.
LidoPAIN SP — EpiCept owns two U.S. patents that have claims directed to the topical use of a local anesthetic or salt thereof, such as lidocaine, for the prevention or relief of pain from surgically closed wounds, in a hydrogel patch, which expire in October 2019. Additionally, EpiCept owns a pending U.S. patent application that is directed to a breathable, sterile patch that can be used to treat pain caused by various types of wounds, including surgically closed wounds. EpiCept has foreign patent applications pending relating to LidoPAIN SP in many major pharmaceutical markets outside the United States.
LidoPAIN BP — EpiCept owns a U.S. patent that has claims directed to the use and composition of a patch containing a local anesthetic, such as lidocaine, to topically treat back pain, myofascial pain and muscular tensions, which expires in July 2016. Equivalent foreign patents have been granted in many major European pharmaceutical markets.
EpiCept also seeks to protect its proprietary information by requiring its employees, consultants, contractors, outside partners and other advisers to execute, as appropriate, nondisclosure and assignment of invention agreements upon commencement of their employment or engagement. EpiCept also requires confidentiality or material transfer agreements from third parties that receive its confidential data or materials.
EpiCept also relies on trade secrets to protect its technology, especially where EpiCept does not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While EpiCept uses reasonable efforts to protect its trade
secrets, its employees, consultants, contractors, partners and other advisors may unintentionally or willfully disclose information to competitors. Enforcing a claim that a third party illegally obtained and is using trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, EpiCept’s competitors may independently develop equivalent knowledge, methods and know-how.
The pharmaceutical, biotechnology and other life sciences industries are characterized by the existence of a large number of patents and frequent litigation based upon allegations of patent infringement. While EpiCept’s drug candidates are in clinical trials, and prior to commercialization, EpiCept believe its current activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States and Section 55.2(1) of the Canadian Patent Act, each of which covers activities related to developing information for submission to the FDA and its counterpart agency in Canada. As EpiCept’s drug candidates progress toward commercialization, the possibility of an infringement claim against EpiCept increases. While EpiCept attempts to ensure that our drug candidates and the methods we employ to manufacture them do not infringe other parties’ patents and other proprietary rights, competitors or other parties may assert that we infringe on their proprietary rights.
For a discussion of the risks associated with our intellectual property, see Item 1A. “Risk Factors — Risks Relating to Intellectual Property.”
License Agreements
We have in the past licensed and will continue to license patents from collaborating research groups and individual inventors.
Cassel
In October 1999, we acquired from Dr. R. Douglas Cassel certain patent applications relating to technology for the treatment of surgical incision pain. On July 16, 2003, this royalty agreement was amended. Pursuant to this agreement, we have agreed to pay Dr. Cassel a fee of $4,000 per month until July 2006. We will also pay Dr. Cassel royalties based on the net sales of any of its products for the treatment of pain associated with surgically closed wounds. The $4,000 per month fee will be credited towards these royalty payments. The royalty obligations will terminate upon the expiration of the last to expire acquired patent. As part of the royalty arrangement, we have engaged Dr. Cassel as a consultant, for which he is paid on a per diem basis. Dr. Cassel provides us with general scientific consulting services, particularly with respect to the development and commercialization of LidoPAIN SP. Dr. Cassel has also granted us an option to obtain, on mutually agreeable terms, an exclusive, worldwide license to any technology discovered by Dr. Cassel outside of his performance of services for us.
Epitome
In August 1999, we entered into a sublicense agreement with Epitome Pharmaceuticals Limited under which EpiCept has an exclusive license to certain patents for the topical use of tricyclic anti-depressants and NMDA antagonists as topical analgesics for neuralgia. This technology has been incorporated into EpiCept NP-1. We have been granted worldwide rights to make, use, develop, sell and market products utilizing the licensed technology in connection with passive dermal applications. We are obligated to make payments to Epitome upon achievement of specified milestones and to pay royalties based on annual net sales derived from the products incorporating the licensed technology. At the end of each year in which there has been no commercially sold products, we will be obligated to pay to Epitome a maintenance fee that is equal to twice the fee paid in the previous year, or Epitome will have the option to terminate the contract. The sublicense terminates upon the expiration of the last to expire licensed patents. The sublicense may be terminated earlier under specified circumstances, such as breaches, lack of commercial feasibility and regulatory issues. EpiCept paid a maintenance fee of $0.2 and $0.1 million in 2005 and 2004, respectively.
