Annual Reports

  • 10-K (Apr 30, 2014)
  • 10-K (Mar 11, 2014)
  • 10-K (Mar 14, 2013)
  • 10-K (Mar 7, 2013)
  • 10-K (Apr 7, 2011)
  • 10-K (Mar 2, 2011)

 
Quarterly Reports

 
8-K

 
Other

Chelsea Therapeutics International 10-K 2014

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

 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013, OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM __________TO__________
 
Commission file number 000-51462
 

 
(Exact name of Registrant as specified in its charter)
 

Delaware

20-3174202

(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
3530 Toringdon Way, Suite 200, Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
 
(704) 341-1516
(Registrant’s telephone number, including area code)
 

 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.0001 Par Value
  
Nasdaq Capital Market
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes ¨  No x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨  No x
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x  No ¨
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes x  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
 
Large accelerated filer  ¨
Accelerated filer  x
 
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x
 
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, based on the closing price of the Registrant’s common stock on June 28, 2013 ($2.30 per share) was approximately $142,400,000.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
At March 10, 2014, 78,433,916 shares of the Registrant's common stock, $.0001 par value per share, were outstanding.
 
 
Portions of the Registrant’s definitive Proxy Statement to be filed for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 
 
 
ANNUAL REPORT ON FORM 10-K
 
 
 
 
Page
 
 
 
PART I
 
 
 
 
Item 1.
Business
1
 
 
 
Item 1A.
Risk Factors
16
 
 
 
Item 1B.
Unresolved Staff Comments
31
 
 
 
Item 2.
Properties
31
 
 
 
Item 3.
Legal Proceedings
31
 
 
 
Item 4.
Mine Safety Disclosures
32
 
 
 
PART II
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
32
 
 
 
Item 6.
Selected Consolidated Financial Data
33
 
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
34
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
49
 
 
 
Item 8.
Financial Statements and Supplementary Data
50
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
50
 
 
 
Item 9A.
Controls and Procedures
51
 
 
 
Item 9B.
Other Information
52
 
 
 
PART III
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
53
 
 
 
Item 11.
Executive Compensation
53
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
53
 
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
53
 
 
 
Item 14.
Principal Accounting Fees and Services
53
 
 
 
PART IV
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
54
 
 
 
SIGNATURES
57
 
 
 
 
Except for the historical information contained herein, the matters set forth in this Report include forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially.  These risks and uncertainties are detailed throughout the report and will be further discussed from time to time in our periodic reports filed with the Securities and Exchange Commission.  The forward-looking statements included in this Report speak only as of the date hereof.
 
ITEM 1.          BUSINESS.
 
 
We are a development stage pharmaceutical company that seeks to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop pharmaceutical products that address important unmet medical needs or offer improved alternatives to current methods of treatment. We are focused on evaluating strategic opportunities while also planning for the commercialization of Northera™ (droxidopa), a novel therapeutic agent, for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with primary autonomic failure (Parkinson’s disease, or PD, multiple systems atrophy, or MSA, and pure autonomic failure, or PAF), dopamine β-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. Northera was granted accelerated approval for marketing in the United States by the U.S. Food and Drug Administration, or FDA, in February 2014, with a commitment for an additional confirmatory study.
 
In addition, we have interest in evaluating droxidopa in other conditions and diseases in which we hypothesize norepinephrine may play a role, including intradialytic hypotension, or IDH, fibromyalgia, freezing of gait and adult attention deficit hyperactivity disorder. We also have a portfolio of metabolically inert antifolates that we have studied as a potential treatment of rheumatoid arthritis and that might also be suitable for the treatment of multiple other autoimmune disorders including psoriasis, Crohn’s disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, cancer and other immunological disorders.
 
 
Our mission is to create long-term stockholder value by acquiring, developing and commercializing innovative products for the treatment of a variety of human diseases that address important unmet medical needs or offer improved, cost-effective alternatives to current methods of treatment. Since inception in 2002, we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, raising capital, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the European Medicines Agency, or EMA, and other regulatory agencies and undertaking preclinical and clinical trials of our product candidates. We are a development stage company and have generated no revenues since inception. We do not anticipate generating any product revenue until and unless we successfully begin selling Northera, which was approved by the FDA in February 2014. None of our other pharmaceutical candidates have received approval from the FDA or equivalent foreign regulatory bodies. We could potentially generate revenue prior to market launch of Northera by entering into strategic agreements including out-licensing, co-development or co-promotion of Northera or any of our other drug candidates. Currently, operating expenses are being funded with proceeds from equity financings and, to a much lesser extent, through the issuance of our common stock pursuant to option or warrant exercises.
 
NORTHERA™ (droxidopa)
U.S. Approval
 
NortheraTM (droxidopa), our most advanced product candidate, is an orally active synthetic precursor of norepinephrine. Northera was approved by the FDA in February 2014 for marketing in the United States for the treatment of orthostatic dizziness, lightheadedness, or the “feeling that you are about to black out” in adult patients with symptomatic neurogenic orthostatic hypotension caused by primary autonomic failure (PD, MSA and PAF), DBH deficiency, and non-diabetic autonomic neuropathy. Orthostatic hypotension is a sustained decrease in blood pressure when a person assumes a standing position and is characterized by lightheadedness, dizziness, blurred vision and syncope. There are multiple known causes for orthostatic hypotension including those that are considered cardiovascular, endocrine and neurological (or neurogenic) in nature. Orthostatic hypotension that is neurogenic in nature is believed to result from a deficient release and/or synthesis of norepinephrine, a neurotransmitter used by autonomic nerves to send signals to the blood vessels and the heart. This condition is most commonly associated with PD, PAF and MSA, and may have significant impact on sufferers’ quality of life, with some patients unable to stand unaided for more than a few minutes a day.
 
 
1

 
Northera is the first and only therapy approved by the FDA which demonstrates symptomatic benefit in patients with Neurogenic OH. We anticipate that Northera sales will begin in the second half of 2014, at the earliest, and anticipate that it will be made available in 100 mg, 200 mg and 300 mg doses. The Northera approval was granted under the FDA’s accelerated approval program, which allows for conditional approval of a medicine that fills a serious unmet medical need, provided additional confirmatory studies are conducted. To this end, a large, multi-center, placebo-controlled, randomized withdrawal study, which includes a 4-week randomized withdrawal phase preceded by a three month open label run-in phase, designed with the goal of definitively establishing the durability of the clinical benefits of Northera, has been preliminarily agreed to with the FDA. The FDA has also agreed that a period of seven years to complete the study, given the size of the study and orphan treatment population. We had initiated a new clinical study of Northera in Neurogenic OH, currently designated as Study 401, in which patient enrollment began in the fourth quarter of 2013. Study 401 was initially designed to provide flexibility depending on the requirements of the FDA as to a post-approval efficacy study. The study is a multi-center, placebo-controlled, randomized double-blind induction study. Given the updated guidance from the FDA for a withdrawal-designed post-approval confirmatory efficacy study, the design of Study 401, as an induction study, does not meet the requirements of the FDA and, as such, management will work with the FDA to evaluate each of the components of our clinical program for Northera.
 
We resubmitted our Northera NDA to the FDA in July 2013 with data from Study 306B and other studies as a complete response to the March 2012 Complete Response Letter, or CRL. On September 4, 2013, we announced that the FDA had acknowledged receipt of the Northera NDA resubmission, deemed the resubmission a complete response to its March 2012 CRL and assigned a new PDUFA goal date of February 14, 2014, although that date was later extended to February 18, 2014 based on a weather-related closure of the FDA offices. Further, on January 14, 2014, our Northera NDA was reviewed by the Cardiovascular and Renal Drug Advisory Committee, or CRDAC. The CRDAC recommended, in a 16 to 1 vote, approval of Northera for the treatment of Neurogenic OH.
 
In 2007, the FDA granted orphan drug status to Northera for the treatment of symptomatic Neurogenic OH, providing for seven years of marketing exclusivity from the date of NDA approval, and the EMA granted orphan medicinal product designation for the treatment of orthostatic hypotension in patients with PAF and MSA, providing for ten years of marketing exclusivity from the date it might be approved. Although we can expect 10 years of data exclusivity for Northera upon approval in Europe as a new chemical entity, orphan medicinal product status could impact regulatory approval requirements in Europe, potentially impacting the time and costs associated with our development of Northera for this market. Following an initial discussion in 2006, we have conducted only limited discussions of the specifics of our clinical program for Northera with the EMA and the regulatory agencies of several European Union member countries and it is unclear if our current program will be acceptable for marketing approval in the European Union or if we may be required to conduct additional clinical trials.
 
In Japan, droxidopa has been approved since 1989 and is marketed by Dainippon Sumitomo Pharma Co., Ltd., or DSP, for the treatment of frozen gait and dizziness on standing in PD, orthostatic hypotension, syncope and dizziness on standing in MSA (Shy-Drager Syndrome) and familial amyloid polyneuropathy and symptoms of orthostatic hypotension in hemodialytic patients. In May 2006, we entered into an agreement with DSP for an exclusive, sub-licensable license and rights to certain intellectual property and proprietary information (the “DSP Agreement”) relating to droxidopa including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation. Pursuant to the DSP Agreement, DSP reserved rights to market droxidopa in Japan, Korea, China and Taiwan, precluding our commercialization of droxidopa in those markets. We agreed to pay DSP and/or its designees (1) royalties on the sales should any compound be approved for commercial sale, and (2) milestone payments, payable upon achievement of milestones as defined in the DSP Agreement.
 
Northera Clinical Trial Program
 
The FDA approval of Northera is based on clinical studies which examined the efficacy of Northera both in the short-term (1 to 2 weeks) and over longer-term periods (8 weeks; 3 months). Studies 301 and 306B showed a treatment effect of Northera at one week of treatment, but none of the studies demonstrated continued, statistically significant efficacy beyond 2 weeks of treatment.
 
 
2

 
Conducted in the United States, Study 306B was a multi-center, double-blind, randomized, placebo-controlled, parallel-group study in patients with symptomatic Neurogenic OH from PD. Efficacy was measured using the OHSA Item #1 score, “dizziness, lightheadedness, feeling faint, and feeling like you might black out,” in patients who had completed titration and 1 week of maintenance therapy. After this treatment period, patients treated with Northera showed a statistically significant decrease in their dizziness scores compared to placebo (p = 0.028).
 
Study 301 was a multicenter, multinational, double-blind, randomized, placebo-controlled, parallel-group study in patients with symptomatic Neurogenic OH caused by PD, PAF, or MSA. Efficacy was measured using the Orthostatic Hypotension Questionnaire, or OHQ, a patient reported outcome that measures symptoms of Neurogenic OH and their impact on the patient’s ability to perform daily activities that require standing and walking. A statistically significant treatment effect was not demonstrated on OHQ (treatment effect of 0.4 unit, p-value=0.19). After 1 week of treatment, patients treated with Northera showed a mean 0.7 unit decrease in their dizziness scores compared to placebo (p=0.06). These data exclude the results of two investigative sites located in Ukraine as the FDA has expressed significant concerns regarding the disproportionate results of these two sites.
 
Study 302 was a placebo-controlled 2-week randomized withdrawal study of Northera in patients with symptomatic Neurogenic OH. Study 303 was an extension of studies 301 and 302, where patients received their titrated dose of Northera for 3 months and then entered a 2-week randomized withdrawal phase. Neither study showed statistically significant differences between treatment arms on their primary endpoints.
 
Product Pipeline
 
In addition to droxidopa, we have devoted resources to the development of a portfolio of molecules for the treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically-inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological disorders, including two clinical stage product candidates designated as CH-1504 and CH-4051.
 
While management believes that further studies might provide evidence of enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the planned completion of the Northera development and commercialization program in Neurogenic OH. As such, there are no immediate activities planned for the further development of CH-4051 although we do continue to pursue potential out-licensing opportunities for this portfolio of molecules.
 
Complementing our autoimmune/inflammatory program is a second platform consisting of a portfolio of therapeutics targeting immune-mediated inflammatory disorders and transplantation, known as our I-3D portfolio. We currently have no work underway related to this portfolio.
 
To date, we have not generated any revenues from our drug candidates.
 
Partnering or Other Strategic Opportunities
 
We continue to pursue out-licensing opportunities for our antifolate program with potential partners to gauge their interest in licensing this portfolio of compounds. We believe a partner, with access to more significant resources, may be able to manage the necessary additional trials and potential global commercialization efforts more effectively and with less risk than we could and, accordingly, our current strategy is to pursue such a partnership.
 
Similarly, we continue to evaluate all available strategic options, with the goal of maximizing shareholder value, including, but not limited to, the potential sale of the Company or potential licensing and/or partnering arrangements for Northera in North America, Europe and other markets. Any such partnership would aim to provide significant value to us and our stockholders, while maximizing the opportunities for Northera in global markets.
 
3

 
 
Our plan of operation is to continue implementing our business strategy, with specific focus on evaluating strategic opportunities while also planning for the commercialization and launch of Northera in the United States. As we have in the past, we plan to continue exploring the feasibility of other licensed or newly developed compounds and to expand our drug candidate portfolio by acquiring additional drug technologies for development as our resources permit. We expect our principal expenditures during 2014 to include:
 
⋅        operating expenses, including general and administrative and business development expenses;
⋅        marketing, sales, distribution, manufacturing, medical science and other pre-launch and post-launch commercialization expenses for Northera;
⋅        costs for the purchase of inventory for commercial resale; and
⋅        product development expenses, including the costs incurred with respect to our clinical trials for Northera.
 
As part of meeting our commercialization needs, we plan to contract with a contract sales organization, or CSO, to provide sales representatives, sales managers, sales operations and back office services. In addition, we plan to hire or enter into contracts for additional manufacturing, scientific, regulatory, sales, marketing, finance, administration and operations staff. We also intend to continue using clinical research organizations and third parties to perform much of our clinical studies and manufacturing.
 
We have retained a management team with leading core competencies and expertise in numerous fields, including manufacturing, clinical drug development, regulatory affairs, finance and business development. We also maintain relationships with advisors with expertise in Neurogenic OH, some of which had been previously engaged in the planning for our 2012 anticipated launch of Northera. Our management and advisors are comprised of experienced pharmaceutical and biotechnology industry veterans and respected experts.
 
 
Our operating company was incorporated in Delaware in April 2002 under the name Aspen Therapeutics, Inc., and changed its name to Chelsea Therapeutics, Inc. in July 2004. On February 11, 2005, Chelsea Therapeutics, Inc. completed a merger with Ivory Capital Corporation, a publicly traded Colorado corporation formed in May 1988. At the time of the transaction, Ivory Capital had only nominal assets and no operating activities. In connection with this merger transaction, a wholly owned subsidiary of Ivory Capital Corporation merged with and into Chelsea Therapeutics, Inc., with Chelsea Therapeutics, Inc. remaining as the surviving corporation and a wholly owned subsidiary of Ivory Capital Corporation. In connection with the merger, the former stockholders of Chelsea Therapeutics, Inc. received 96.75% percent of our outstanding equity on a fully diluted basis. Pursuant to the terms of the merger, the sole officer and director of Ivory Capital Corporation prior to the merger was replaced with the officers and directors of Chelsea Therapeutics, Inc.
 
On June 17, 2005, Ivory Capital Corporation formed a wholly owned subsidiary in Delaware named Chelsea Therapeutics International, Ltd. for the purposes of reincorporating in Delaware. On July 28, 2005, Ivory Capital Corporation merged with Chelsea Therapeutics International, Ltd., with Chelsea Therapeutics International, Ltd. as the surviving corporation. As a result, Chelsea Therapeutics International, Ltd. is the public reporting company and is the 100% owner of Chelsea Therapeutics, Inc., its operating subsidiary.
 
Except where the context provides otherwise, references to “we,” “us,” “our” and similar terms mean Chelsea Therapeutics International, Ltd., Ivory Capital Corporation and Chelsea Therapeutics, Inc. When we refer to business and financial information relating to periods prior to December 31, 2004, we are referring to the business and financial information of Chelsea Therapeutics, Inc. unless the context requires otherwise. When we refer to business and financial information for periods between January 1, 2005 and July 28, 2005, we are referring to the business and financial information of Ivory Capital Corporation.
 
Products Under Development
 
DROXIDOPA
 
 
Droxidopa, a synthetic amino acid, is converted by the body into norepinephrine and, as a prodrug of norepinephrine, provides replacement therapy for norepinephrine deficiency. Droxidopa was approved for marketing in the United States by the FDA in February 2014, under the brand name Northera, for the treatment of orthostatic dizziness, lightheadedness, or the “feeling that you are about to black out” in adult patients with symptomatic neurogenic orthostatic hypotension caused by primary autonomic failure (PD, MSA and PAF), DBH deficiency, and non-diabetic autonomic neuropathy.
 
 
4

 
Norepinephrine is both a hormone and a neurotransmitter. As a hormone, secreted by the adrenal gland, it works alongside epinephrine/adrenaline to give the body sudden energy in times of stress, known as the "fight or flight" response. As a neurotransmitter, it passes nerve impulses from one neuron to the next. While norepinephrine, as a catecholamine, does not penetrate the blood-brain barrier, droxidopa, as a neutral amino acid, is able to do so thus providing both a peripheral and central effect on circulating norepinephrine levels. By producing and replenishing depleted norepinephrine via endogenous enzymatic pathways, droxidopa is believed to allow for the re-uptake of norepinephrine into peripheral and central nervous system neurons.
 
Droxidopa is currently approved and marketed by DSP in Japan for the treatment of frozen gait and dizziness on standing in PD, orthostatic hypotension, syncope and dizziness on standing in MSA (Shy-Drager Syndrome) and familial amyloid polyneuropathy and symptoms of orthostatic hypotension in hemodialytic patients. Receiving initial Japanese marketing approval in 1989, droxidopa has historically generated annual revenues of up to approximately $50 million in Japan. In addition to the indications studied by DSP and subsequently approved in Japan and the United States, other conditions that may potentially be treated with droxidopa include fibromyalgia, attention deficit hyperactivity disorder, or ADHD and other indications in which norepinephrine deficiencies are believed to play a role. However, safety and efficacy in such additional indications has not been proven and we are not authorized to market or promote the use of Northera for such indications in the United States or elsewhere.
 