Government Regulation
United States
The FDA and comparable state and local regulatory agencies impose substantial requirements upon the clinical development, manufacture, marketing and distribution of drugs. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our product candidates. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, (“FFDCA”), and implementing regulations. The process required by the FDA before our product candidates may be marketed in the United States generally involves the following:
| • | completion of extensive pre-clinical laboratory tests, pre-clinical animal studies and formulation studies all performed in accordance with the FDA’s good laboratory practice (“GLP”), regulations; | ||
| • | submission to the FDA of an Investigational New Drug (“IND”) application that must become effective before clinical trials may begin; | ||
| • | performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product candidate for each proposed indication; | ||
| • | submission of an NDA to the FDA; | ||
| • | satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product is produced to assess compliance with current GMP, or cGMP, regulations; and | ||
| • | FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug. |
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.
Pre-clinical Activities. Pre-clinical activities include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of pre-clinical tests, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND, or those of our collaborators, may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development, and the FDA must grant permission before each clinical trial can begin. Further, an independent institutional review board (“IRB”), for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center, and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice (“GCP”), regulations and regulations for informed consent of subjects.
Clinical Trials. For purposes of NDA submission and approval, clinical trials are typically conducted in the following three sequential phases, which may overlap:
| • | Phase I: Studies are initially conducted in a limited population to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in subjects. In some cases, a sponsor may decide to run what is referred to as a “Phase Ib” evaluation, which is a second safety-focused Phase I clinical trial typically designed to evaluate the impact of the drug candidate in combination with currently approved drugs. | ||
| • | Phase II: Studies are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the drug candidate for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and |
| more expensive Phase III clinical trials. In some instances, a sponsor may decide to run what is referred to as a “Phase IIa” clinical trial, which is designed to provide dose-ranging and additional safety and pharmaceutical data. In other cases, a sponsor may decide to run what is referred to as a “Phase IIb” evaluation, which is a second, confirmatory Phase II clinical trial that could, if positive and accepted by the FDA, serve as a pivotal clinical trial in the approval of a drug candidate. | |||
| • | Phase III: These are commonly referred to as pivotal studies. When Phase II clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety profile, Phase III clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites. |
In some cases, the FDA may give conditional approval of an NDA for a drug candidate on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval trials are typically referred to as Phase IV clinical trials.
New Drug Application (“NDA”). The results of drug candidate development, pre-clinical testing, chemistry and manufacturing controls and clinical trials are submitted to the FDA as part of an NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it may require additional clinical data or an additional pivotal Phase III clinical trial. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we do. Once issued, the FDA may withdraw drug approval if ongoing regulatory requirements are not met or if safety problems occur after the drug reaches the market. In addition, the FDA may require testing, including Phase IV clinical trials, and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a drug based on the results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label. Further, if there are any modifications to the drug, including changes in indications, labeling or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require us to develop additional data or conduct additional pre-clinical studies and clinical trials.
Satisfaction of FDA regulations and requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of drug candidates for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our drug candidates on a timely basis, if at all. Even if a drug candidate receives regulatory approval, the approval may be significantly limited to specific usages, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a drug may result in restrictions on the drug or even complete withdrawal of the drug from the market. Delays in obtaining, or failures to obtain, regulatory approvals for any of our drug candidates would harm its business. In addition, we cannot predict what additional governmental regulations may arise from future U.S. governmental action.
Any drugs manufactured or distributed by us or its collaborators pursuant to FDA approvals are subject to continuing regulation by the FDA, including record keeping requirements and reporting of adverse experiences associated with the drug. Drug manufacturers and their subcontractors 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 ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to potential legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers, will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt EpiCept’s clinical trials, require EpiCept to recall a drug from distribution, or withdraw approval of the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the drug’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.
Section 505(b)(2) Drug Applications. Once an FDA-approved new drug is no longer patent-protected, another company may sponsor a new indication, a new use or put the drug in a new dosage form. Each new indication from a different company requires an NDA filing. As an alternate path to FDA approval for new or improved formulations of previously approved products, a company may file a Section 505(b)(2) NDA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. However, this NDA does not have to contain all of the information or data that was submitted with the original NDA because of the FDA’s prior experience with the drug product. An original NDA for an FDA-approved new drug would have required numerous animal toxicology studies that have been reviewed by the FDA. These can be referenced in the 505(b)(2) NDA submitted by the new applicant. Many studies in humans that support the safety of the drug product may be in the published literature. The FDA allows the new sponsor company to submit these publications to support its 505(b)(2) NDA. By allowing the new sponsor company to use this information, the time and cost required to obtain approval for a drug product for the new indication can be greatly reduced. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.
To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. If the applicant does not challenge the listed patents, the Section 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.
Foreign Regulation
Whether or not EpiCept obtains FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement also vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the United States typically are administered with the three-phase sequential process that is discussed above under “Government Regulation — United States.” However, the foreign equivalent of an IND is not a prerequisite to performing pilot studies or Phase I clinical trials.
Under European Union regulatory systems, we may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all EU member states. This authorization is a marketing authorization application (“MAA”). The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure (“MRP”).
In addition, regulatory approval of prices is required in most countries other than the United States. We face the risk that the resulting prices would be insufficient to generate an acceptable return to us or our collaborators.
Competition
The pharmaceutical industry, and the pain management sector specifically, is highly competitive and includes a number of established, large and mid-sized pharmaceutical and specialty pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on EpiCept’s target markets and areas of expertise. These organizations also compete with us to attract qualified personnel and potential parties for acquisitions, joint ventures or other strategic alliances. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than EpiCept does. Large pharmaceutical companies in particular have extensive experience in clinical testing, obtaining regulatory approvals and drug commercialization. If approved, our product candidates will compete with a large number of products that include over-the-counter treatments, prescription drugs specifically indicated for pain management and prescription drugs that are prescribed off-label. In addition, new developments occur in the pharmaceutical industry at a rapid pace.
If approved, each of our product candidates will compete for a share of the existing market with products that have become standard treatments recommended or prescribed by physicians.
We believe that the primary competition for our lead product candidates are as follows:
EpiCept NP-1. The primary competition for EpiCept NP-1 in the area of post-herpetic neuralgia is Neurontin (gabapentin), which is currently marketed by Pfizer. Gabapentin, the generic equivalent of Neurontin, is now available at a cost substantially below the price of Neurontin. Pfizer has developed a successor product candidate to Neurontin called Lyrica or pregabalin, which has been shown in Phase III clinical trials to effectively treat subjects with neuropathic pain. We also face competition from Endo’s Lidoderm patch, which is currently indicated for post-herpetic neuralgia.
LidoPAIN SP. The primary competition in the market for acute post-operative pain are narcotic analgesics. Several competitors are seeking product candidates that would be used in combination with opioids to mitigate one or more of the adverse side effects associated with their use. For example, Endo recently announced that the FDA has approved Skyepharma’s NDA for DepoDur for the treatment of pain following major surgery, to which product Endo has licensed the commercial rights. Previously referred to as DepoMorphine, DepoDur is a single dose sustained-release injectable formulation of morphine. Other competitors include Purdue Pharmaceuticals, Johnson & Johnson and Endo.
LidoPAIN BP. There are a number of competitive products that are used to treat acute lower back pain. We compete with fully-integrated pharmaceutical companies, smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have drugs already approved by the FDA or in development and operate larger research and development programs in these fields than we do.