Post Approval Studies
 
As part of the accelerated approval granted by the FDA under 21 CFR 314.510, we are required to conduct an additional clinical study to verify and describe the long term clinical benefit of Northera. While final design and procedural aspects of this study are still under discussion with the FDA, we anticipate the trial will be a 4-week, double-blind, randomized, withdrawal study, after 3 months of open label treatment. The primary endpoint will be the mean change in Orthostatic Hypotension Symptom Assessment (OHSA) Item 1, “dizziness, lightheadedness, feeling faint, and feeling like you might black out,” from randomization to the end of the 4 week randomized withdrawal period. This study is expected to enroll up to 1,400 patients over seven years.
 
 
While we currently have no firm plans to seek approval for droxidopa in additional indications, we have completed some clinical work in other potential indications and have established an extra-mural development program. Our extra-mural development program enables independent investigators to conduct clinical trials in their respective fields of expertise to maximize the study of additional therapeutic applications of droxidopa while conserving capital. We plan to continue exploring opportunities to support additional, investigator-led studies of droxidopa in indications for which we believe a strong clinical rationale exists.
 
Intradialytic Hypotension (IDH)
 
IDH is another indication for which DSP conducted extensive clinical evaluation. Pivotal clinical studies conducted by DSP have demonstrated the efficacy of droxidopa in the prevention of vertigo, dizziness and weakness associated with hypotension in hemodialysis patients. After showing benefit in clinical trials, DSP received expanded marketing approval in Japan for this indication in 2000.
 
IDH is the most common adverse event during routine hemodialysis. IDH is often defined as a decrease in systolic blood pressure by ≥ 20 mm Hg or a decrease in mean arterial pressure by 10 mm Hg. IDH has been reported in 15-25% of all hemodialysis patients, with elderly patients reporting an even higher incidence. Many adverse hemodialysis events, including headaches, lightheadedness, nausea, cramps, and seizures, are associated with IDH. These complications can routinely interrupt dialysis sessions, resulting in insufficient uremia toxin removal and necessitating repetition of the procedure. Interruptions due to IDH increase the costs of both the dialysis treatment sessions and the long-term care of less healthy hemodialysis patients.
 
In 2009, we reported results from a double-blind, placebo controlled Phase II trial comparing 400mg and 600mg of droxidopa to placebo. The study recruited 85 patients at 15 sites in the United States. Droxidopa demonstrated a dose dependent benefit across multiple, clinically relevant assessment criteria for IDH. While the study did not achieve a statistically significant improvement in mean arterial blood pressure during dialysis, the prospective primary endpoint for the study, droxidopa demonstrated a significant benefit in limiting the severity of the drop (nadir) in blood pressure during treatment.
 
 
5

 
 
Fibromyalgia is a polysymptomatic syndrome characterized by chronic, widespread musculoskeletal pain, multiple tender points, abnormal pain sensitivity, and is often accompanied by severe fatigue, insomnia and mood symptoms. According to the American College of Rheumatology, fibromyalgia is the second most commonly diagnosed condition in rheumatology clinics in the United States after osteoarthritis and is estimated to affect over six million Americans. While the precise etiology of fibromyalgia remains unknown, current research includes the role of norepinephrine reuptake and availability in the central nervous system. Norepinephrine, a widely used neurotransmitter in the central and peripheral nervous systems, has long been linked to both chronic pain and depression. While norepinephrine, as a catecholamine, does not penetrate the blood-brain barrier, droxidopa, as a neutral amino acid, is able to do so thus providing both a peripheral and central effect on circulating norepinephrine levels. In prior studies conducted by DSP, droxidopa has shown statistically significant dose-dependent analgesia in chronic pain.
 
In 2011, we reported results of a Phase II dose-finding study designed to evaluate the safety and determine the potential therapeutic dose range of droxidopa, alone or in combination with carbidopa, which might be effective for the treatment of fibromyalgia. Topline results of the study indicated a dose response with the highest dose of droxidopa, 600 mg three times daily, or TID, demonstrating a 6.2-point average improvement from a baseline score of 23.00 on the Short Form McGill Questionnaire (SF-MPQ) at the end of the nine-week treatment period, the study’s primary endpoint. This reflected a 3.2 unit improvement over placebo on the SF-MPQ total pain score. Although the study was not designed to demonstrate statistical significance given the limited number of patients per arm, results of the study show a mean change in pain as measured by the visual analog scale (VAS) of -1.64 for patients treated with droxidopa monotherapy compared to a mean change of -0.90 for placebo. Interestingly, administration of droxidopa as a monotherapy proved more effective than droxidopa/carbidopa combination therapy in this study. The Phase II trial, conducted in the U.K., was a multi-center, randomized, double-blind, placebo-controlled, dose response, factorial parallel group study evaluating 120 patients equally randomized to receive droxidopa monotherapy, carbidopa monotherapy, droxidopa/carbidopa combination therapy or placebo over a 9-week treatment period.
 
While doctors have used antidepressants and pain drugs for years, in June 2007, the FDA granted its first approval for the treatment of fibromyalgia to Pfizer’s Lyrica®, which was already used to treat epilepsy and neuropathic pain. U.S. sales of Lyrica® in 2013 totaled $2.4 billion. Eli Lilly received approval in 2008 to market Cymbalta®, a selective serotonin and norepinephrine reuptake inhibitor, to treat fibromyalgia and generated sales in all indications of $5.1 billion in 2013. Cypress Biosciences, with their partner Forest Laboratories, received FDA approval in early 2009 for Savella® for the treatment of fibromyalgia. Savella® is a norepinephrine serotonin reuptake inhibitor that increases the level of norepinephrine more than it does serotonin and had U.S. sales of $105 million in fiscal 2013.
 
Investigator-led Studies
 
To facilitate research in additional indications and maximize the long-term development potential, we have provided support to several investigator-led studies of droxidopa, including a study completed in September 2012 to measure the blood pressure effect of droxidopa in hypotensive individuals with spinal cord injury, or SCI, and a study completed in 2011 in adult Attention Deficit Hyperactivity Disorder, or ADHD. We are also currently providing drug product to support an investigator-led, single-site study to measure the effect of droxidopa on low and normal supine blood pressure variants of orthostatic intolerance and an investigator-led, single-site study to measure the effect of droxidopa, in combination with pyridostigmine, on orthostatic hypotension. We anticipate that an additional investigator-led, single-site study to investigate the effect of droxidopa on freezing of gait and cognition in patients with PD will begin during 2014. For studies conducted under investigator-sponsored INDs, we have limited control over the timing for initiating or completing these studies and, therefore, cannot predict with any certainty when data from these programs will be available.
 
 
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In July 2011, we announced positive top-line results of an investigator-led Phase II clinical study of droxidopa in combination with carbidopa in 20 adults with ADHD indicating that droxidopa dramatically improved patients’ mean score on the adult ADHD Investigator Symptom Rating Scale, or AISRS. The AISRS is a standardized, validated rating scale for assessing symptoms of adult ADHD and for measuring response to treatment. Upon enrollment, patients in the study had a mean AISRS score of 34. After three weeks of open-label droxidopa monotherapy (titration from 200mg-600mg TID), the mean AISRS score decreased by approximately 47% to 19 (p<0.0001). The reduction in AISRS score was maintained with the addition of carbidopa (25mg or 50mg) for another three weeks.
 
In September 2012, results from an investigator-led, Phase II study to evaluate droxidopa for the treatment of orthostatic hypotension resulting from SCI suggest that low to moderate doses of droxidopa do not worsen supine increases in blood pressure in persons with SCI.  Although droxidopa increased seated blood pressure in a dose-dependent manner, subjects remained relatively hypotensive.  Additional studies would be necessary to determine the effective dose of droxidopa that normalizes blood pressure in this population.
 
We plan to continue working with key opinion leaders to identify and evaluate additional potential indications for droxidopa and may provide droxidopa drug product for future studies when deemed appropriate and as funding and availability of drug substance permits.
 
Northera Competition
 
Neurogenic Orthostatic Hypotension
 
Midodrine (ProAmatine®)
 
Midodrine had been the only FDA-approved therapeutic for the treatment of orthostatic hypotension prior to the approval of Northera. Midodrine’s product label contains a black box warning for the side effect of supine hypertension, along with the statement that midodrine has not shown benefit to patients’ activities of daily living, or symptomatic/functional benefit. In August 2010, the FDA proposed removing midodrine from the market because required post-approval studies to verify the clinical benefit of the drug have not been satisfactorily completed by Shire plc, the holder of the NDA for ProAmatine™ (midodrine HCL). In January 2011, the FDA announced the opening of a public docket (FDA-2010-N-0475) to provide a forum to facilitate communication regarding the conduct of clinical trials needed to support continued marketing authorization for midodrine.
 
In December 2011, Shire reached an agreement with the FDA and in February 2012, the FDA’s Center for Drug Evaluation, or CDER, also agreed to allow Shire to conduct two additional clinical trials to demonstrate the clinical benefit of ProAmatine by September 2014. While these trials are ongoing, the proposal to withdraw midodrine from the market has been placed on hold. Should the FDA determine that Shire has failed to adhere to the terms or timeframes specified in this agreement, or the agreed upon trials fail to verify clinical benefit, Shire has agreed to have the FDA make decisions on midodrine without a public hearing, including the potential for withdrawing the marketing approval for midodrine.
 
Given that midodrine had been the only approved compound for orthostatic hypotension in the U.S, its removal might facilitate higher sales and/or more rapid acceptance of Northera in this indication. However, the FDA has never removed a drug under similar circumstances and we can provide no assurance that they will do so in the case of midodrine or that any such removal would have an impact on the sales and acceptance of Northera.
 
Other than the increase in blood pressure caused by vasoconstriction, additional midodrine side effects include paresthesia (tingling), piloerection (goosebumps), dysuria (painful urination), and pruritus (itching). The most recently available information shows annual sales (branded and generic) in 2013 of approximately $51 million in the United States. In addition to Shire’s ProAmatine brand, Mylan Pharmaceuticals, Impax Laboratories (Global Pharmaceuticals), Sandoz, Apotex and Upsher-Smith are generic manufacturers of the compound.
 
Fludrocortisone (Florinef®)
 
Fludrocortisone is also widely used in the treatment of orthostatic hypotension although this specific indication has not been approved by the FDA. Fludrocortisone is a synthetic adrenocortical steroid possessing very potent mineralocorticoid properties and high glucocorticoid activity. Fludrocortisone, in small oral doses (0.1mg.) produces marked sodium retention and increased urinary potassium excretion leading to enhanced plasma volume and a rise in blood pressure. Side effects include hypertension, water and sodium retention and potassium, or K+, loss. Fludrocortisone is not FDA-approved for Neurogenic OH.
 
 
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Northera Market
 
We currently estimate that nearly 300,000 patients suffer from chronic, symptomatic Neurogenic OH in the United States and the European Union combined. This condition is most commonly associated with PD, PAF and MSA, the latter encompassing disorders previously known as striatonigral degeneration, olivoponto-cerebellar atrophy and the Shy-Drager syndrome. In addition to the broader symptoms and impact on activities of daily living, Neurogenic OH significantly increases the risk of falling in patients with PD and is believed to be responsible for significant healthcare costs due to the high incidence of falls-related injuries in this patient population, particularly in elderly patients. According to the Centers for Disease Control and Prevention, the cost of medical care for falls-related injuries was estimated to be approximately $19 billion in 2000 and is estimated to grow to $55 billion by 2020. The National Center for Injury Prevention and Control estimates this cost to be between $82 billion and $240 billion with over 500,000 hospitalizations in 2040. Preliminary data from our studies suggests that the use of Northera by patients with Neurogenic OH associated with PD might result in a reduction in falls in these patients and provides a rationale for continued interest in evaluating the impact of Northera on falls. Reducing serious falls by 30% in this population, by our estimate, could result in a potential annual savings of approximately $5 billion in falls-related costs, including the costs of extended care in skilled nursing facilities. The FDA has not evaluated or approved the use of Northera for the prevention of falls.
 
Metabolically Inert Antifolates
 
 
Our portfolio of novel antifolate compounds was originally developed by Dr. M. Gopal Nair and licensed to us in 2004. A library of orally available and metabolically inert antifolate compounds with potent autoimmune, anti-inflammatory and anti-tumor properties, these compounds are engineered to treat a broad range of immunological disorders with fewer harmful and unpleasant side effects than those typically associated with classical antifolates such as methotrexate, or MTX, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases.
 
Drug candidates from this portfolio, including both clinical candidates CH-1504 and CH-4051, inhibit dihydrofolate reductase, an enzyme required for cell proliferation, but, due to the lack of metabolism, are devoid of the metabolites believed to play a significant role in the liver and kidney toxicities associated with long-term use of MTX and show a clinically relevant decrease in toxicity compared to MTX.
 
We believe these unique antifolates might have clinical advantages over MTX as they might have less toxicity and increased tolerability while maintaining equal or potentially greater efficacy. Potential advantages over existing therapies, supported by our preclinical and clinical work to date, include:
 
⋅        faster onset of action;
⋅        better tolerability; and
⋅        superior toxicity profile.
 
Diseases that may potentially be treated with metabolically inert antifolates include rheumatoid arthritis, psoriasis, Crohn’s disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, cancer and other immunological disorders.
 
 
CH-1504 has completed Phase II trials in rheumatoid arthritis. While we do not intend to conduct additional trials or make further investments in the development of CH-1504, clinical work related to this compound might provide meaningful informative data supporting the development of additional compounds in this portfolio. Based on preclinical and clinical findings, we focused our clinical resources on the development of CH-4051, the second clinical stage compound in this portfolio and the more potent L-isomer of CH-1504. CH-4051 has been studied in rheumatoid arthritis as its lead indication, having completed a Phase I trial in April 2009 and a Phase II trial for the treatment of rheumatoid arthritis in May 2012.
 
 
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Rheumatoid arthritis is a chronic inflammatory disease that leads to pain, stiffness, swelling and limitation in the motion and function of multiple joints. If left untreated, rheumatoid arthritis can produce serious destruction of joints that frequently leads to permanent disability. Though the joints are the principal body part affected by rheumatoid arthritis, inflammation can develop in organs and other body parts as well. The disease currently affects over two million Americans, almost 1% of the population, and is two to three times more prevalent in women. Onset can occur at any point in life with most patients developing the disease between the ages of 35 and 50.
 
Given the variation in the metabolism of MTX, we believe that our novel antifolates might have significant clinical advantages over MTX in rheumatoid arthritis patients due to metabolic stability. Because of this stability, it can be hypothesized that in those patients who fail to achieve a sufficient therapeutic response to MTX as a result of either a slower or more rapid metabolism of MTX, a non-metabolized antifolate might be clinically efficacious since it is not deactivated by these enzymatic processes.
 
 
In parallel to our clinical development of CH-1504, we continued additional preclinical evaluation, including formulation work on the enantiomers of CH-1504. After conducting studies to determine the relative potency of the L- and D-isomers, we found that the L-isomer, now identified as CH-4051, was the more potent of the two thus prompting additional preclinical, and subsequently, clinical evaluation of CH-4051.
 
In May 2012, we announced the top-line results of our completed multinational, 12-week, double-blind Phase II trial of CH-4051 in patients with rheumatoid arthritis, designed to compare the efficacy and tolerability of CH-4051 against methotrexate, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. This Phase II trial was conducted in 244 patients with rheumatoid arthritis who experience an inadequate response to methotrexate treatment. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. CH-4051 was found to be safe and well-tolerated in the study, with no dose-limiting toxicities or clear differences in the overall adverse event rate between methotrexate and the CH-4051 treatment groups.
 
While management believes that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the planned completion of the Northera development and commercialization program in Neurogenic OH. As such, there are no immediate activities planned for the further development of CH-4051 although we do continue to discuss potential out-licensing opportunities for this portfolio of molecules.
 
 
When available resources allow, we might continue our evaluation of our antifolate portfolio in other indications. Additional potential indications for our antifolates include psoriasis, Crohn’s disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, certain cancers and other immunological disorders. If and as our antifolates advance in rheumatoid arthritis studies, we could begin to focus on the timing of clinical programs for our antifolate compounds in these additional indications.
 
 
There are many different drugs that are used to treat rheumatoid arthritis, including hormones, small molecules and biologics, which are manufactured using recombinant technology. The normal course of therapy for rheumatoid arthritis begins with analgesics, such as aspirin, and non-steroidal anti-inflammatory agents, followed by disease modifying anti-rheumatic drugs, or DMARDs, including low dose steroids, MTX, leflunomide and biologics, and, finally, reconstructive joint surgery for patients failing all therapies. DMARDs are the only drugs that have been shown to alter the course of the disease.
 
 
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Currently Available DMARDs. MTX, a classical antifolate, was originally used as a chemotherapy drug to treat certain kinds of cancer, but was also found to be beneficial in treating inflammatory arthritis and psoriasis. MTX is generic and marketed in both injectable and oral formulations by multiple companies including Teva, Boehringer Ingelheim Pharma, Mayne Pharma and Mylan Laboratories. Traditional oral DMARDs include MTX, leflunomide, auranofin, sulfaszlazine, cyclosporine, hydroxychloroquine, azathioprine and penicillamine. In November 2012, the FDA approved the newest oral small molecule DMARD, Pfizer’s JAK3 inhibitor (Xeljanz, formerly tofacitinib) for the treatment of rheumatoid arthritis. We believe that with significant ACR scores and good tolerability in addition to the benefit of oral delivery, Xeljanz may be a favorable alternative to the currently approved biological agents.
 
Currently Available Biologics. Although there have been positive results for biologics, we believe physicians are likely to reserve anti-tumor necrosis factor, or anti-TNF, and other biologic therapies for patients who have failed or had a limited response to initial MTX monotherapy. Despite increased aggressiveness of treating physicians and easier reimbursement, we believe front line use with biologics either in monotherapy or in combination with MTX is unlikely to occur due to their high costs and side effect profile. Humira®, Enbrel® and Remicade® are TNF blockers that have been approved by the FDA and are the top selling biologics for rheumatoid arthritis with 2013 U.S. sales of $5.4 billion, $4.6 billion and $4 billion, respectively. These three TNF blockers are administered to patients by injection and can be used alone or in combination with other DMARDs, such as MTX, or NSAIDs such as aspirin or ibuprofen. Other biologics available for the treatment of rheumatoid arthritis are Simponi®, Rituxan®, Orencia®, Cimzia®, Actemra®, and Kineret®.
 