Although we believe that, if approved, our product candidates will have favorable features for the treatment of their intended indications, existing treatments or treatments currently under clinical development that also receive regulatory approval may possess advantages in competing for market share.
Corporate Information
We were incorporated in Delaware in March 1993. We have two wholly-owned subsidiaries, EpiCept GmbH, based in Munich, Germany, which is engaged in research and development activities on our behalf and Maxim Pharmaceuticals, Inc. which we acquired on January 4, 2006. Our principal executive offices are located at 270 Sylvan Avenue, Englewood Cliffs, New Jersey, and our telephone number is (201) 894-8980. Our website address is www.epicept.com . Our website, and the information contained in our website, is not a part of this annual report.
Employees
As of February 14, 2006, EpiCept’s workforce consists of 35 full-time employees, eight of whom hold a Ph.D. or M.D., and one of whom holds other advanced degrees. We have no collective bargaining agreements with our employees and has not experienced any work stoppages. We believe that our relations with our employees are good.
Research and Development
Since our inception, we have made substantial investments in research and development. In the years ended December 31, 2005, 2004 and 2003, we incurred research and development expenses of $1.8 million, $1.8 million and $1.6 million, respectively.
Availability of SEC Filings
EpiCept has filed reports, proxy statements and other information with the SEC. Copies of EpiCept’s reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding EpiCept. The address of the SEC website is http://www.sec.gov . We will also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge available through its website at www.epicept.com as soon as reasonably practicable after filing electronically such material with the SEC. Copies are also available, without charge, from EpiCept Corporation, 270 Sylvan Avenue, Englewood Cliffs, NJ, 07632.
RISK FACTORS
Risks Relating to our Financial Condition
We have had limited operating activities, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Our activities to date have been limited to organizing and staffing our operations, acquiring, developing and securing our technology, licensing product candidates, and undertaking preclinical and clinical studies and clinical trials. We have not yet demonstrated an ability to obtain regulatory approval, manufacture products or conduct sales and marketing activities. Consequently, it is difficult to make any predictions about our future success, viability or profitability based on our historical operations.
We have a history of losses, and as a result we may not be able to generate sufficient net revenue from product sales in the foreseeable future.
We have incurred significant losses since our inception, and we expect that we will experience net losses and negative cash flow for the foreseeable future. Since our inception in 1993, we have incurred significant net losses in each year. Our losses have resulted principally from costs incurred in connection with our development activities and from general and administrative costs associated with our operations. Our net loss for the fiscal year ended December 31, 2005 was $7.2 million. As of December 31, 2005, our accumulated deficit was $67.7 million. Prior to the merger, Maxim experienced net losses every year since its inception. Maxim’s net losses applicable to common stock were $27.6 million for the fiscal year ended September 30, 2005 As of September 30, 2005, Maxim had an accumulated deficit of approximately $379.1 million. Even if we succeed in developing and commercializing one or more of our product candidates, we may never become profitable. Accordingly, we may never generate sufficient net revenue to achieve or sustain profitability.
We expect to continue to incur increasing expenses over the next several years as we:
| • | continue to conduct clinical trials for our product candidates; | ||
| • | seek regulatory approvals for our product candidates; | ||
| • | develop, formulate and commercialize our product candidates; | ||
| • | implement additional internal systems and develop new infrastructure; | ||
| • | acquire or in-license additional products or technologies or expand the use of our technologies; | ||
| • | maintain, defend and expand the scope of our intellectual property; and | ||
| • | hire additional personnel. |
We expect that we will have large fixed expenses in the future, including significant expenses for research and development and general and administrative expenses. We will need to generate significant revenues to achieve and maintain profitability. If we cannot successfully develop and commercialize our product candidates, we will not be able to generate significant revenue from product sales or achieve profitability in the future. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels.
We may need substantial additional funding, may be unable to raise additional capital when needed and may not continue as a going concern. This could force us to delay, reduce or eliminate our product development and commercialization activities.
Developing drugs, conducting clinical trials and commercializing products is time-consuming and expensive. Our future funding requirements will depend on many factors, including:
| • | the progress and cost of our clinical trials and other development activities; | ||
| • | the costs and timing of obtaining regulatory approval; |
| • | the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patent and other intellectual property rights; | ||
| • | the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any; | ||
| • | the costs of establishing sales, marketing and distribution capabilities; and | ||
| • | the terms and timing of any collaborative, licensing and other arrangements that we may establish. |
We believe that, after giving effect to the merger and our recent sale of common stock and common stock purchase warrants, our existing cash resources will be sufficient to meet our projected operating requirements through the second quarter of 2007. However, we may need to raise additional capital or incur indebtedness to continue to fund our operations in the future. We cannot assure you that sufficient funds will be available to us when required or on satisfactory terms. If necessary funds are not available, we may have to delay, reduce the scope of or eliminate some of our development programs, which could delay the time to market for any of our product candidates.
We may raise additional capital through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Our ability to raise additional capital will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We cannot be certain that such additional funding will be available upon acceptable terms, or at all. To the extent that we raise additional capital by issuing equity securities, our then-existing stockholders may experience further dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. To the extent that we raise additional capital through collaboration and licensing arrangements, it may be necessary for us to relinquish valuable rights to our product candidates that we might otherwise seek to develop or commercialize independently.
If certain contingent liabilities of Maxim mature into actual liabilities, our cash reserves and financial condition could be adversely affected.
Maxim was named as a defendant in state and federal stockholder suits that were filed in 2004. The cases were tendered to Maxim’s insurance carrier, which denied coverage. In addition, prior to the merger, on May 3, 2005, plaintiff Carolina Casualty Insurance Company filed a complaint in the United States District Court for the Southern District of California against Larry G. Stambaugh, Anthony E. Altig, Kurt R. Gehlsen, and Maxim’s Board of Directors, seeking a declaratory judgment from the court that Maxim’s D&O insurance policy did not cover losses arising from the state and federal stockholder suits that were filed in 2004.
We dispute Maxim’s insurance carrier’s denial of coverage and fully intend to enforce our rights under the policy. We also intend to engage in a rigorous defense against Carolina Casualty Insurance Company’s claims. No assurances can be made that we will be successful in enforcing our rights under the policy or defending the pending claims. If we are is not successful in our enforcement of the policy or defense of such claims, we could be forced to, among other things, make significant payments to resolve these claims, and such payments could have a material adverse effect on Maxim’s business, financial condition and results of operations if not covered by Maxim’s insurance carrier.
On August 19, 2005, prior to the merger, Maxim entered into an agreement with Larry G. Stambaugh, who served as Maxim’s Chairman, President and Chief Executive Officer until January 4, 2006, regarding the forgiveness of all amounts owed (including principal and accrued interest) under a $2,850,000 full recourse, interest bearing, secured revolving promissory note made by Maxim to Mr. Stambaugh on December 8, 2000, as amended on December 8, 2001. The loan was originally made to replace a loan Mr. Stambaugh had with a third-party that was secured by shares of Maxim stock that he owned. The purpose of the loan was to avoid the necessity of Mr. Stambaugh selling Maxim stock during periods of market volatility and was viewed at the time to be in the best interests of Maxim and its stockholders. As reported in Maxim’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005, the loan had been written down to zero. This write-down resulted from Maxim’s evaluation of Mr. Stambaugh’s inability to repay the loan, which has been in default since December 2002. On August 3, 2005, Mr. Stambaugh forfeited all collateral securing the loan, including 203,333 shares of Maxim’s common stock and 1,563,667 of options to purchase Maxim’s common stock. Mr. Stambaugh is currently insolvent and unable to repay the outstanding balance of the loan. After extensively reviewing all related facts and circumstances, including Maxim’s then needs, prospects and contingency plans, Mr. Stambaugh’s then assets and liabilities, Maxim’s resulting inability to collect the loan indebtedness, and the best interests of Maxim’s stockholders and creditors, Maxim’s board of directors agreed to forgive the loan. The agreement relating to such forgiveness also provides for the release by Mr. Stambaugh of any and all claims that he may have against Maxim, its officers, directors, stockholders and certain of its other
representatives with regard to any claims that he may have arising out of or in connection with the loan. In connection with the loan forgiveness, on August 19, 2005, Maxim entered into an indemnification agreement with Mr. Stambaugh. Pursuant to the indemnification agreement, Maxim agreed to indemnify Mr. Stambaugh for certain excise taxes, if any, under Section 280G and Section 4999 of the Internal Revenue Code of 1986, as amended, that may arise as a result of the forgiveness of the loan. These sections of the Internal Revenue Code relate to so called “golden parachute payments” made to certain individuals in connection with a change in ownership of a business. If the forgiveness of Mr. Stambaugh’s loan is found to be compensation paid contingent upon a change in ownership or control of Maxim, then Mr. Stambaugh will be subject to such excise taxes and EpiCept will be required to indemnify Mr. Stambaugh for such taxes, including the full amount of any additional taxes on the indemnification payments made to Mr. Stambaugh or on his behalf.