DMARDs and Biologics in Development. There are numerous small molecule oral DMARDs and biologics in various stages of clinical development for rheumatoid arthritis. We anticipate that, like most biologics, small molecule oral DMARDs would work best in combination with MTX or similar antifolates and should not significantly impact the opportunity available to our antifolate portfolio.
 
Antifolate Market
 
Given the size of the rheumatoid arthritis market, the vast sales forces required to compete in this market, and the necessary infrastructure required, our marketing strategy for our antifolates would include contracting with or licensing to third parties. It is possible that we might directly commercialize or co-promote our antifolate compounds in the smaller therapeutic indications such as psoriasis or inflammatory bowel disease. Out-licensing arrangements might be negotiated and entered into prior to one or more of our antifolate drug candidates being approved for marketing.
 
I-3D PORTFOLIO
 
In May 2006, we signed an agreement with Active Biotech AB for the co-development and commercialization of the I-3D portfolio, a group of orally active compounds that inhibit the enzyme dihydroorotate dehydrogenase, or DHODH, for the treatment of autoimmune diseases and transplant rejection. At the time of the agreement, Active Biotech had already isolated more than 15 compounds and conducted extensive preclinical modeling resulting in the identification of two potential lead compounds.
 
Having previously demonstrated proof of concept in both rheumatoid arthritis and transplant rejection in animal models, the joint development committee selected AB-224050 as the first I-3D compound to undergo IND-enabling toxicology studies during the third quarter of 2006. As part of the ongoing evaluation and preparation for Phase I trials, the joint development committee initiated a Phase 0 (micro-dosing) study to evaluate the half-life of AB-224050 in humans in the first quarter of 2007.   Based on the results of the micro-dosing study and other ongoing preclinical activity, it was determined that, while demonstrating a significantly shorter half-life than Arava®, AB-224050 would require additional work prior to the commencement of Phase I clinical trials.  In 2007, the joint development committee continued preclinical optimization of AB-224050 and conducted further comparisons of AB-224050 versus other compounds in the I-3D.
 
In April 2008, following a decision to focus its resources on its immunomodulatory compounds, Active Biotech AB discontinued its participation in the I-3D co-development program and granted us exclusive global rights to the portfolio in exchange for royalties on future sales. As a result of our limited funding and strategic development efforts associated with the development of droxidopa, we currently do not have any active clinical or preclinical programs associated with compounds from this portfolio.
 
 
10

 
Government Regulation
 
The FDA and foreign regulatory agencies regulate many aspects of product development and marketing of our product candidates including research, development, manufacture, labeling, promotion, advertising, distribution, and marketing. Meeting the various U.S. and international regulatory requirements often takes several years, and the actual time required can vary substantially based upon the type, complexity and novelty of the pharmaceutical product and the therapeutic indication. Furthermore, meeting the regulatory requirements as well as maintaining compliance often necessitates implementing costly procedures. Failure to comply with the applicable requirements mandated by the FDA and other regulatory agencies can result in administrative or judicial sanctions and/or fines. In the United States, such sanctions may include the FDA’s refusal to approve pending NDAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
 
Success in preclinical or early-stage clinical trials does not ensure success in late-stage clinical trials. Data obtained from preclinical and early stage clinical activities are not always conclusive and are susceptible to varying interpretations that could negatively impact our trials and delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval might be significantly limited to specific indications or uses. After regulatory approval is obtained and the product becomes available on the market, the later discovery, over time, of previously unknown problems with a product might result in restrictions on the product or even complete withdrawal of the product from the market.
 
 
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and those regulations are published in the Federal Register. None of our drugs may be marketed in the United States until the drug has received FDA approval. The process required before a drug can be marketed in the United States includes:
 
· preclinical laboratory tests, animal pharmacology and toxicology studies, and formulation studies;
· submission to the FDA of an investigational new drug application, or IND, for human clinical testing, which must be cleared by the FDA before human clinical trials can begin in the United States;
· adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication;
· submission to the FDA of a new drug application, or NDA;
· satisfactory completion of any FDA inspections of the manufacturing facility or facilities at which the drug is produced to assess compliance with current good manufacturing practices, or cGMPs;
· FDA review and approval of the NDA; and
· the completion of any contingent requirements of the FDA as a condition to maintaining marketing approval should it be granted.
 
Preclinical tests include laboratory tests and animal studies. The conduct of the preclinical tests as well as the formulation of the compounds must comply with FDA regulations. The preclinical test data, together with manufacturing information and analytical data of product chemistry are submitted to the FDA as part of an IND, which must become effective before human clinical trials can begin. Human clinical trials submitted to the FDA as part of an IND will automatically become effective 30 days after receipt by the FDA, unless, within those 30 days, the FDA raises concerns or questions regarding the clinical trials, or places a clinical hold on the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. We cannot be certain that submission of an IND will result in clearance by the FDA to allow clinical trials to begin.
 
Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified clinical investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each clinical trial protocol must be submitted to the FDA as part of an IND.
 
 
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Clinical trials typically are conducted in three sequential phases, but the phases might overlap. The study protocol and informed consent information for study subjects in clinical trials must also be approved by an Institutional Review Board for each institution where the trials will be conducted. Study subjects must sign an informed consent form before participating in a clinical trial. The normal clinical trial phases are:
 
· Phase I usually involves the initial introduction of the investigational drug into healthy volunteers to evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics and pharmacologic actions, and, if possible, to gain an early indication of its effectiveness.
 
· Phase II usually involves trials in a small patient population to evaluate dosage tolerance and appropriate dosage, identify possible adverse effects and safety risks, and evaluate preliminarily the efficacy of the drug for specific indications.
 
· Phase III trials usually involve further evaluation of clinical safety and efficacy by using the drug in its final form in a larger patient population.
 
There can be no assurance that Phase I, Phase II, or Phase III testing will be completed successfully within any specified period of time, if at all. Furthermore, clinical trials might be suspended by us or the FDA at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
 
Once the required clinical testing is successfully completed, the results of the preclinical studies and of the clinical studies, as well as information on the manufacture and composition of the drug, are submitted to the FDA in an NDA. If the FDA grants NDA approval, the product can then be marketed for one or more approved indications. On the other hand, if the FDA reviews the application and deems it to be inadequate to support the NDA approval, and hence, marketing approval, an approval might not be granted on a timely basis, if at all. The FDA might also refer the application to the appropriate advisory committee, typically a panel of clinicians and scientists, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the advisory committee.
 
The overall drug development process, including preclinical testing and clinical trials through to marketing approval, requires substantial time, effort and financial resources.
 
The FDA has various programs, including fast track, priority review, and accelerated approval, that are intended to expedite or simplify the process for reviewing drugs, and/or provide for approval on the basis of surrogate endpoints. Generally, drugs that might be eligible for one or more of these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that provide meaningful benefit over existing treatments. While Northera qualified as Fast Track, we cannot ensure that any of our other drugs will qualify for any of these programs, or, to the extent that a drug does qualify, that the review time will be reduced.
 
Section 505(b)(2) of the FDCA allows the FDA to approve a follow-on drug on the basis of data in the scientific literature or data used by the FDA in the approval of other drugs. This procedure potentially makes it easier for drug manufacturers to obtain rapid approval of new forms of drugs based on proprietary data of the original drug manufacturer.
 
Before approving an NDA, the FDA usually will inspect the facility or the facilities at which the drug is manufactured, and may not approve the product unless the manufacturing site is good manufacturing practices, or cGMP, compliant. Similarly, the FDA may inspect clinical sites and analytical laboratories to determine compliance with good clinical and laboratory practices.
 
If the FDA evaluates an NDA, the FDA might issue an approval letter or a complete response letter. Both letters usually contain a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue a final approval letter. The final approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA might require post-marketing testing and surveillance to monitor the drug’s safety or efficacy, or may impose other conditions.
 
 
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After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes, or making certain additional labeling claims, are subject to further FDA review and approval and may require the submission of a supplemental NDA. Before we could market our product candidates for additional indications, we would have to obtain additional approvals from the FDA. Obtaining approval for a new indication generally requires that additional clinical studies be conducted. We cannot ensure that additional approvals for new indications, if any, for any product candidate would be approved.
 
 
Often, even after a drug has been approved by the FDA for sale, the FDA might require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies. If such post-approval conditions are not satisfied, the FDA might withdraw its approval of the drug. In addition, holders of an approved NDA are required to:
 
· report certain adverse reactions to the FDA;
 
· comply with certain requirements concerning advertising and promotional labeling for their products; and
 
· continue to have quality control and manufacturing procedures conform to cGMP after approval.
 
The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing facilities, including an assessment of compliance with cGMP. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. We intend to use, or have contracted with, third party manufacturers to produce our products in clinical quantities and in commercial quantities for Northera, and we intend to do so with any future manufacturing needs. Future FDA inspections might identify compliance issues at the facilities of our contract manufacturers that might disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product after any approval might result in restrictions on a product, manufacturer, or holder of an approved NDA, including withdrawal of the product from the market.
 
 
The FDA can grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. If the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Orphan drug designation does not necessarily convey an advantage in, or shorten the duration of, the review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, meaning that the FDA will not approve any other applications to market the same drug for the same indication for a period of seven years from approval, except in certain very limited circumstances. Orphan drug designation does not prevent competitors from developing or marketing different drugs for that indication.
 
 
Before our products can be marketed outside of the United States, they are subject to regulatory approval similar to that required in the United States, although the requirements governing the conduct of clinical trials, including additional clinical trials that might be required, product licensing, pricing and reimbursement vary widely from country to country. No action can be taken to market any product in a country until an appropriate application has been approved by the regulatory authorities in that country. The current approval process varies from country to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be approved. The pricing review period often begins after market approval is granted. Even if a product is approved by a regulatory authority, satisfactory prices might not be approved for such product.
 
In Europe, marketing authorizations may be submitted via a centralized, decentralized or mutual recognition approach (or at a national level). The centralized procedure is mandatory for the submission of high technology/biotechnology products, products with an orphan medicinal product designation, if filing for indications contained in such designation, and certain therapeutic areas of community interest. This procedure provides for the grant of a single marketing authorization that is valid in all European Union member states. It is optional for those products and indications deemed innovative and also to generic products where the originator product was authorized via a centralized procedure. The decentralized and mutual recognition procedures are available for those products not subject to a mandatory centralized procedure. There can be no assurance that the chosen regulatory strategy will secure regulatory approvals on a timely basis or at all.
 
 
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We own no manufacturing facilities, quality control laboratories or warehouses for storage and distribution of our product candidates. We intend to use, or have contracted with, third-party contractors for manufacturing drug substances under development or planned for commercialization. We also use contractors for preformulation, formulation and analytical development as well as manufacturing of drug products used for clinical studies. We plan to use third-party contractors for producing the commercial product and have contracted with manufacturers to do so for Northera. This strategy enables us to direct our financial resources to product development without devoting resources to the time and costs associated with building manufacturing plants and laboratories and we plan on continuing this strategy for the foreseeable future.
 
We obtain the active pharmaceutical ingredient for droxidopa from DSP pursuant to our exclusive license and supply agreements with DSP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – License Agreement and Development Agreement Obligations” in Part II, Item 7 of this Report for a description of that agreement. We rely on Patheon Inc., with whom we have a manufacturing services agreement, to manufacture and package Northera. Pursuant to the agreement, we have the right to qualify an alternative manufacturer.
 
 
We actively seek to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and in other key markets. Our goal is to obtain, where appropriate, the broadest intellectual property protection possible for our current product candidates, including droxidopa, and any future product candidates and proprietary technologies through a combination of contractual arrangements and patents, both in the United States and other countries.
 
Our patent estate for droxidopa, which is owned entirely by Chelsea Therapeutics, Inc., includes four issued U.S. patents, several issued foreign patents, several pending U.S. patent applications and related patent applications pending in countries outside the United States, including Europe. The pending applications are directed to pharmaceutical compositions comprising droxidopa and therapeutic methods of treatment using droxidopa.  We plan to continue to strengthen our patent estate on droxidopa by filing and pursuing additional patents.
 
The issued U.S. patents within the droxidopa patent portfolio are U.S. Patent No. 8,008,285, issued August 30, 2011 and entitled “Droxidopa and Pharmaceutical Compositions Thereof for the Treatment of Fibromyalgia,” (with a nominal expiration date of  February 16, 2029); U.S. Patent No. 8,158,149, issued April 17, 2012 and entitled “Threo-DOPS Controlled Release Formulation” (with a nominal expiration date of April 4, 2028); U.S. Patent No. 8,383,681, issued February 26, 2013 and entitled “Droxidopa and Pharmaceutical Composition Thereof for the Treatment of Mood Disorders, Sleep Disorders, or Attention Deficit Disorders” (with a nominal expiration date of December 7, 2029); and U.S. Patent No. 8,460,705, issued June 11, 2013 and entitled “Threo-DOPS Controlled Release Formulation” (with a nominal expiration date of May 12, 2024). 
 
The issued foreign patents within the droxidopa patent portfolio include: New Zealand Patent No. 581707, granted September 5, 2011 and entitled “Droxidopa and Pharmaceutical Composition Thereof for the Treatment of Mood Disorders, Sleep Disorders, or Attention Deficit Disorders” (with a nominal expiration date of May 7, 2028); European Patent No.1 948 155, granted on March 7, 2012 and entitled “Pharmaceutical Compositions Comprising Droxidopa” (with a nominal expiration date of  June 28, 2027), which is validated in Albania, Austria, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxemburg, Former Yugoslav Republic of Macedonia, Malta, Monaco, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland/Liechtenstein, Turkey, and United Kingdom; Mexican Patent No. 298529, granted April 24, 2012 and entitled “Droxidopa and Pharmaceutical Compositions Thereof for the Treatment of Fibromyalgia” (with a nominal expiration date of March 7, 2028); New Zealand Patent No. 579368, granted July 9, 2012 and entitled “Droxidopa and Pharmaceutical Compositions Thereof for the Treatment of Fibromyalgia” (with a nominal expiration date of March 7, 2028); European Patent No. 2 142 185, granted August 15, 2012 and entitled “Droxidopa and Pharmaceutical Composition Thereof for the Treatment of Neurally Mediated Hypotension” (with a nominal expiration date of  March 12, 2028), and validated in France, Germany, Italy, Spain, Switzerland, and United Kingdom; European Patent No. 2 167 066, granted June 26, 2013 and entitled “Droxidopa and Pharmaceutical Composition Thereof for the Treatment of Mood Disorders, Sleep Disorders, or Attention Deficit Disorders” (with a nominal expiration date of May 7, 2028), and validated in France, Germany, Italy, Spain, Switzerland, and United Kingdom; Australian Patent No. 2008226541, granted August 22, 2013 and entitled “Droxidopa and Pharmaceutical Compositions Thereof for the Treatment of Fibromyalgia” (with a nominal expiration date of March 7, 2028); and Australian Patent No. 2008248382, granted October 31, 2013 and entitled “Droxidopa and Pharmaceutical Composition Thereof for the Treatment of Mood Disorders, Sleep Disorders, or Attention Deficit Disorders” (with a nominal expiration date of May 7, 2028).  All patent expiration dates noted herein assume payment of required maintenance fees or annuities during the patent term, and such expiration dates are subject to change resulting from patent term extension in various jurisdictions.
 
Our patent estate for the antifolate portfolio includes four issued U.S. patents, several issued patents outside the United States, two pending U.S. patent applications, and several related patent applications pending in countries outside the United States. The issued U.S. patents are U.S. Patent No. 5,912,251, issued June 15, 1999; U.S. Patent No. 7,829,708, issued November 9, 2010; U.S. Patent No. 7,951,812, issued May 31, 2011; and U.S. Patent No. 8,530,653, issued September 10, 2013. Issued and pending patent applications cover certain antifolate compounds, including claims to these compounds as compositions of matter, in pharmaceutical formulations and for use in treatment of certain diseases.
 
The patent estate for the I-3D portfolio includes U.S. Patent No. 7,074,831, issued July 11, 2006; U.S. Patent No. 8,263,658, issued September 11, 2012; and U.S. Patent No. 8,461,205, issued June 11, 2013. The portfolio also includes several related issued patents outside the United States and a number of related patent applications pending in countries outside the United States.
 
 
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Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents are unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, it is our policy to require all of our employees, consultants, advisors and contractors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
 
 
We have attracted and retained a management team with core competencies and expertise in numerous fields, including manufacturing, research, clinical, regulatory, administration and business development. Our management and advisors are comprised of experienced pharmaceutical and biotechnology industry veterans and respected experts.
 
At March 10, 2014, we had a total of 19 full time employees. We believe the relationships with our employees are satisfactory. We anticipate that we will need to identify, attract, train and retain other highly skilled personnel as we prepare for the commercial launch of Northera. Hiring for such personnel is competitive, and there can be no assurance that we will be able to retain our key employees or attract, assimilate or retain the qualified personnel necessary to support our business.
 
 
Our website address is www.chelseatherapeutics.com. We make available, free of charge, through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
 
 
The following table sets forth the name, age and position of each of our executive officers as of March 10, 2014.
 
Name
 
Age
 
Position
 
 
 
 
 
Joseph Oliveto
 
46
 
President and Chief Executive Officer
 
 
 
 
 
J. Nick Riehle
 
61
 
Vice President, Administration and Chief Financial Officer
 
 
 
 
 
William D. Schwieterman
 
56
 
Vice President, Chief Medical Officer
 
 
 
 
 
L. Arthur Hewitt
 
60
 
Vice President, Chief Scientific Officer
 
 
 
 
 
Michael J. Roberts
 
44
 
Vice President, Business Development
 
 
 
 
 
Keith W. Schmidt
 
63
 
Vice President, Chief Commercial Officer
 
Joseph Oliveto, MBA – President and Chief Executive Officer. Mr. Oliveto was named President and Chief Executive Officer on January 27, 2014. He was appointed as Interim President and Chief Executive Officer in July 2012 in conjunction with the resignation of our former CEO during the restructuring announced at that time. He joined us in June 2008 as Vice President of Operations following a two-year assignment as Executive in Residence at Pappas Ventures, a life sciences venture capital firm. Prior to Pappas Ventures, he served in a number of progressively senior positions at Hoffmann-La Roche, most recently as the Global Alliance Director for Roche's licensing organization. Previous experience at Roche includes clinical development, project management, manufacturing process improvement and global business. During his tenure, he played an integral part in the success of multiple NDA filings, developed comprehensive launch programs, including those for both Pegasys and Copegus, and closed multiple licensing deals. Mr. Oliveto obtained a BA in Chemistry and an MBA from Rutgers University.
 
 
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J. Nick Riehle, MBA – Vice President, Administration and Chief Financial Officer. Mr. Riehle has been our Vice President, Administration and Chief Financial Officer since July 2004. Prior to that he served as Chief Financial Officer at HAHT Commerce, Inc., a software company, from August 1996 until June 2003 and as an independent contractor from July 2003 until July 2004. Prior to that, Mr. Riehle served in various roles at Nortel Networks and IBM. Mr. Riehle has his Bachelor of Commerce from McGill University, his MBA from York University and earned a Certified Management Accountant (CMA) designation from Ontario, Canada.
 
William D. Schwieterman, M.D. – Vice President, Chief Medical Officer. Dr. Schwieterman joined the company as an employee and officer in October 2009 after serving for more than a year on our Board of Directors and several years as a consultant and member of our Scientific Advisory Board for rheumatology.  He is a rheumatologist and board-certified internist who was formerly Chief of the Medicine Branch and Chief of the Immunology and Infectious Disease Branch in the Division of Clinical Trials at the FDA. In these capacities and others, Dr. Schwieterman spent 10 years at the FDA in the Center for Biologics overseeing a wide range of clinical development plans for a large number of different types of molecules. Dr. Schwieterman helped author the FDA's "Good Review Practices" for investigational products, and was instrumental in developing several guidance documents for the industry. After leaving the FDA, he acted as an independent consultant to biotechnology and pharmaceutical companies, focusing on clinical drug development and regulatory matters. He currently serves on the board of directors of OXiGENE, Inc., a publicly traded company, and is a co-founder of Neumedics, Inc., an early stage, privately held, drug development company. Dr. Schwieterman holds a B.S. and M.D. from the University of Cincinnati.
 
L. Arthur Hewitt, Ph.D. – Vice President, Chief Scientific Officer. Dr. Hewitt was named our Chief Scientific Officer in January 2010 after serving as our Vice President, Drug Development since May 2004. Prior to that he served as an independent contractor from January 2003 to May 2004, as Director of Scientific Affairs at Shearwater Corporation, a drug delivery company, from October 2002 until January 2003 and as Director of Scientific Affairs for Amgen Canada from July 1991 until November 2000. During his years at Amgen, Dr. Hewitt oversaw the approval of Neupogen, Stemgen and Infergen. Dr. Hewitt obtained his Ph.D. in Pharmacology from the Medical School at the University of Montreal.
 
Michael J. Roberts, Ph.D. – Vice President, Business Development. Dr. Roberts was named an officer of Chelsea in January 2010 after having served since August 2004 as Senior Director of Business Development. He joined us from Nektar Therapeutics where he was Director of Business Development for their Molecule Engineering technology. Prior to this, he was Manager of Biopharmaceutical Research at Shearwater Corporation where he led and was successful in the development of preclinical drug candidates from initial stages of research through Phase I clinical study. Dr. Roberts obtained his Ph.D. in Materials Science from the University of Alabama in Huntsville and B.S. in Chemical Engineering from Pennsylvania State University.
 
Keith Schmidt, MBA – Vice President, Chief Commercial Officer. Mr. Schmidt was appointed as our Chief Commercial Officer on January 30, 2014. Prior to that he served as our Vice President, Marketing and Sales from July 2006 until July 2012. Prior to that he was President of his biotech consulting company, Tellico Pharma LLC from June 2005 and served as Vice President of Thomson Healthcare Advanced Therapeutics Communications, a medical education company, from February 2002 until May 2005. From 1996 until January 2002, Mr. Schmidt served as an International Business Leader for Hoffmann-La Roche where he developed and led the global sales and marketing launch efforts for Pegasys and Copegus. Mr. Schmidt earned a Bachelor of Science from South Dakota State University and an MBA from the University of San Francisco.
 
ITEM 1A. RISK FACTORS.
 
Investment in our securities involves a high degree of risk. You should consider carefully the risks described below, together with other information in this Annual Report on Form 10-K and our other public filings, before making investment decisions regarding our securities. If any of the following events actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. This could cause the trading price of our common stock to decline and you may lose all or part of your investment. Moreover, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition. This Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in any documents incorporated in this Report by reference.
 
 
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Risks Related to Our Business
 
We currently have no product revenue and may not be able to obtain sufficient funding to successfully commercialize Northera, our lead product candidate.
 
To date, we have generated no product revenue. Until, and unless, approval is received from the FDA or other regulatory authorities for our product candidates, we cannot sell our drugs and will not have product revenue.  Northera™ (droxidopa) is our only drug product candidate that has been approved by the FDA.  Although Northera was approved for sale in the United States by the FDA in February 2014, it is currently not available for sale and is not anticipated to be available for sale until, at the earliest, the second half of 2014.  In order to commercialize Northera we may seek to out-license one or more of our products, or seek additional sources of financing, or both, and such opportunities might not be available on favorable terms, if at all. If we are unable to raise sufficient additional funds on acceptable terms, we might be unable to successfully commercialize Northera.
 
 
We have a history of losses and expect to incur substantial losses and negative operating cash flow at least through 2014. We might never achieve profitability or, if we do, we might be unable to maintain profitability. Even if we succeed in commercializing Northera, we expect to incur substantial losses during the commercialization process. From inception through December 31, 2013 we had a loss of $231.5 million. We had net losses of $16.4 million, $31.7 million and $50.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Actual losses will depend on a number of considerations, including:
 
the cost, pace and level of success of commercialization and marketing efforts for Northera in the U.S ;
 
 
the timing and amount of revenue generated from any sales of Northera;
   
the possible out-licensing or other strategic partnering opportunities for our product candidates;
   
the requirements of the FDA for post-approval trials for Northera and the related costs thereof;
   
the costs and requirements to seek regulatory approval for Nothera in additional markets outside the U.S.;
   
seeking additional regulatory approvals for any of our other product candidates, formulations and indications;
   
the pace of development of new intellectual property for our existing product candidates;
   
in-licensing and development of additional product candidates;
   
implementing additional internal systems and infrastructure; and
   
changes in existing staffing levels.
 
We expect to experience negative cash flow for some time to come as we fund our operating activities. Should we raise additional funds by selling shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be required to delay, reduce the scope of, or eliminate one or more of our current or future development programs or commercialization plans or curtail operations. As a result, our business, financial condition and results of operations would be materially harmed.
 
 
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Although we plan to evaluate strategic arrangements that would be beneficial to our stockholders, we might not be successful.
 
We have stated our intent to explore and evaluate all available strategic options to determine the best path forward for our Company and our stockholders. Such options might include out-licensing of our products, other strategic partnering arrangements or the merger or sale of the company. Despite this intent, there is no guarantee that we will be able to successfully identify any such opportunities that would be acceptable. Moreover, if we are able to identify any acceptable options, we cannot provide assurances that we could be successful in negotiating any such transaction on favorable terms, if at all, or that the terms of any such transaction would be sufficient to meet our capital requirements. Such a transaction might also reduce the potential for future profits and/or negatively impact our stock price.
 
Our consideration and evaluation of possible strategic opportunities may impact the timing of the commercial launch of Northera in the United States.
 
While we are currently focused on the evaluation of strategic opportunities following the approval of Northera in the United States, we are also initiating activities in preparation for the commercialization and launch of Northera. While commercialization activities will continue during the evaluation process, our goal is to minimize the time to launch while being opportunistic to any opportunities to enhance shareholder value and the value of Northera.  A delay in the timing of the launch of Northera in the United States that results from the consideration of other options, could impact the revenue anticipated from the sales of Northera.
 
Our potential future earnings might be reduced should we decide to out-license one or more of our drug product candidates.
 
We may decide to out-license one or more of our drug product candidates, reducing future profits available to us. Should we license our drug product candidates to another pharmaceuticals company, it would allow the partner to market and sell our compounds in one or more markets around the world. If either droxidopa or the antifolates are licensed to a strategic partner, the profit available to us may be substantially reduced from what might otherwise be possible should we retain all rights to the products and market and sell them directly.
 
We might not be able to commercialize Northera or any other of our product candidates.
 
As a development stage company, we have not demonstrated our ability to perform the functions necessary for the successful commercialization of any product candidates. The successful commercialization of Northera or any other of our product candidates will require us to perform a variety of functions, including:
 
 
formulating and manufacturing products;
 
 
  
 
developing appropriate administration and compliance processes; and
 
 
  
 
conducting sales, marketing and distribution activities.
 
Our operations provide a limited basis for you to assess our ability to commercialize our product candidates, including Northera. To date, our operations have largely been limited to organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMA and other regulatory agencies and undertaking preclinical trials and clinical trials of our product candidates. While we had begun preparations for the commercialization of Northera in late 2011 and the first quarter of 2012, these activities were curtailed upon receipt of the CRL in March 2012 and most of the personnel hired for those commercialization activities were terminated in conjunction with our restructuring in July 2012. We currently have no sales and marketing employees other than our recently hired Chief Commercial Officer and we cannot assure you that we will be able to obtain, through employment, consulting relationships or otherwise, the appropriate expertise necessary to successfully commercialize Northera.
 
The label approved by the FDA for Northera may adversely impact our sales potential.
 
The approved label for Northera includes an acknowledgment that our clinical trials results vary, with several studies failing to meet statistical significance in favor of Northera and with only one trial shown to have statistical significance. Moreover, none of the trials show statistical significance beyond two weeks and the label instructs prescribing physicians to monitor patients, keeping them on the drug only if patients continue to show benefit. In addition, the label has a “black box warning” instructing physicians to monitor patients for supine hypertension, advising the physicians ultimately to take the patient off Northera if such hypertension cannot be controlled. Accordingly, this label may discourage doctors from prescribing Northera or continuing to prescribe Northera over an extended period and it might discourage patients from using Northera. Moreover the label might limit Northera’s acceptance among insurance companies and other payers, leading them to limit or restrict insurance coverage and use of the product by patients. Such limitations may include prior written authorization from physicians for patients to use the drug, or a requirement for patients to have failed on midodrine and/or other treatment prior to being prescribed Northera, or restrictions on the duration of use of Northera. As a result, our pricing options might be limited, our sales ramp might be slower than anticipated and we might be unable to reach the level of market penetration we otherwise would have anticipated, each of which might have an adverse impact on sales of Northera.
 
 
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Physicians and patients might not accept and use Northera or any of our other product candidates that might receive marketing approval. Acceptance and use of our products will depend upon a number of factors including:
 
 
perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drug candidates;
 
 
  
 
cost-effectiveness of our product relative to competing products;
 
 
  
 
understanding by prescribing physicians of the medical conditions we are attempting to address;
 
 
  
 
availability of reimbursement for our product from government or other healthcare payers; and
 
 
  
 
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.
 
Because we expect that sales of our product candidates could generate substantial product revenues for an extended period, the failure of such a drug to find market acceptance would harm our business and could require us to seek additional financing or curtail our operations.
 
Our lack of internal expertise for the commercialization of a drug in the United States and the constantly evolving nature of the regulatory requirements to market a drug in the United States might lead to potential compliance issues in our adherence to federal and state regulations. Such non-compliance might constrain our sales and marketing efforts and reduce, or limit the growth of, our revenue.
 
There are a myriad of federal and state regulations that we must comply with to successfully market Northera in the United States. Failure to comply with the applicable requirements mandated by the FDA and other regulatory agencies can result in administrative or judicial sanctions and/or fines. In the United States, such sanctions could include warning letters, corporate integrity agreements, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution. Such regulations include, but are not limited to, reporting of interactions with and payments made to qualified health care providers, allowed promotional and marketing activities for pharmaceutical products, government pricing calculations and reporting, medical information and communications and manufacturing and clinical practices. While we are aware of the critical importance of compliance with these regulations, the process of training, motivating and managing commercial resources can be complex, especially for a company with rapid growth and limited commercial experience. While we are developing strategies to address this risk, including heavy reliance on experienced third party consultants, there remains a risk of non-compliance. Any punitive consequences of non-compliance might limit the efficiency and effectiveness of any commercialization efforts, resulting in increased costs and/or constrained revenue growth.
 
Products competing with Northera are generic and we expect that Northera will be priced significant higher.
 
Midodrine (ProAmatine®) is currently the only FDA-approved therapeutic for the treatment of orthostatic hypotension but physicians are also known to prescribe fludrocortisone (Florinef®) off-label. Both of these products are generic and we expect to have a significantly higher price for Northera than either of these. Patients who bear all or a significant portion of this price may be unwilling to fill their prescriptions and/or payers may limit their coverage for Northera, requiring additional hurdles for physicians, possibly including prior prescribing of midodrine or other treatment options. In addition to such hurdles, payers may demand higher co-pays from our patients. While we are exploring strategies to assist physicians and patients to navigate through these challenges, we cannot guarantee that Northera will receive significant acceptance or that Northera pricing will be sufficient to overcome inadequate sales volume and the high cost for patient assistance programs.
 
 
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Our commercialization program depends upon third-party contractors who are outside our direct control.
 
We intend to use contracted third-party resources for many aspects of our planned commercial launch of Northera including, but not limited to, a contract sales organization, or CSO, compliance and monitoring assistance, advertising and marketing, price reporting, contracting and channel strategy. Various key middle management executives will also, at least initially, be retained on a contract basis. We believe this is the most expedient way of engaging experienced, professional resources but such resources will not be directly employed by us and may not respond or perform as intended. They might not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our programs, if their performance is substandard or if the FDA or other regulators determine there is inadequate compliance with relevant rules and regulations our revenue growth may be detrimentally impacted and/or we may face punitive action from regulatory authorities. If we cannot successfully enter into new agreements with outside collaborators on acceptable terms, or if we encounter disputes over or cannot renew or, if necessary, amend prior agreements, the commercialization of Northera could be delayed. These collaborators might also have relationships with other commercial entities, some of which might compete with us or might simply command more attention. If our collaborators assist other entities at our expense, our commercialization program and growth opportunities could be harmed.
 
 
We depend upon independent clinical research organizations, investigators and other collaborators, such as universities and medical institutions, to conduct our preclinical and clinical trials under agreements with us. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. They might not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug development programs, if their performance is substandard or the FDA determines there are issues upon review of the study data, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. If we cannot successfully enter into new agreements with outside collaborators on acceptable terms, or if we encounter disputes over or cannot renew or, if necessary, amend existing agreements, the development of our drug candidates could be delayed. These collaborators might also have relationships with other commercial entities, some of which might compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.
 
Our drug development program also depends upon other parties who are outside our control.
 
We have licensed certain rights related to droxidopa from DSP and depend upon them for data and support in advancing our clinical program for this compound. Our licensing agreement with DSP grants us an exclusive, sub-licensable license, with certain geographic restrictions, and rights to droxidopa including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation. In addition, DSP is currently the preferred manufacturer of this compound for our clinical programs and commercialization efforts. Without the timely support of DSP, our drug development programs could suffer significant delays, require significantly higher spending or face cancellation.
 
 
We have only limited experience in drug formulation and no experience in drug manufacturing and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to formulate or manufacture our own product candidates. While we have a contract in place with DSP and another manufacturer for droxidopa for our clinical trials and potential commercialization, we currently have no contract for the commercial scale manufacture of our antifolates or I-3D compounds. We have contracted with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our antifolate clinical trials. Given the recent approval of Northera by the FDA or if any of our current product candidates or any other product candidates that we may develop or acquire in the future receive marketing approval in the U.S. or other markets, we plan to rely on one or more third-party contractors to manufacture our drugs. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to risks, including that:
 
 
·
We might not be able to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any.
 
 
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·
Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical needs and commercial needs, if any, or limitations in their capacity could limit the timely availability of our product, which could alienate prescribing physicians and/or their patients if we cannot meet their demand for our drugs.
 
·
Our contract manufacturers might not perform as agreed or might not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.
 
·
Our contract manufacturers might require financial assistance to increase their capacity levels required for our markets.
 
·
Our contract manufacturers have competing clients and/or competing products that vie for production scheduling. Drug manufacturing lead times for droxidopa are long. The increased risk associated with not securing timely production scheduling slots could lead to not having adequate supplies for launch should Northera be approved or facing gaps in commercial supply and “stock outs” after launch.
 
·
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration, or DEA, and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
 
Each of these risks could delay our commercialization of Northera, the conduct of our clinical trials, the approval, if any, of any of our other product candidates or result in higher costs or deprive us of potential product revenue.
 
Northera has been approved under the FDA’s “Accelerated Approval” program, requiring us to conduct a long-term withdrawal study to establish Northera’s durability of effect. Should we fail to meet enrollment milestones or fail to show statistical significance for the primary end point, the FDA could initiate a process to remove Northera from the market.
 
The FDA has approved Northera under Accelerated Approval whereby short term results have been used to anticipate longer term effect, even though our clinical trials did not provide statistically significant evidence of a long term effect. Under the terms of our approval we are required to conduct additional clinical research to support durability of effect for Northera or the drug could be removed from the market. The approval of Northera stipulates that a large, adequately powered withdrawal study is required to determine whether Northera provides durability of effect for patients remaining on therapy for more than one or two weeks. While specifics of the protocol for this study have not been finalized are still under discussion with the agency, initial discussions would indicate that up to 1,500 patients to power might be required to power such a study at 80% to detect a treatment difference of 0.45 units on the OHSA Item 1 scale.  This study will likely require 6 to 7 years to enroll at an estimated cost of $10 - $15 million per year, increasing our development expenses and potentially delaying profitability.  We have agreed with the FDA to specific milestone dates for commencing the study, recruiting patients into the study and completing the study.  If these milestones are not met or if the study fails to demonstrate durability of effect, the FDA could initiate a process to remove Northera from the market. Should Northera be removed from the market in the United States and with the resulting loss of Northera revenue, the company might have to cease operations or sell itself or its assets under less than favorable terms and that could be detrimental to our shareholders.
 