Our quarterly financial results are likely to fluctuate significantly, which could have an adverse effect on our stock price.
Our quarterly operating results will be difficult to predict and may fluctuate significantly from period to period, particularly because we will be a relatively small company with no approved products. The level of our revenues, if any, and results of operations at any given time could fluctuate as a result of any of the following factors:
| • | research and development expenses incurred in connection with our license agreement with Endo Pharmaceuticals and other license agreements; | ||
| • | results of our clinical trials; | ||
| • | our ability to obtain regulatory approval for our product candidates; | ||
| • | our ability to achieve milestones under our strategic relationships on a timely basis or at all; | ||
| • | timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors; | ||
| • | regulatory approvals and legislative changes affecting the products we may offer or those of our competitors; | ||
| • | our ability to establish and maintain a productive sales force; | ||
| • | demand and pricing of any products we may offer; | ||
| • | physician and patient acceptance of our products; | ||
| • | levels of third-party reimbursement for our products; | ||
| • | interruption in the manufacturing or distribution of our products; | ||
| • | the effect of competing technological and market developments; | ||
| • | litigation involving patents, licenses or other intellectual property rights; and | ||
| • | product failures or product liability lawsuits. |
Until we obtain regulatory approval for any of our product candidates, we cannot begin to market or sell them. As a result, it will be difficult for us to forecast demand for our products with any degree of certainty. It is also difficult to predict the timing of the achievement of various milestones under our strategic relationships. In addition, we will be increasing our operating expenses as we develop product candidates and build commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly losses. Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.
Our independent registered public accounting firm determined that a material weakness related to our internal controls and procedures existed, which could adversely impact our ability to report our consolidated financial results accurately and on a timely basis.
As a result of numerous journal entry adjustments and corrections in connection with the audit of our 2004, 2003 and 2002 consolidated financial statements, and the past restatements of those consolidated financial statements, our independent registered public accounting firm communicated a reportable condition constituting a material weakness related to our internal control
over financial reporting. The financial statement restatements related to our accounting for revenue recognition, the recording of a contingent reverse stock split, and cash flow reporting of noncash deferred initial public offering costs.
In connection with their audits of previous years, our independent registered public accounting firm made various recommendations to improve our financial reporting internal controls, including establishing formal technical accounting training for financial personnel, reviewing our internal financial and accounting resources, performing periodic detailed financial analysis of our German subsidiary’s financial results, documenting our conclusions on technical accounting issues and determinations on a timely basis and ensuring the technical proficiency of our audit committee to oversee our financial reporting function. We continue to address these issues and have taken actions related to all of these recommendations. For instance, we hired a Chief Financial Officer in the second quarter of 2004. We also hired a certified public accountant for our finance department in 2005. We have installed a new general ledger system and adopted stricter journal entry authorization procedures. We have improved documentation of our conclusions relating to technical accounting issues and determinations. Since we have had only limited experience with the improvements we have made to date, we cannot assure you that the steps we have taken to date or any future measures will fully remediate the material weakness identified by our independent registered public accounting firm or that we will be successful in implementing and maintaining adequate controls over our financial reporting in the future. We cannot assure you that new material weaknesses or reportable conditions in our financial reporting internal controls will not be discovered in the future. Any failure to remediate any reported material weaknesses or implement required new or improved internal controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial statements. Inadequate internal controls could also cause investors to lose confidence in our reported financial statements, which could result in a decline in value for our stock.