We might not obtain the necessary European or other regulatory approvals to commercialize Northera outside the United States or to obtain U.S. or any other approvals for our other product candidates.
 
We cannot assure you that we will receive the approvals necessary to commercialize Northera or other product candidates outside the United States. We will need approvals from the relevant regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain such approvals we must submit an appropriate application for approval to the designated agency in each jurisdiction demonstrating that the product candidate is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the regulatory requirements at each such agency typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing. We cannot predict whether our products and the related research and clinical programs will result in drugs that these agencies will consider safe for humans and effective for indicated uses. Governmental agencies have substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. Moreover, while we recently did receive approval from the FDA to market Northera in the United States, we might never achieve such approval from the FDA for other product candidates or for other indications for droxidopa.
 
 
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The approval process might also be delayed by changes in government regulation, future legislation or administrative action or changes in agency policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals might:
 
 
delay commercialization of, and our ability to derive product revenue from, a product candidate;
 
 
  
 
reduce available time during which our intellectual property is protected under various U.S. and foreign patents;
 
 
  
 
impose costly procedures on us; and
 
 
  
 
diminish any competitive advantages that we might otherwise enjoy.
 
Even if we comply with all regulatory agency requests, such agencies may reject our applications for approval. We cannot be sure that we will ever obtain regulatory clearance for any of our other product candidates or for Northera outside of the United States. Failure to obtain such approval for our product candidates could undermine our business.
 
We have not determined any additional clinical requirements that may be needed in order to meet the expectations of the European Medicines Agency, or EMA, or other foreign regulatory agencies in order to obtain marketing approval for Northera outside the United States.
 
Since an initial discussion several years ago, we have only conducted limited discussions of the specifics of our clinical program with the EMA, and several individual European Union, or EU, countries’ regulatory agencies, and we have not yet determined if our current program for Northera in Neurogenic OH will be acceptable for approval in the EU, or any particular member country. While we continue to believe that the safety data from Study 306B with an extended period of placebo control is better aligned with the requirements as expressed by the EMA previously, we cannot be certain of this. In 2011, we conducted discussions with several EU member country regulatory agencies to better understand their and, derivatively, the EMA’s expectations with regard to their efficacy requirements. However, until we proceed further with those discussions it will not be clear that Study 301 and Study 302 data, along with data from the related extension studies and Study 306B data, will be sufficient for filing in the EU. If not, we may be required to conduct additional clinical trials and, regardless, we cannot guarantee that Study 306B data will be sufficient to show a significant symptomatic benefit for patients with Neurogenic OH to support approval or that any subsequent trials will provide adequately favorable data.
 
We and certain of our executive officers and directors have been named as defendants in recently initiated lawsuits that could result in substantial costs and divert management’s attention.
 
We and certain of our executive officers were named as defendants in purported class action lawsuits that alleged violations of federal securities laws related to various statements regarding our development of Northera for the treatment of symptomatic Neurogenic OH and the likelihood of FDA approval. On October 10, 2013, the U.S. District Court for the Western District of North Carolina granted our motion to dismiss these lawsuits, with prejudice. On November 8, 2013, the plaintiffs appealed the district court’s judgment to the United States Court of Appeals for the Fourth Circuit. Briefing of the appeal began in January 2014.
 
On May 2, 2012, a purported shareholder derivative lawsuit was filed in the Delaware Court of Chancery against the members of our board of directors as of the date of the lawsuit. The complaint generally alleges that, from at least June 2011 through February 2012, the defendants breached their fiduciary duties and otherwise caused harm to Chelsea in connection with various statements related to our development of Northera for the treatment of neurogenic OH and the likelihood of FDA approval. The complaint seeks unspecified damages, attorneys’ fees and other costs. On June 25, 2012, the Court of Chancery entered an Order staying the action until the U.S. District Court for the Western District of North Carolina which it did in October 2013. After the dismissal of the class action and the filing of the notice of appeal in that case, plaintiff in this action sought to proceed with the case and the parties entered into a scheduling stipulation in January 2014, subsequently approved by the Court of Chancery, for the briefing of defendants’ motions to stay the action and to dismiss the complaint.
 
 
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We intend to engage in a vigorous defense of the litigation described above. Even if we were to be successful in the defense of the litigation, we could incur substantial costs not covered by our directors’ and officers’ liability insurance, suffer a significant adverse impact on our reputation and divert management’s attention and resources, which could have a material adverse effect on our business. In addition, any settlement of the litigation could require payments that exceed the limits of our available directors’ and officers’ liability insurance, which could have a material adverse effect on our operating results or financial condition. Additional similar lawsuits might be filed.
  
 
Our I-3D product candidates are very early in their development. None of the candidates have had adequate toxicology testing in animals to permit clinical testing and there is no clinical evidence of efficacy for any of these candidates, despite limited similarities with compounds currently marketed by others. Animal toxicology trials on our I-3D compounds may not permit further development of these drugs or we may have to carry out toxicology trials on several compounds before we find one that is appropriate for clinical testing, if at all. Once clinical trials are undertaken, the compound or compounds may not prove adequately safe and efficacious in humans and may not be approved by the FDA or other regulatory agencies. Moreover, because of the scarcity of capital and competing priorities within our development program we do not know when we will be able to continue any such testing or commence clinical trials, if ever. We currently have no work underway related to our I-3D product candidate portfolio.

There has been virtually no development activity for our antifolate candidates since 2012.
 
While we conducted significant preclinical and phase I and phase II clinical studies on our antifolate portfolio, there has been very little development activity on these compounds since the completion of our phase II study for CH-4051 in 2012. Studies completed so far have not provided unambiguous support regarding the advisability of further study and before any future programs are initiated we would need to carefully assess their likelihood of success and the strength and duration of our intellectual property protection. If additional trials are conducted and even if they are successful our compounds may not be approved by the FDA or other regulatory agencies.
 
 
Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The clinical trial process is also time-consuming. For example, because we did not receive orphan drug status from the EMA for droxidopa as a treatment for Parkinson’s disease, our clinical trials for that indication might have to be more involved and take longer to complete and get reviewed than otherwise would have been the case. Furthermore, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials might be delayed by several factors, including:
 
 
unforeseen safety issues;
 
 
  
 
clarification of dosing issues;
 
 
  
 
lack of effectiveness during clinical trials;
 
 
  
 
slower than expected clinical site recruitment;
 
 
  
 
slower than expected rates of patient recruitment;
 
 
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inability to monitor patients adequately during or after treatment;
 
 
  
 
inability or unwillingness of medical investigators to follow our clinical protocols; and
 
 
  
 
unexpected emergence of competitive drugs against which our compounds might compete for clinical trial resources or need to be tested.
 
In addition, we or the FDA or another governing regulatory agency may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the regulatory agency finds deficiencies in the conduct of these or our regulatory submissions. Therefore, we cannot predict with any certainty the schedule for our current or any future clinical trials.
 
 
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and preclinical testing. The clinical trial process might fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure could cause us to abandon a product candidate and might delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenue.
 
 
We have announced our intent to explore certain additional indications for droxidopa and we may make similar announcements in the future. While trials conducted by DSP for the Japanese market provide evidence of efficacy for certain indications, other indications may be explored for which we have no existing clinical evidence of efficacy. Such trials are likely to be very costly. We do not have market approval from the FDA or other regulatory agencies for any of these other indications we are exploring and there are no guarantees that additional clinical trials will provide new evidence of efficacy in the targeted indications or permit us to gain market approval from regulatory agencies.
 
 
The initial market for Northera (neurogenic OH) has well established generic competition. Other markets for droxidopa, such as fibromyalgia, are emerging with new and heavily marketed offerings. The market for our antifolate product candidates is characterized by intense competition and rapid technological advances. Northera (or in the future, our antifolates or other product candidates that may receive FDA approval) will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products might provide greater therapeutic convenience, efficacy or other benefits for a specific indication than our products or might offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we will not achieve sufficient product revenue and our business will suffer.
 
We will compete against fully integrated pharmaceutical companies and 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 compounds already approved or in development. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater financial resources than we do, as well as significantly greater experience in:
 
 
developing drugs;
 
 
 
 
undertaking preclinical testing and human clinical trials;
 
 
 
 
obtaining FDA and other regulatory approvals of drugs;
 
 
 
 
formulating and manufacturing drugs;
 
 
24

 
 
launching, marketing and selling drugs; and
 
 
 
 
post-marketing safety surveillance.
 
 
Our ability to commercialize our drugs, alone or with collaborators, will depend in part on the extent to which reimbursement will be available from:
 
 
government and health administration authorities;
 
 
 
 
private health maintenance organizations and health insurers; and
 
 
 
 
other healthcare payers.
 
Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including the Center for Medicare and Medicaid Services, or CMS, are challenging the prices charged for medical products and services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if a product candidate is approved by the FDA, insurance coverage might not be available and reimbursement levels might be inadequate to cover our drug. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our product, once approved, market acceptance and our revenue could be reduced.
 
Specifically, not all physicians recognize a separate indication for symptomatic Neurogenic OH and we cannot provide assurances that reimbursement will be approved by the relevant decision makers at healthcare payers.
 
In addition, the U.S. and international healthcare industry is subject to changing political, economic and regulatory influences that may significantly affect the purchasing practices and pricing of pharmaceuticals. The laws and regulations governing and issued by the FDA and other healthcare policies might change, and additional government regulations might be enacted, which could prevent or delay regulatory approval of our product candidates. In March 2010, the U.S. Congress passed landmark healthcare legislation. As the rollout of the Patient Protection and Affordable Care Act, or PPACA, continues, we cannot predict, with any certainty, what impact on federal reimbursement policies the continued implementation of requirements under this legislation will have in general or on our business specifically. We anticipate that the U.S. Congress and state legislatures will continue to review and assess this legislation and possibly alternative health care reform proposals. The U.S. Congress may adopt additional legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. Cost-containment measures, whether instituted by healthcare providers or imposed by government health administration regulators or new regulations, could result in greater selectivity in the purchase of drugs. As a result, healthcare payers might challenge the price and cost effectiveness of our products. In addition, in many major markets outside the United States, pricing approval is required before sales may commence. As a result, significant uncertainty exists as to the reimbursement status of approved healthcare products.
 
While the FDA has announced it might seek to remove midodrine from the market, midodrine is expected to continue to be available to patients at the time Northera is launched.
 
In August 2010, the FDA proposed removing midodrine from the market because required post-approval studies to verify the clinical benefit of the drug have not been satisfactorily completed by the manufacturer. In January 2011, the FDA opened a public docket to provide a forum to facilitate communication regarding the conduct of clinical trials needed to support the continued marketing authorization for midodrine. In December 2011, Shire reached an agreement with the FDA to conduct a new set of clinical trials to demonstrate the clinical benefit of midodrine. The agreement requires Shire to complete two additional clinical trials and submit the results of those trials to the FDA by September 2014. Should the FDA determine that Shire has failed to adhere to the terms or timeframes specified in this agreement, or that the agreed upon trials fail to verify clinical benefit, Shire has agreed to have FDA withdraw the marketing approval for midodrine and has waived the right for a public hearing.
 
It is still not clear what action the FDA will take following the conclusions of the renewed clinical trials; however, the recent agreement with Shire is likely to ensure the availability of midodrine in the near term. Furthermore, the FDA has never removed a drug under similar circumstances and we can provide no assurance that they will do so in the case of midodrine.
 
 
25

 
  
Companies that currently sell compounds used for the treatment of orthostatic hypotension include Apotex, Mylan Pharmaceuticals, Impax Laboratories, Sandoz, Teva, Upsher-Smith Laboratories, Pfizer and Shire. Companies that currently sell both generic and proprietary compounds for the treatment of rheumatoid arthritis include, but are not limited to, Abbott Laboratories, Amgen, Pfizer, Sanofi-Aventis, Boehringer Ingelheim Pharma, Hoffmann-La Roche, Johnson & Johnson, Bristol-Myers Squibb, Mylan Laboratories and UCB. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations.
 
Our success, competitive position and future revenue will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
  
We do not know whether any of our pending patent applications or those patent applications that we may file or license in the future will result in the issuance of any patents. Moreover, we cannot predict the degree of patent protection that will be afforded by those patent applications that do result in issuance. Although we generally seek the broadest reasonable patent protection available for our proprietary compounds, we may not be able to obtain patent protection for the actual composition of any particular compound and may be limited to protecting a new method of use for the compound or otherwise restricted in our ability to prevent others from exploiting the compound. If our patent protection for any particular compound is limited to a particular method of use or indication such that, if a third party were to obtain approval of the compound for use in another indication, we could be subject to competition arising from off-label use.
 
Moreover, our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated, rendered unenforceable or circumvented, any of which could limit our ability to stop competitors from marketing related products. In addition, the rights granted under any issued patents may not provide us with competitive advantages against competitors with similar compounds or technologies. Furthermore, our competitors may independently develop similar technologies in a manner that does not infringe our patents or other intellectual property.
 
If a third party legally challenges our patents or other intellectual property rights that we own or license, we could lose certain of these rights. For example, third parties may challenge the validity of our U.S. or foreign patents through reexaminations, oppositions or other legal proceedings. If successful, a challenge to our patents or other intellectual property rights could deprive us of competitive advantages and permit our competitors to use our technology to develop similar products.
 
In addition, we do not have composition of matter patent protection on droxidopa which recently received market approval by the FDA for Neurogenic OH under the brand name Northera. While the orphan drug designation for this compound by the FDA will provide seven years of market exclusivity, we will not be able to exclude other companies from manufacturing and/or selling this compound beyond that timeframe.
 
We may not obtain or maintain the benefits associated with orphan drug status, including market exclusivity.
  
During 2007, the FDA granted orphan drug status to Northera for the treatment of symptomatic Neurogenic OH in patients with primary autonomic failure, DBH deficiency and non-diabetic autonomic neuropathy and the EMA granted orphan medicinal product designation for the treatment of patients with pure autonomic failure and patients with multiple system atrophy. We may not receive the benefits associated with orphan drug designation (primarily the benefit providing for seven years of market exclusivity in the U.S. and ten years or market exclusivity in the EU from the respective dates of approval), including as a result of failure to maintain orphan drug designation, or should a competing product that is the same chemical entity and has an orphan designation for the same disease indication become approved for marketing or commercial distribution in the EU market before Northera. Under U.S. and EU rules for orphan drugs, if such a competing product reaches the market before ours does, the competing product could potentially obtain a scope of market exclusivity that limits or precludes Northera from being sold in the U.S. for seven years or from being sold in the EU for ten years. Also, in the EU, even after orphan medicinal product status has been granted, that status is re-examined shortly prior to the product receiving any regulatory approval. The EMA must be satisfied that there is evidence that the product offers a significant benefit relative to existing therapies, in order for the therapeutic product to maintain its orphan medicinal product status. Accordingly, our product candidates will have to re-qualify for orphan drug status prior to any potential product approval in the EU. In the U.S., orphan drug marketing exclusivity can be overcome by a different sponsor for the same drug with a showing of clinical superiority, greater safety or a major contribution to patient care in a head-to-head trial.
 
 
26

 
  
If a third party were to file a patent infringement suit against us, we could be forced to stop or delay research, development, manufacturing or sales of any infringing product in the country or countries covered by the patent infringed, unless we can obtain a license from the patent holder. Any necessary license may not be available on acceptable terms or at all, particularly if the third party is developing or marketing a product competitive with the infringing product. Even if we are able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. We also may be required to pay substantial damages to the patent holder in the event of an infringement. If we have supplied infringing products to third parties for marketing or have licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses they may sustain themselves as a result.
 
  
Legal or administrative proceedings may be necessary to defend against claims of infringement or to enforce our intellectual property rights. If we become involved in any such proceeding, irrespective of the outcome, we may incur substantial costs, and the efforts of our technical and management personnel may be diverted, which could materially harm our business. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that disclosure of some of our confidential information could be compelled and the information compromised. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments that, if perceived as negative by securities analysts or investors, could have a substantial adverse effect on the trading price of our common stock.
 
  
Other entities may have or obtain patents or proprietary rights that could limit our ability to manufacture, use, sell, offer for sale or import products or impair our competitive position. In addition, to the extent that a third party develops new technology that covers our products, we may be required to obtain licenses to that technology, which licenses might not be available or may not be available on commercially reasonable terms, if at all. Our failure to obtain a license to any technology that we require may materially harm our business, financial condition and results of operations.
 
  
The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Therefore, enforceability or scope of our patents in the United States or in foreign countries cannot be predicted with certainty, and, as a result, any patents that we own or license may not provide sufficient protection against competitors.
 
Some jurisdictions have laws that permit the government to force a patentee to grant a license to a third party for commercialization of a patented product if the government concludes that the product is not sufficiently developed or not meeting the health needs of the population. Such compulsory licensing laws are very rarely invoked outside of South America and Africa. In addition, a number of countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially diminish the value of the patent. Such compulsory licenses could be extended to include some of our product candidates, which may limit our potential revenue opportunities.
 
 
27

 
Because of the extensive time required for development, testing and regulatory review of a new drug, it is possible that any related patent may expire before any of our product candidates can be commercialized or remain in force for only a short period following commercialization. In either case, this would reduce any advantages of the patent.
 
  
We license patent and/or certain other rights from DSP for droxidopa. Similarly, we are a party to a license agreement with Dr. M. Gopal Nair under which we license patent rights for our antifolates. We may enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various milestone payments, royalty payments and other obligations on us. If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business. If a licensor challenges our license position, our competitive position and business prospects could be harmed.
 
Our license agreement with DSP reserves rights to the licensor in Japan, Korea, China and Taiwan which preclude our commercialization of droxidopa in those markets. Our license agreement with Dr. Nair reserves rights to the licensor in India. Therefore, we will not commercialize our products in these respective markets.
 
  
Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents are unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, it is our policy to require all of our employees, consultants, advisors and contractors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements might not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
 
  
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we might have to:
 
obtain licenses, which might not be available on commercially reasonable terms, if at all;
   
abandon an infringing drug candidate;
   
redesign our products or processes to avoid infringement;
   
stop using the subject matter claimed in the patents held by others;
   
pay damages; or
   
defend litigation or administrative proceedings, which might be costly whether we win or lose, and which could result in a substantial diversion of valuable management resources.
  
  
Through 2013 we have remained a small, development stage company. With the FDA approval of Northera, our success will depend in large part upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on our administrative, operational and financial resources. As of March 10, 2014, we had 19 full-time, permanent employees. If we are unable to manage our growth effectively, our business would be harmed.
 
 
28

 
  
Our research and development activities might involve the controlled use of hazardous materials and chemicals. Although we believe that our safety procedures, and those of our partners, for using, storing, handling and disposing of these materials comply with federal, state, local and, where applicable, foreign laws and regulations, we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of operations. In addition, the laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products might require us to incur substantial compliance costs that could materially adversely affect our business, financial condition and results of operations.
 
  
As a small company, we are highly dependent on our executive officers, including our principal scientific, regulatory, and medical officers and advisors. We do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in commercialization and development programs, loss of any future customers and sales and diversion of management resources, which could adversely affect our operating results.
  
  
As a small company, we currently employ qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and administration. We compete for qualified individuals with numerous pharmaceutical and biopharmaceutical companies, universities and other research institutions. In the third quarter of 2012, we instituted a corporate reorganization in which we eliminated virtually all sales and marketing personnel whom we had previously hired in anticipation of the commercial launch of Northera. To commercialize Northera on our own, we will need to hire or contract with appropriate personnel in the areas of sales and marketing, medical affairs, distribution, IT, regulatory and compliance. Competition is intense for qualified individuals in all areas of pharmaceutical development and commercialization and we cannot be certain that any search for such personnel will be successful.
 
  
The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we might incur substantial liabilities or be required to limit commercialization of our products. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of our products. Although we carry clinical trial insurance, we might not be able to renew such insurance at a reasonable cost, if at all, or our intended collaborators may be unable to obtain such insurance at a reasonable cost, if at all. Even if our agreements with any future collaborators entitle us to indemnification against losses, that indemnification might not be available or adequate should any claim arise.
 
Risks Related to Our Common Stock
 
  
You should expect the prices at which our common stock is traded to be volatile. Since the commencement of trading on The NASDAQ Capital Market in May 2006, the price of our common stock has varied from a low of $0.70 to a high of $8.41. The expected volatile price of our stock will make it difficult to predict the value of your investment, to sell your shares at a profit at any given time, or to plan purchases and sales in advance. A variety of other factors might also affect the market price of our common stock. These include, but are not limited to:
 
 
29

 
publicity regarding actual or potential clinical results relating to products under development by our competitors or us;
 
delays or failures in initiating, completing or analyzing preclinical or clinical trials or the unsatisfactory design or results of these trials;
 
success or delays in commercialization of our product candidates;
 
market acceptance of our product candidates;
 
obtaining, delays in or rejection of regulatory approvals for our products or our competitor’s products by U.S. or foreign regulators;
 
announcements of technological innovations or new commercial products by our competitors or us;
 
developments concerning proprietary rights, including patents;
 
developments concerning our collaborations;
 
regulatory developments in the United States and foreign countries;
 
economic or other crises and other external factors;
 
period-to-period fluctuations in our results of operations;
 
changes in financial estimates by securities analysts;
 
should the market price of our shares drop below $5 per share, stock exchange rules that prevent our stockholders from using shares of our common stock as collateral for borrowing in margin accounts or certain institutional investors’ restrictions against investing in our shares; and
 
sales of our common stock.
 
We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.
 
In addition, the stock market in general, and the market for pharmaceutical companies in particular, has experienced extreme price and volume fluctuations that might have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors might seriously harm the market price of our common stock, regardless of our operating performance.
 
  
We currently anticipate that no cash dividends will be paid on our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that all earnings, if any, will be retained to finance our future operations.
 
If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.
  
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. Currently, six financial analysts publish reports about us and our business. We do not control these or any other analysts. Furthermore, there are many large, well-established, publicly traded companies active in our industry and market, which may mean that it is less likely that we will receive widespread analyst coverage. If any of the analysts who cover us downgrade our stock, our stock price would likely decline rapidly. If these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
  
Substantial future sales of our common stock in the public market may depress our stock price and make it difficult for you to recover the full value of your investment in our shares of common stock.
  
As of March 10, 2014, we had 78,433,916 shares of common stock outstanding. Substantially all of these shares are available for public sale, subject in some cases to volume and other limitations or delivery of a prospectus. The market price of our common stock may decline if our common stockholders sell a large number of shares of our common stock in the public market, or the market perceives that such sales may occur. In addition, we have outstanding options to purchase an aggregate of 8,049,209 shares of our common stock. If these options are exercised and the shares issued upon exercise are sold, the market price of our securities may also decline. These factors also could impair our ability to raise needed capital by depressing the price at which we could sell our securities.
 
 
30

 
We are authorized to issue blank check preferred stock, which could adversely affect the holders of our common stock.
  
Our restated certificate of incorporation allows us to issue blank check preferred stock with rights potentially senior to those of our common stock without any further vote or action by the holders of our common stock. The issuance of a class of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of such holders. In certain circumstances, such issuance could have the effect of decreasing the market price of our shares, or making a change in control of us more difficult.
 
Our executive officers and directors may sell shares of their stock, and these sales could adversely affect our stock price.
  
Sales of our stock by our executive officers and directors, or the perception that such sales may occur, could adversely affect the market price of our stock. Our executive officers and directors may sell stock in the future, either as part, or outside, of trading plans under SEC Rule 10b5-1.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
We currently lease 13,979 square feet of office space in Charlotte, North Carolina. This lease, as amended in October 2010, currently requires monthly payments of approximately $31,000. The lease will expire in March 2016. The agreement calls for annual rent increases of 3%. Under the terms of the lease, a security deposit equal to two months’ rent, or approximately $38,000, was returned to us in 2012. We believe that our current facilities are adequate to meet our needs until late 2014.
 
ITEM 3. LEGAL PROCEEDINGS.
 
Following the receipt of the CRL from the FDA regarding the NDA for Northera™ (droxidopa) in March 2012 and the subsequent decline of the price of our common stock, two purported class action lawsuits were filed on April 4, 2012 and another purported class action lawsuit was filed on May 1, 2012 in the U.S. District Court for the Western District of North Carolina against us and certain of our executive officers.
 
The complaints generally allege that, during differing class periods, all of the defendants violated Sections 10(b) of the Exchange Act and Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making various statements related to our development of Northera for the treatment of symptomatic neurogenic OH and the likelihood of FDA approval. The complaints seek unspecified damages, interest, attorneys’ fees, and other costs. Following consolidation of the three lawsuits and the appointment of a lead plaintiff, a consolidated complaint was filed on October 5, 2012, on behalf of purchasers of our common stock from November 3, 2008 through March 28, 2012. On November 16, 2012, the Company and the other defendants moved to dismiss the complaint. On October 10, 2013, the court granted the motion to dismiss with prejudice and entered judgment in favor of the defendants. On November 8, 2013, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit. Briefing of the appeal began in January 2014. We and our officers intend to vigorously defend against the appeal but are unable to predict the outcome or reasonably estimate a range of possible loss at this time.
 
On May 2, 2012, a purported shareholder derivative lawsuit was filed in the Delaware Court of Chancery against the members of our board of directors as of the date of the lawsuit.  The complaint generally alleges that, from at least June 2011 through February 2012, the defendants breached their fiduciary duties and otherwise caused harm to the Company in connection with various statements related to our development of Northera for the treatment of Neurogenic OH and the likelihood of FDA approval.  The complaint seeks unspecified damages, attorneys’ fees and other costs.  On June 25, 2012, the Court of Chancery entered an Order staying the action until the U.S. District Court for the Western District of North Carolina ruled upon the motion to dismiss that we and our officers filed in November 2012 in response to the consolidated complaint in the class action. After the dismissal of the class action and the filing of the notice of appeal in that case, plaintiff in this action sought to proceed with the case and the parties entered into a scheduling stipulation in January 2014, subsequently approved by the Court of Chancery, for the briefing of defendants’ motions to stay the action and to dismiss the complaint.
 
 
31

 
ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is traded on the NASDAQ Capital Market under the symbol “CHTP”. The following table sets forth the high and low prices of our common stock for the reported periods, as reported by the NASDAQ Capital Market.
 
 
 
High
 
Low
 
Fiscal year ended December 31, 2012
 
 
 
 
 
 
 
First Quarter
 
$
5.40
 
$
2.18
 
Second Quarter
 
$
2.56
 
$
1.05
 
Third Quarter
 
$
1.50
 
$
0.70
 
Fourth Quarter
 
$
1.97
 
$
0.73
 
 
 
 
 
 
 
 
 
Fiscal year ended December 31, 2013
 
 
 
 
 
 
 
First Quarter
 
$
2.17
 
$
0.76
 
Second Quarter
 
$
2.76
 
$
1.68
 
Third Quarter
 
$
3.30
 
$
2.28
 
Fourth Quarter
 
$
4.53
 
$
2.57
 
 
As of March 10, 2014, the last sale price of our common stock on the NASDAQ Capital Market was $5.60 per share. As of March 7, 2014, there were approximately 214 stockholders of record, as derived from our shareholder records excluding beneficial owners of our common stock whose shares are held in the name of various dealers, clearing agencies, banks, brokers and other fiduciaries.
 
For a discussion of outstanding options, warrants and other securities exercisable for, or convertible into, shares of our common stock, please see Note 7 of the financial statements under Item 8 in this Annual Report on Form 10-K.
 
We have neither paid nor declared dividends on our common stock since our inception and do not plan to pay dividends in the foreseeable future. Any earnings that we may realize will be reinvested to finance our operations.
 
The market prices for securities of pharmaceutical companies, including ours, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors, such as regulatory actions, clinical trial results, public concern as to the safety of drugs developed by us or others, fluctuations in our operating results, announcements of technological innovations or new therapeutic products by us or others, developments concerning agreements with collaborators, governmental regulation, developments in patent or other proprietary rights, future sales of substantial amounts of common stock by existing stockholders and general market conditions, can have an adverse effect on the market price of our common stock.
 
 
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ITEM 6.           SELECTED FINANCIAL DATA.
 
The following table sets forth financial data with respect to us as of and for the five years ended December 31, 2013 and the period from April 3, 2002 (inception) through December 31, 2013. The selected financial data below should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period from
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
April 3, 2002
 
 
 
Years ended December 31,
 
(inception) through
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
December 31, 2013
 
 
 
(In thousands, except share and per share data)
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
$
10,368
 
$
16,744
 
$
37,270
 
$
30,871
 
$
23,985
 
$
172,873
 
Sales and marketing
 
 
1,089
 
 
7,222
 
 
8,068
 
 
2,476
 
 
2,289
 
 
25,335
 
General and administrative
 
 
4,978
 
 
5,680
 
 
5,276
 
 
4,155
 
 
4,076
 
 
35,881
 
Restructuring
 
 
-
 
 
2,158
 
 
-
 
 
-
 
 
-
 
 
2,158
 
Total operating expenses
 
 
16,435
 
 
31,804
 
 
50,614
 
 
37,502
 
 
30,350
 
 
236,247
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
 
 
(16,435)
 
 
(31,804)
 
 
(50,614)
 
 
(37,502)
 
 
(30,350)
 
 
(236,247)
 
Interest income, net of expense
 
 
18
 
 
68
 
 
162
 
 
172
 
 
188
 
 
4,769
 
Other income (expense)
 
 
-
 
 
-
 
 
-
 
 
-
 
 
4,390
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(16,417)
 
$
(31,736)
 
$
(50,452)
 
$
(37,330)
 
$
(25,772)
 
$
(231,478)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per basic and diluted
    share of common stock
 
$
(0.24)
 
$
(0.47)
 
$
(0.84)
 
$
(0.91)
 
$
(0.82)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number
    of basic and diluted common
    shares outstanding
 
 
68,825,944
 
 
66,892,982
 
 
60,136,326
 
 
41,184,623
 
 
31,549,739
 
 
 
 
 
 
 
As of December 31,
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
(in thousands)
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
45,323
 
$
28,425
 
$
41,106
 
$
47,593
 
$
22,295
 
Short-term investments, net
 
 
-
 
 
-
 
 
4,500
 
 
-
 
 
11,450
 
Working capital
 
 
43,211
 
 
25,765
 
 
33,336
 
 
34,970
 
 
12,671
 
Total assets
 
 
46,503
 
 
28,928
 
 
46,903
 
 
48,374
 
 
34,349
 
Line of credit payable
 
 
-
 
 
-
 
 
-
 
 
-
 
 
11,466
 
Deficit accumulated during the
    development stage
 
 
(231,478)
 
 
(215,061)
 
 
(183,326)
 
 
(132,873)
 
 
(95,543)
 
Total stockholders' equity
 
 
43,256
 
 
25,916
 
 
33,665
 
 
35,188
 
 
12,852
 
 
 
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ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
 
 
We are a development stage pharmaceutical company that seeks to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop pharmaceutical products that address important unmet medical needs or offer improved alternatives to current methods of treatment. We are now focused on commercialization efforts for Northera™ (droxidopa), a novel therapeutic agent, for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with primary autonomic failure (Parkinson’s disease, or PD, multiple systems atrophy, or MSA, and pure autonomic failure, or PAF), dopamine β-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. Northera was granted accelerated approval for marketing in the United States by the U.S. Food and Drug Administration, or FDA, in February 2014, with a commitment for an additional confirmatory study.
  
In addition, we have interest in evaluating droxidopa in other potentially norepinephrine-related conditions and diseases including intradialytic hypotension, fibromyalgia, freezing of gait and adult attention deficit hyperactivity disorder. We also have a portfolio of metabolically inert antifolates that we have studied as a potential treatment of rheumatoid arthritis and that might also be suitable for the treatment of multiple other autoimmune disorders including psoriasis, Crohn’s disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, cancer and other immunological disorders.
 
Northera™ (droxidopa), our most advanced product candidate, is an orally-active synthetic precursor of norepinephrine being developed for the treatment of symptomatic Neurogenic OH. In Japan, Northera has been approved since 1989 and is marketed by Dainippon Sumitomo Pharma Co., Ltd., or DSP, for the treatment of frozen gait and dizziness on standing in PD, orthostatic hypotension, syncope and dizziness on standing in MSA (Shy-Drager Syndrome) and familial amyloid polyneuropathy and symptoms of orthostatic hypotension in hemodialytic patients. During 2007, the FDA granted orphan drug status to Northera for the treatment of symptomatic Neurogenic OH in patients with primary autonomic failure (PD, MSA and PAF), DBH deficiency and non-diabetic autonomic neuropathy and the European Medicines Agency, or EMA, granted orphan medicinal product designation for the treatment of patients with PAF and patients with MSA. In the U.S., orphan drug status provides seven years of marketing exclusivity from the date of approval and designation as a new chemical entity in the European Union provides for 10 years of marketing exclusivity.
 
On February 18, 2014, the FDA granted accelerated approval of Northera for the treatment of symptomatic Neurogenic OH. Northera is the first and only therapy approved by the FDA which demonstrates symptomatic benefit in patients with Neurogenic OH. We anticipate that Northera sales will begin in the second half of 2014, at the earliest, and that it will be made available in 100 mg, 200 mg and 300 mg doses. The Northera approval was granted under the FDA’s accelerated approval program, which allows for conditional approval of a medicine that fills a serious unmet medical need, provided additional confirmatory studies are conducted. To this end, a large, multi-center, placebo-controlled, randomized withdrawal study, which includes a 4-week randomized withdrawal phase preceded by a three month open label run-in phase, designed with the goal of definitively establishing the durability of the clinical benefits of Northera, has been preliminarily agreed to with the FDA. The FDA has also agreed that a period of seven years to complete the study is acceptable, given the size of the study and orphan treatment population. We had initiated a new clinical study of Northera in Neurogenic OH, currently designated as Study 401, in which patient enrollment began in the fourth quarter of 2013. Study 401 was initially designed to provide flexibility depending on the requirements of the FDA as a post-approval efficacy study. The study is a multi-center, placebo-controlled, randomized double-blind induction study. Given the updated guidance from the FDA for a withdrawal-designed post-approval confirmatory efficacy study, management will work with the FDA to evaluate each of the components of our clinical program for Northera.
 
 
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The resubmission of the Northera NDA included data from our three completed Phase III efficacy studies (Studies 301, 302, 306A and 306B), an integrated summary of efficacy, an expanded, 650-patient safety database, two long-term, open label extension studies, a dedicated thorough QTc study and a 24-hour ambulatory blood pressure monitoring study.
 
Prior to our NDA filing in September 2011, that resulted in the FDA issuing a complete response letter, or CRL, in March 2012, we had completed two Phase III efficacy trials, Studies 301 and 302, of Northera for the treatment of symptomatic Neurogenic OH in patients with primary autonomic failure. The improvements in the symptoms of Neurogenic OH, as measured by the orthostatic hypotension questionnaire composite score, or OHQ composite, associated with Northera treatment showed improvement (p<0.05) in OHQ composite scores in a post-hoc analysis of Study 302 data. The same measure was used in our pivotal efficacy Study 301 and those results did not demonstrate a statistically significant treatment effect (treatment effect of 0.4 unit, p-value=0.19). After 1 week of treatment, patients treated with Northera showed a mean 0.7 unit decrease in their dizziness scores compared to placebo (p=0.06). These data exclude the results of two investigative sites located in Ukraine as the FDA, during the May 2012 End-of-Review meeting, or EOR, had expressed significant concerns regarding the disproportionate results of these two sites. Although we submitted all information pertaining to two independent site visits, neither of which revealed any significant errors in the conduct of the trial, which was consistent with the positive findings from the FDA pre-approval inspection conducted during the review of the Northera NDA. Further, we have submitted all source documentation from all patients at the site and engaged independent, third-party quality experts to confirm the validity of data from the site. Notwithstanding this information, the FDA has and continues to maintain that the concentration and pattern of positive results at this site precludes Study 301 from meeting its primary endpoint.
 
Northera showed similar improvements (p<0.05) in OHQ composite scores in a post-hoc analysis of Study 302 data. We had also completed, at the request of the FDA, a QTc study. A QT interval is a measure of time between the start of the Q wave and the end of the T wave in the heart’s electrical cycle. In general, a prolonged QT interval is a biomarker for ventricular tachyarrhythmias and can be a risk factor for sudden death. The results of this trial showed that Northera, at either therapeutic or supra-therapeutic doses, did not increase heart rate or prolong AV conduction or cardiac polarization times as measured by the PR interval, QT interval and duration of the QRS complex.
 