In addition, for 2006 we will currently be required to comply with Section 404(a) of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting and an attestation to, and testing and assessment of, our internal control over financial reporting by our independent registered public accounting firm. While we are executing a plan to ensure the effectiveness of our internal control over financial reporting, our failure to satisfy the requirements of Section 404(a) on a timely basis could result in a decline in the value of our common stock.
Our recurring losses and stockholders’ deficit has raised substantial doubt regarding our ability to continue as a going concern.
EpiCept’s recurring losses from operations and EpiCept’s stockholders’ deficit raise substantial doubt about EpiCept’s ability to continue as a going concern and as a result EpiCept’s independent registered public accounting firm included an explanatory paragraph in its report on EpiCept’s consolidated financial statements for the year ended December 31, 2005 with respect to this uncertainty. EpiCept will need to raise additional debt or equity capital to fund our product development efforts and to meet our obligations, including servicing our existing indebtedness and performing our contractual obligations under our license agreements and strategic alliances. In addition, the perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
Clinical and Regulatory Risks
If we are unable to successfully design, conduct and complete clinical trials, we will not be able to obtain regulatory approval for product candidates, which could delay or prevent us from being able to generate revenue from product sales.
We currently have no products for sale, and we cannot guarantee you that we will ever have marketable products. Before our product candidates can be commercialized, we or our partners must submit a NDA, to the FDA. The NDA must demonstrate that the product candidate is safe and effective in humans for its intended use. To support our NDAs, we or our partners must conduct extensive human tests, which are referred to as clinical trials. Satisfaction of all regulatory requirements typically takes many years and requires the expenditure of substantial resources.
EpiCept currently has several product candidates in various stages of clinical testing. All of our product candidates are prone to the risks of failure inherent in drug development and testing. Product candidates in later-stage clinical trials may fail to show desired safety and efficacy traits despite having progressed through initial clinical testing. In addition, the data collected from clinical trials of our product candidates may not be sufficient to support FDA approval, or FDA officials could interpret the data differently than we do. The FDA may require us or our partners to conduct additional clinical testing, in which case we would have to expend additional time and resources. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during regulatory review.
Any failure or significant delay in completing clinical trials for our product candidates, or in receiving regulatory approval for the sale of our product candidates, may severely harm our business and delay or prevent us from being able to generate revenue from product sales, and our stock price will likely decline.
We may not obtain regulatory clearance to market our product candidates on a timely basis, or at all.
Our product candidates will be subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. The process of obtaining FDA, EMEA, and other governmental and similar international regulatory approvals is costly, time consuming, uncertain and subject to unanticipated delays. Even if we believe that preclinical and clinical data are sufficient to support regulatory approval for a drug candidate, the FDA, EMEA and similar international regulatory authorities may not ultimately approve the candidate for commercial sale in any jurisdiction. The FDA, EMEA or similar international regulators may refuse to approve an application for approval of a drug candidate if they believe that applicable regulatory criteria are not satisfied. The FDA, EMEA or similar international regulators may also require additional testing for safety and efficacy. Any failure or delay in obtaining these approvals could prohibit or delay us from marketing product candidates. If our product candidates do not meet applicable regulatory requirements for approval, we may not have the financial resources to continue research and development of these product candidates, and we may not generate revenues from the commercial sale of any of our products.
Clinical trial designs that were discussed with regulatory authorities prior to their commencement may subsequently be considered insufficient for approval at the time of application for regulatory approval.