Although modified by subsequent guidance, in June 2012, the FDA advised that, based on the theoretical potential for un-blinding, Study 306B was unlikely to provide sufficient confirmatory evidence to support a Northera NDA. Soon after receipt of the written response from the FDA, we stopped enrolling patients in our Study 306B. Total enrollment was completed with 174 patients randomized, representing the single largest placebo-controlled study ever conducted in Neurogenic OH. In addition, we modified the primary endpoint of Study 306B to the mean change in OHSA item #1 score (dizziness, lightheadedness, feeling faint or “feeling like you might black out”) at visit 4 (one-week post titration). The rate of patient reported falls was a secondary efficacy endpoint of the study. In December 2012, we announced that preliminary results of Study 306B showed that the primary endpoint of the study had been met. The results showed that treatment with Northera provided clinically meaningful and statistically significant improvements compared to placebo in dizziness/lightheadedness at week 1 (1.0 unit change; p=0.018), the primary endpoint. In addition, compared to placebo, a statistically significantly greater number of patients were observed to experience 2, 3 or 4 unit improvements at week 1 compared to baseline (all p-values < 0.05). Study results also demonstrated a statistically significant increase in standing systolic blood pressure (SBP) at week 1 (5.6 mmHg; p=0.032), an important secondary endpoint of the study. At time points beyond week 1, dizziness/lightheadedness and standing blood pressure predominantly favored Northera-treated patients, although the results were not statistically significant.
 
 
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Treatment with Northera also resulted in a reduction in the rate of patient falls over the course of Study 306B, although these results were not statistically significant.  Patients receiving placebo experienced a rate of falls per patient per week of 2.0 vs. 0.4 for those on Northera, an 80% reduction. Because several patients on placebo experienced a very large number of falls, we performed multiple sensitivity analyses on this outcome. These analyses showed that the beneficial effect of Northera on falls trended favorably even if the top 2, 5 or 10 fallers from each treatment group were removed (34%, 36% and 29% reduction, respectively, p=NS). Importantly, the falls data were supported by additional safety data showing that 34% fewer patients receiving Northera experienced fall-related injuries (e.g., contusions, lacerations, fractures) than patients receiving placebo (placebo=25.6% vs. Northera=16.9%, p=NS). Both the reduction in falls and fall-related injuries associated with Northera are consistent with results observed in Study 306A. Preliminary safety data showed that Northera was well tolerated at all dosages tested and, as in prior studies, the incidence of supine hypertension was low.
 
In December 2011, we announced that we had received a notice of allowance from the U.S. Patent and Trademark Office for our patent “Threo-DOPS Controlled Release Formulation.” U.S. Patent No. 8,158,149. This patent was issued in April 2012 and will expire in 2028. The allowed claims relate to certain oral, controlled release formulations of Northera that include an extended release component and an immediate release component. Although we are not currently seeking regulatory approval for such a controlled release formulation of Northera, if we were to do so, the patent would provide protection for the claimed formulation beyond the seven-year marketing exclusivity afforded by its orphan designation in the U.S. Also, in September 2011, we announced that we had been issued U.S. Patent No. 8,008,285 entitled “Droxidopa and pharmaceutical composition thereof for the treatment of fibromyalgia.” The claims of the patent are related to methods of reducing pain associated with fibromyalgia by administering droxidopa alone, or in combination with other specified medications.
 
In December 2011, we announced top-line results from our Phase II trial of droxidopa, alone and in combination with carbidopa, for the treatment of fibromyalgia. Top-line results of the study indicate a dose response with the highest dose of droxidopa, 600mg three times daily, demonstrating a 6.2-point average improvement from a baseline score of 23.00 on the Short Form McGill Pain Questionnaire, or SF-MPQ, at the end of the nine-week treatment period, the study’s primary endpoint. This reflects a 3.2 unit improvement over placebo on the SF-MPQ total pain score. Although the study, conducted under approval from the United Kingdom’s Medicines and Healthcare Products Regulatory Agency, was not designed to demonstrate statistical significance given the limited number of patients per arm, results of the study show a mean change in pain, as measured by the visual analog scale, or VAS, of -1.64 for patients treated with droxidopa monotherapy compared to a mean change of -0.90 for placebo. Assessment using the Fibromyalgia Index Questionnaire, or FIQ, showed patients treated with droxidopa monotherapy demonstrated a mean change from baseline of -9.72 compared to -4.74 reported by patients in the placebo arm. Administration of droxidopa monotherapy appeared to be more effective than droxidopa/carbidopa combination therapy in the study.
 
In July 2011, we announced positive top-line results of an investigator-led Phase II clinical study of droxidopa in combination with carbidopa in 20 adults with ADHD indicating that droxidopa dramatically improved patients’ mean score on the adult ADHD Investigator Symptom Rating Scale, or AISRS. The AISRS is a standardized, validated rating scale for assessing symptoms of adult ADHD and for measuring response to treatment. Upon enrollment, patients in the study had a mean AISRS score of 34. After three weeks of open-label droxidopa monotherapy (titration from 200mg-600mg TID), the mean AISRS score decreased by approximately 47% to 19 (p<0.0001). The reduction in AISRS score was maintained with the addition of carbidopa (25mg or 50mg) for another three weeks.
 
In September 2012, preliminary data from an investigator-led, Phase II study to evaluate droxidopa for the treatment of orthostatic hypotension resulting from spinal cord injury, or SCI, suggests that low to moderate doses of droxidopa do not worsen supine increases in blood pressure in persons with SCI.  Although droxidopa increased seated blood pressure in a dose-dependent manner, subjects remained relatively hypotensive.  Additional studies will be necessary to determine the effective dose of droxidopa that normalizes blood pressure in this population.
 
In addition to droxidopa, we have devoted resources to the development of a portfolio of molecules for the treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically-inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological disorders, including two clinical stage product candidates designated as CH-1504 and CH-4051.
 
 
36

 
CH-1504 has completed Phase II trials in rheumatoid arthritis. While we do not intend to conduct additional trials or make further investments in the development of CH-1504, clinical work related to this compound might provide meaningful informative data supporting the development of additional compounds in this portfolio. Based on preclinical and clinical findings, we focused our clinical resources on the development of CH-4051, the second clinical stage compound in this portfolio and the more potent L-enantiomer of CH-1504. CH-4051 has been studied in rheumatoid arthritis as its lead indication, having completed a Phase I trial in April 2009 and a Phase II trial for the treatment of rheumatoid arthritis in May 2012.
 
In November 2011, we announced results from an interim analysis of unblinded efficacy data from the lower two of three doses of CH-4051 and half of the patients enrolled into the methotrexate, or MTX, control arm in our multinational, 12-week, double-blind Phase II trial of CH-4051 in patients with rheumatoid arthritis, designed to compare the efficacy and tolerability of CH-4051 against MTX. MTX is currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. This data suggested a dose-dependent therapeutic response in which patients treated with the mid-range, or 1.0 mg daily oral dose, of CH-4051 experienced similar efficacy to patients treated with a standard 20.0 mg weekly dose of MTX.
 
In May 2012, we announced the top-line results of this trial conducted in 244 patients with rheumatoid arthritis who experience an inadequate response to methotrexate treatment. Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated. CH-4051 was found to be safe and well-tolerated in the study, with no dose-limiting toxicities or clear differences in the overall adverse event rate between methotrexate and the CH-4051 treatment groups.
 
While management believes that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the planned completion of the Northera development and commercialization program in Neurogenic OH. As such, there are no immediate activities planned for the further development of CH-4051 although we do continue to pursue potential out-licensing opportunities for this portfolio of molecules.
 
Complementing our autoimmune/inflammatory program is a second platform consisting of a portfolio of therapeutics targeting immune-mediated inflammatory disorders and transplantation, known as our I-3D portfolio. We currently have no work underway related to this portfolio.
 
Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMA and other regulatory agencies, raising capital and undertaking preclinical trials and clinical trials of our product candidates. In addition, during late 2011 and early 2012, prior to the date we received the CRL, we had initiated activities to support the planned commercialization of Northera. In February 2014, upon the approval of Northera in the United States, we re-initiated such activities to support the commercial launch of Northera that is currently estimated to occur, at the earliest, in the second half of 2014. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any product revenue until we begin selling Northera or any of our other pharmaceutical candidates, should they be approved by the appropriate regulatory agencies, although we could potentially generate revenue by entering into strategic agreements including out-licensing, co-development or co-promotion of our drug candidates. Developing pharmaceutical products is a lengthy and expensive process. Currently, development and commercialization expenses are being funded with proceeds from equity financings and, to a much lesser extent, proceeds from the exercise of warrants and options. We may require additional funding to successfully commercialize and launch Northera in the U.S. Such funding might be provided by securing a partnering arrangement for one or more of our product candidates that would also provide access to additional expertise in conducting these activities. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development and/or commercialization of the products.
 
 
37

 
 
We have not generated any revenue from licensing, milestones or product sales through December 31, 2013.   We do not expect to generate product revenue until we are able to successfully commercialize and launch Northera in the United States.  We may also attempt to out-license one or more of our drug product candidates and, if successful, we would anticipate revenue to be recorded from such a transaction.  However, we might never be able to generate revenue or generate revenue sufficient to fund ongoing operations. Other than Northera, which could be launched in the second half of 2014, at the earliest, none of our other product candidates are expected to be commercially available until, at the earliest, 2019, if at all.
 
 
Research and development expenses consist primarily of costs associated with determining feasibility, licensing and preclinical and clinical testing of our licensed pharmaceutical candidates, including salaries and related personnel costs, fees paid to consultants and outside service providers for drug manufacture and development, certain legal expenses and other expenses. All of our major research and development projects subject us to drug development and regulatory risks, including specifically risks of delays and cost over-runs that could be material to our financial condition and results of operations.  For certain programs, we might rely on collaborative partners or our ability to enter into collaborations on favorable terms in order to advance a product candidate and pay a portion of the research and development expenses.  See “Item 1A. Risk Factors.” Research and development expenses, related to our major research and development projects, for the years ended December 31, 2013, 2012 and 2011 were approximately $10.4 million, $16.7 million and $37.3 million, respectively, and are detailed as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Period from
 
 
 
 
 
 
 
 
 
 
 
 
April 3, 2002
 
(in thousands)
 
Years ended December 31,
 
(inception) through
 
 
 
2013
 
2012
 
2011
 
December 31, 2013
 
Antifolates
 
$
-
 
$
4,000
 
$
7,350
 
$
43,000
 
Droxidopa
 
 
10,400
 
 
12,700
 
 
29,950
 
 
127,400
 
I-3D
 
 
-
 
 
-
 
 
-
 
 
2,500
 
 
 
$
10,400
 
$
16,700
 
$
37,300
 
$
172,900
 
 
 
During 2013, selling and marketing expenses consisted primarily of salaries and related expenses that support our business development activity, including programs related to our patents and intellectual property.  During 2012 and earlier periods, these costs also included promotional initiatives, activities related to the branding, pricing and market analysis of our pharmaceutical compounds and the initial steps taken to establish a Northera sales force in the United States.
 
 
General and administrative expenses focus on the support of administrative activities and consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses for such personnel, consulting and professional fees and other corporate expenses, including general legal and accounting activities, certain taxes and other government fees and facilities-related expenses.
 
 
Our operating company, Chelsea Therapeutics, Inc., or Chelsea Inc., was incorporated in Delaware in April 2002 under the name Aspen Therapeutics, Inc.  Its name was changed in July 2004.  In February 2005, we completed a merger with Ivory Capital Corporation, or Ivory, a publicly traded Colorado corporation, in which a wholly owned subsidiary of Ivory Capital was merged with and into Chelsea Inc. and Chelsea Inc. became a wholly owned subsidiary of Ivory.  The merger resulted in a change of control of Ivory, with the former stockholders of Chelsea Inc. owning approximately 96.75% of the resulting entity, after assuming the conversion of all outstanding options and warrants.  In addition, the terms of the merger provided that the sole officer and director of Ivory would be replaced by the officers and directors of Chelsea Inc. The transaction was accounted for as a reverse acquisition with Chelsea Inc. as the acquiring party and Ivory as the acquired party, in substance, a reorganization of Chelsea Inc. Accordingly, when we refer to our business and financial information relating to periods prior to the merger, we are referring to the business and financial information of Chelsea Inc. unless the context indicates otherwise.  On July 28, 2005, Ivory merged with Chelsea Therapeutics International, Ltd., or Chelsea Ltd., with Chelsea Ltd. as the surviving corporation. As a result, Chelsea Ltd. is the public reporting company and is the 100% owner of Chelsea Inc., its operating subsidiary.
 
 
38

 
When we refer to business and financial information for periods between January 1, 2005 and July 28, 2005, we are referring to the business and financial information of Ivory. Except as noted, all share numbers included herein reflect the conversion of every nine shares of Ivory Capital Corporation common stock for one share of Chelsea Ltd. common stock that occurred in connection with our Delaware reincorporation on July 28, 2005.
 
 
The tables below set forth, for the periods indicated, certain items in our consolidated statements of operations and other pertinent financial and operating data.
 
Comparison of Years ended December 31, 2013 and 2012
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the
 
For the
 
 
 
 
 
 
 
 
 
year ended
 
year ended
 
 
 
 
 
 
 
 
 
December 31,
 
December 31,
 
$
 
%
 
 
 
 
2013
 
2012
 
Decrease
 
Change
 
 
Research and development expense
 
$
10,368
 
$
16,744
 
$
(6,376)
 
-38
 
%
Sales and marketing expense
 
 
1,089
 
 
7,222
 
 
(6,133)
 
-85
 
%
General and administrative expense
 
 
4,978
 
 
5,680
 
 
(702)
 
-12
 
%
Restructuring
 
 
-
 
 
2,158
 
 
(2,158)
 
-100
 
%
Interest income
 
 
18
 
 
68
 
 
(50)
 
-74
 
%
 
Research and development expenses.  During 2013, we recorded the initial costs related to the initiation of Study 401 and reconciled and recorded final costs associated with Study 306B and our open-label extension study, Study 304 for Northera.  We also had expenses related to our 300mg bioequivalence study, the preparation and resubmission of our Northera NDA and the costs of preparing for the January 2014 meeting of the Cardiovascular and Renal Drug Advisory Committee, or CRDAC.  Specifically, expenses for 2013 included approximately $3.1 million of initial costs for Study 401 for Northera, $1.8 million related to preparation of our Northera NDA for resubmission and preparation for the 2014 meeting of CRDAC, $0.4 million for our 300mg bioequivalence study and $0.5 million for Study 304 for Northera. We also incurred costs in 2013 related to ongoing public affairs activities, including support of patient advocacy groups that continue to advocate the approval of additional therapies for the treatment of Neurogenic OH.  During 2012, we incurred costs for our now-completed Study 306B and our open-label extension study, Study 304, and had expenses for our now completed Phase II trial of CH-4051 in rheumatoid arthritis.  We also incurred costs of approximately $0.2 million to support the preparation for the meeting of the CRDAC held in February 2012 and our EOR meeting with the FDA held in May 2012.  Specifically, expenses for 2012 included approximately $2.3 million of direct study costs related to the completion of our Phase II trial of CH-4051 and $3.4 million for Study 306B and our extension studies for Northera. Additionally, we incurred costs during the first six months of 2012 related to medical affairs activities, including a team of medical science liaison professionals, hired on a contract basis, generating costs of $0.8 million.  We also incurred approximately $1.2 million of expenses for the purchase of active pharmaceutical ingredient in January 2012 to be used in the manufacture of commercial product, formulation activities and the costs of distributing clinical trial material. Also contributing to our expenses in both periods were compensation and related costs. As a percentage of operating expenses, research and development costs were 63% for 2013 and 56% for 2012, excluding restructuring costs.
 
Droxidopa.  From inception through December 31, 2013, we had spent approximately $127.4 million in research and development expenses on droxidopa.  For 2013, research and development costs for the Northera Neurogenic OH core program include the initial costs of Study 401; our Phase III trial, Study 306B; our access and safety program, Study 304; our 300mg bioequivalence study; regulatory activity to support our resubmission of the Northera NDA; and costs related to drug supply, manufacture and distribution.  In February 2014, the FDA granted an accelerated approval of Northera for sale in the United States.  While the FDA has a requirement for us to complete a confirmatory efficacy study, the design of that study has not been finalized.  As such, we are currently evaluating the potential costs that might be incurred in 2014 related to this program.
 
 
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Antifolates. From inception through December 31, 2013, we had spent approximately $43 million in research and development expenses on our portfolio of antifolates. In May 2012, we announced the top-line results of our completed Phase II trial of CH-4051 in patients with rheumatoid arthritis.  Results of this trial indicated that CH-4051 did not demonstrate superior efficacy to methotrexate in the dose range evaluated.  While we believe that higher doses of CH-4051 might provide enhanced therapeutic benefit in rheumatoid arthritis and that CH-4051 could be developed for other anti-inflammatory and autoimmune indications, we determined that current resources would be better allocated toward the completion of our Northera development and registration program in Neurogenic OH.  Although we continue to evaluate potential partnering opportunities for these compounds we currently have no immediate activities planned for the further development of CH-4051.
 
I-3D Portfolio. From inception through December 31, 2013, we had spent approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have conducted compound discovery work on the portfolio to try and identify one or more lead compounds. All of the work completed to date was performed before 2008 and we do not expect to incur significant additional expenses for these compounds unless and until we identify a partner.
 
Sales and marketing expenses. With no formalized selling activities and given the elimination of the 2012 pre-commercialization activities for Northera, sales and marketing expenses decreased significantly for the year ended December 31, 2013 when compared to 2012.  Costs incurred in 2013 included compensation and related expenses for our continuing business development efforts and legal fees related to our intellectual property activities.  We had decreases in compensation and related expenses, recruiting costs, travel costs and legal expenses related to our intellectual property when comparing 2013 with 2012.  During the first quarter of 2012, we had spent considerable resources on supporting the development and implementation of sales and marketing initiatives for Northera in anticipation of a 2012 commercial launch.  During the second quarter of 2012, the majority of costs were related to bringing such activities to a close, cancelling related vendor contracts and finalizing projects that were in progress upon receipt of the CRL in March 2012.  We incurred costs of approximately $3.8 million for such activities that included market research, sales force strategy and planning, planning and development of advertising and promotional campaigns, website development, sales operations, sales support systems implementations, employee training programs, sales force recruiting and public relations.  In 2012, we also incurred compensation expenses related to personnel added in early 2012 to support our planned commercialization of Northera.  As a component of the reduction in force announced in July 2012, all the positions of the sales and marketing commercial team were eliminated. 
 
General and administrative expenses. During the year ended December 31, 2013, general and administrative expenses decreased by approximately $0.7 million when compared to 2012.  Contributing to this were decreases in compensation and related expenses, recruiting and relocation expenses, office expenses, franchise taxes, bank fees and financial printing.   Offsetting these were increases in professional fees, including legal and audit fees, insurance expense and investor relations consulting fees.
 
Interest income and interest expense. At December 31, 2013, we had cash and cash equivalents of $45.3 million. The decrease in interest income is primarily related to the lower average amount of investable funds available throughout 2013 when compared to 2012.  Interest rates also remain low in 2013 as there continues to be softness in the interest rate market for cash deposits in the United States.
 
Restructuring expense.  In July 2012, we initiated a corporate restructuring under which the number of employees was significantly reduced, retaining only those employees necessary to continue supporting our efforts to obtain marketing approval for Northera in the United States. This reduction in force primarily, but not exclusively, impacted those positions that had been filled in 2011 and 2012 to support the planned commercialization of Northera in the United States.  In addition, our Chief Executive Officer and our Vice President of Sales and Marketing resigned.  At the Board level, the Chairman of the Board stepped down, but remains a director while another existing director assumed the role of Chairman.  The former CEO and two other directors also resigned from the Board. Costs related to these activities, consisting primarily of severance payments, were recorded in 2012 and totaled approximately $2.2 million.
 
 
40

 
Comparison of Years ended December 31, 2012 and 2011
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the
 
For the
 
 
 
 
 
 
 
 
year ended
 
year ended
 
$
 
 
 
 
 
December 31,
 
December 31,
 
Increase
 
%
 
 
 
2012
 
2011
 
(Decrease)
 
Change
 
Research and development expense
 
$
16,744
 
$
37,270
 
$
(20,526)
 
-55
%
Sales and marketing expense
 
 
7,222
 
 
8,068
 
 
(846)
 
-10
%
General and administrative expense
 
 
5,680
 
 
5,276
 
 
404
 
8
%
Restructuring
 
 
2,158
 
 
-
 
 
2,158
 
100
%
Interest income
 
 
68
 
 
162
 
 
(94)
 
-58
%
 
Research and development expenses.  During 2012, we incurred costs for Study 306B and our open-label extension study, Study 304, and had expenses for our now completed Phase II trial of CH-4051 in rheumatoid arthritis.  We also incurred costs of approximately $0.2 million to support the preparation for the FDA requested meeting of the CRDAC held in February 2012 and our EOR meeting with the FDA held in May 2012.  Specifically, expenses for 2012 included approximately $2.3 million of direct study costs related to our recently completed Phase II trial of CH-4051 and $3.4 million for Study 306B and our extension studies for Northera. Additionally, we incurred costs during the first six months of 2012 related to medical affairs activities, including a team of medical science liaison professionals, hired on a contract basis, generating costs of $0.8 million.  We also incurred approximately $1.2 million of expenses for the purchase of active pharmaceutical ingredient in January 2012 to be used in the manufacture of commercial product, formulation activities and the costs of distributing clinical trial material.  During 2011, primary expenditures were associated with the manufacturing of and process validation for commercial drug product, our Northera QTc study, our Phase III and extension studies for Neurogenic OH, our Phase II trial of droxidopa in fibromyalgia, our Phase II trial of CH-4051, medical affairs activities including medical science liaison contractors and the costs of manufacturing, packaging and labeling clinical trial material for these trials.  As a percentage of operating expenses, excluding the impact of the restructuring, research and development costs were 53% for 2012 and 74% for 2011 reflecting the overall decrease in our clinical research and development activities during the period.
 
Sales and marketing expenses. Although we had no formalized selling activities in either 2011 or 2012, sales and marketing expenses decreased by $0.8 million during 2012 when compared to 2011.  During late 2011 and early 2012, we spent considerable resources on supporting the development and implementation of sales and marketing initiatives for Northera in anticipation of a 2012 commercial launch.  During the second quarter of 2012, the majority of costs were related to bringing such activities to a close, cancelling related vendor contracts and finalizing projects that were in progress upon receipt of the CRL in March 2012.  Such activities included market research, sales force strategy and planning, planning and development of advertising and promotional campaigns, website development, sales operations, sales support systems implementations, employee training programs, sales force recruiting and public relations.  At the beginning of the third quarter of 2012, we announced a restructuring and concurrent reduction in force which essentially eliminated all sales and marketing positions that had been filled in anticipation of commercialization.  As such, overall expenses for the second half of 2012 decreased significantly.  Sales and marketing expenses for the six months ended June 30, 2012 were approximately $6.7 million leaving only $0.5 million of expenses recognized in the second half of 2012.  During 2011, primary expenditures were related to the initiation of the commercialization activities outlined above as well as compensation and related expenses, travel costs and legal expenses related to our intellectual property. 
 
General and administrative expenses.  During 2012 general and administrative expenses increased by approximately $0.4 million when compared to 2011.  Contributing to this increase were increases in professional fees, including legal and investor relations costs, insurance, financial printing and bank fees.
 
Restructuring expense.  In July 2012, we initiated a corporate restructuring under which the number of employees was significantly reduced, retaining only those employees necessary to continue supporting our efforts to obtain marketing approval for Northera in the United States. This reduction in force primarily, but not exclusively, impacted those positions that had been filled in 2011 and 2012 to support the planned commercialization of Northera in the United States.  In addition, our Chief Executive Officer and our Vice President of Sales and Marketing resigned.  At the Board level, the Chairman of the Board stepped down, but remains a director while another existing director assumed the role of Chairman.  The former CEO and two other directors also resigned from the Board. Costs related to these activities, consisting primarily of severance payments, were recorded in 2012 and totaled approximately $2.2 million.
 
 
41

 
Interest income and interest expense. At December 31, 2012, we had cash and cash equivalents of $28.4 million. The decrease in interest income in 2012 compared to 2011 is primarily related to our decreased cash position and continued low interest rates in the United States.
 
 
We have incurred negative cash flows from operations since inception.  We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned launch of Northera in the United States, additional product development efforts, our clinical trials and our continued evaluation of opportunities for possible strategic alliances.   
 
From inception through December 31, 2013 we had losses of $231.5 million.  We had net losses of $16.4 million, $31.7 million and $50.5 million for the years ended December 31, 2013, 2012 and 2011, respectively, and we anticipate losses at least through 2014 and into 2015 unless we should successfully negotiate a strategic agreement earlier that might include out-licensing, co-development or co-promotion of one or more of our drug candidates.  Actual losses will depend on a number of considerations including:
 
the cost, pace and level of success of commercialization and marketing efforts for Northera in the U.S.;
 
the timing and amount of revenue generated from Northera and the pace of revenue growth;
 
the possible out-licensing or other strategic partnering opportunities for our product candidates;
 
the requirements of the FDA for post-approval trials for Northera and the related costs thereof;
 
the costs, requirements and timing for possible regulatory approval for Northera in additional markets outside the U.S.;
 
seeking additional regulatory approvals for any of our other product candidates, formulations  and indications;
 
the pace of development of new intellectual property for our existing product candidates;
 
changes in existing staffing levels;
 
implementing additional internal systems and infrastructure; and
 
in-licensing and development of additional product candidates.
 
Should we raise additional funds by selling shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted.  If we are not able to obtain financing when needed, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or curtail operations.    As a result, our business, financial condition and results of operations would be materially harmed.
 
 
42

 
 
2012 Shelf Registration Statement
 
In November 2013, we raised gross proceeds of approximately $23.0 million through the sale of 7,666,667 shares of our common stock in a publicly-marketed offering.  These shares were offered pursuant to our 2012 shelf registration statement.  In connection with this offering, we paid commissions and other offering-related costs of approximately $1.6 million, resulting in net proceeds of approximately $21.4 million.
 
In November 2012, the Company filed the required documents and became eligible to use an at-the-market common equity sales program for the sale of shares of our common stock up to a value of $20,000,000.  These shares were offered pursuant to the Company’s 2012 shelf registration statement. During the year ended December 31, 2013, we sold 3,609,595 shares of our common stock under this program at an average sales price of approximately $3.02 per share, generating gross proceeds of approximately $10.9 million.  In conjunction with this program, we paid commissions and other offering-related expenses of approximately $0.5 million, resulting in net proceeds of approximately $10.4 million  No sales were made under the program during the year ended December 31, 2012.
 
On February 8, 2012, the Company filed with the Securities and Exchange Commission, or SEC, an amendment to its shelf registration statement on Form S-3 that was originally filed on January 26, 2012, under which the Company may offer shares of its common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $100,000,000.  Such registration statement, as amended, became effective as of February 9, 2012.
 
2011 Shelf Registration Statement
 
In January 2012, we raised gross proceeds of approximately $23.7 million through the sale of 4,989,275 shares of our common stock in a publicly-marketed offering.  These shares were offered pursuant to our shelf registration statement, amended pursuant to Rule 462(b), as filed with the SEC, under which we could offer shares of common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $63,950,000.  The registration statement, as amended, became effective as of January 19, 2011.  In connection with this offering, we paid commissions and other offering-related costs of approximately $1.6 million, resulting in net proceeds of approximately $22.1 million.
 
In February 2011, we raised gross proceeds of approximately $40.3 million through the sale of 10,062,500 shares of our common stock in a publicly-marketed offering.  These shares were offered pursuant to our 2011 shelf registration statement.  In connection with this offering, we paid commissions and other offering-related costs of approximately $2.5 million, resulting in net proceeds of approximately $37.8 million.
 
There are no more securities available under the 2011 shelf registration statement. 
 
2009 Shelf Registration Statement
 
In October 2010, we raised gross proceeds of approximately $40.3 million through the sale of 8,214,286 shares of common stock in a publicly-marketed offering pursuant to our shelf registration statement, as amended pursuant to Rule 462(b), as filed with the SEC under which we could offer shares of our common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $61,566,686.  Such registration statement became effective as of August 20, 2009.  In connection with this offering, we paid commissions and other offering-related costs of approximately $2.5 million. 
 
In July 2010, we filed the required documents and became eligible to use an at-the-market common equity sales program for the sale of up to 3,000,000 shares of common stock pursuant to our 2009 shelf registration statement.  In September 2010, we sold 634,500 shares of common stock under this program resulting in net proceeds, after expenses for the program, of approximately $2.9 million.
 
 
43

 
On March 5, 2010, we raised gross proceeds of approximately $18.2 million through the sale of 6,700,000 shares of common stock plus warrants for the purchase of 2,345,000 shares of common stock.  These warrants had an aggregate fair value of approximately $3.9 million, permitted the holders to purchase the underlying common shares at $2.79 each or elect a net share settlement. All warrants that remained unexercised expired in March 2013.  These shares were offered pursuant to our 2009 shelf registration statement.  In connection with this offering, we paid commissions and other offering-related costs of approximately $1.5 million.
 
There are no more securities available under the 2009 shelf registration statement. 
 
2007 Shelf Registration Statement
 
On July 28, 2009, we raised gross proceeds of approximately $13.3 million through the sale of 3,325,000 shares of common stock.  These shares were offered pursuant to our shelf registration statement filed with the SEC that became effective October 11, 2007, as amended pursuant to Rule 462(b), effective July 22, 2009, to increase the dollar amount of securities available for sale, as filed with the SEC under which we could offer shares of common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $62,218,060.  In connection with the July 2009 offering, we received net proceeds, after deducting placement fees and offering expenses, of approximately $12.4 million.
 
On November 8, 2007, we raised gross proceeds of approximately $48.9 million through the sale of 7,388,172 shares of our common stock in a registered direct offering.  These shares were offered pursuant to our 2007 shelf registration statement as filed with the SEC, under which we were able to offer shares of our common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $60.0 million, prior to its amendment.  Such registration statement became effective as of October 11, 2007.  In connection with this offering, we paid commissions and other offering-related costs of approximately $3.2 million.
 
There are no more securities available under the 2007 shelf registration statement. 
 
Private Placements
 
On March 22, 2007, we raised gross proceeds of approximately $12.5 million through the private placement of 2,648,306 shares of our common stock plus warrants for the purchase of 794,492 shares of our common stock.  The aggregate fair value of these warrants was approximately $1.3 million.  The warrants, all of which were subsequently exercised, permitted the holders to purchase the underlying common shares at $5.66 each.  Under the terms of the placement agreement, we agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on August 7, 2007.   In connection with this offering, we paid commissions and other offering-related costs of approximately $1.0 million in cash.
 
On February 13, 2006, we raised gross proceeds of approximately $21.5 million through the private placement of 7,166,666 shares of our common stock plus warrants for the purchase of 2,149,999 shares of our common stock.  The aggregate fair value of these warrants was approximately $1.1 million.  The warrants permitted the holders to purchase the underlying common shares at $4.20 each. All warrants that remained unexercised expired in February 2011. In connection with this offering, we paid commissions and other offering-related costs of approximately $1.6 million in cash and issued warrants to the placement agent for the purchase of 716,666 shares of our common stock with an exercise price of $3.30 per share, or 110% of the price of the shares sold in the offering and an aggregate fair value of approximately $0.7 million.  All warrants that remained unexercised expired in February 2013. Under the terms of the financing, we filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on March 29, 2006.
 
 
44

 
In December 2004, we raised gross proceeds of approximately $14.5 million through the private placement of 5,532,994 shares of our common stock. The amount raised included the conversion of a $1.7 million stockholder loan along with accrued interest, for which a total of 677,919 shares of common stock were issued.  In connection with this offering, we paid commissions and other offering-related costs of approximately $1.0 million in cash and issued warrants to the placement agent for the purchase of 483,701 shares of our common stock with an aggregate fair value of approximately $14,000.  The warrants, all of which were subsequently exercised, permitted the holders to purchase the underlying common shares at $2.88 per share.
 
 
In March 2004, we entered into a License Agreement with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for rights to use, produce, distribute and market products derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled “metabolically inert anti-inflammatory and antitumor antifolates”, designated by us as CH-1504 and related compounds. The license provides the Company exclusive rights, excluding India, for CH-1504, CH-4041 and related compounds. 
 
In 2004, as consideration for these rights, we paid $150,000 and issued Dr. Nair and his designees 471,816 shares of common stock at an estimated aggregate value of $402.  As additional consideration, we agreed to pay to Dr. Nair and or his designees: (1) royalties on the sales should any compounds be approved for commercial sale; (2) milestone payments, payable upon achievement of clinical milestones; and (3) payments to be made on specified anniversary dates, some of which were payable in equity, at our discretion. There are no minimum royalties under the agreement.  We made milestone payments as required by the agreement of $100,000 each in March 2006 and 2005.  In April 2007, we issued 26,643 shares of our common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the $150,000 annual milestone payment for 2007.  In March 2008, we made a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement.  In April 2008, we issued 30,612 shares of common stock, subject to trading restrictions, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment of $150,000.  In April 2009, we made the 2009 anniversary milestone payment of $150,000.  In October 2010, we made a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement.  We are obligated to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of market exclusivity after the first commercial sale, on a country-by-country basis.  The potential royalty payment under the license agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the agreement and there are no minimum royalties required under the agreement.  We are also obligated to make future potential milestone payments based on the achievement of specific development and regulatory approval milestones.  Although we have no current development activities planned for this portfolio of compounds, approximately $1.5 million of payments might become due if specific clinical or regulatory milestones are achieved at a future date, subject to our right to terminate the license agreement.  In addition, should we enter into an out-licensing agreement, such payments could be offset by revenue received from the sub-licensee.  The agreement remains in effect until the date of the last to expire claim in the patent rights, if not terminated earlier.  Currently, the date of the last to expire claim in the patent rights under this agreement is January 17, 2018, without consideration of the potential for patent term extension or the granting of additional patents. The agreement also provides for termination (i) upon material breach, including nonpayment by us of any monies due, if such breach remains uncured for a period of sixty days, (ii) for bankruptcy and (iii) for our convenience upon thirty days’ written notice. 
 
The license agreement includes certain other covenants, which require us to, among other things, maintain and prosecute patents related to the license; use commercially reasonable best efforts to bring the licensed product to market as soon as reasonably practicable and continue active, diligent marketing efforts; and prepare and provide to the licensor certain reports concerning our development and commercialization efforts. In the event we fail to carry out our responsibilities under the license agreement, the licensors may terminate the license. We may elect to abandon the maintenance and prosecution of any patent applications or issued patents and we retain the right to terminate the license agreement in whole or as to any portion by providing written notice of such intentions to the licensor.
 
 
45

 
In May 2006, we entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd., or DSP, for an exclusive, sub-licensable license and rights to certain intellectual property and proprietary information, the DSP Agreement, relating to L-threo-3,4-dihydroxyphenylserine, or L-DOPS or droxidopa, including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation.  Pursuant to the DSP Agreement, DSP reserved rights to market droxidopa in Japan, Korea, China and Taiwan that precludes the Company’s commercialization of droxidopa in those markets.  As consideration for these rights, we paid DSP $100,000 and issued 63,131 shares of our common stock, with a value of approximately $4.35 per share, or $274,621.  As additional consideration, we agreed to pay DSP and or its designees: (1) royalties on the sales should any compound be approved for commercial sale; and (2) milestone payments, payable upon achievement of milestones as defined in the agreement.  The potential royalty payment under the license agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the DSP Agreement.  All of our obligations to pay royalties under the DSP Agreement expire (i) with respect to North America, which is defined to include the United States, Canada and Mexico, eight years after the First Commercial Sale, as defined in the DSP Agreement, in the United States, and (ii) with respect to the remainder of the territory, eleven years after the First Commercial Sale in either the United Kingdom, France, Italy, Germany or Spain.  In January 2007, we received notification that the FDA had granted orphan drug designation for droxidopa for the treatment of symptomatic neurogenic orthostatic hypotension.  Based on the terms of the DSP agreement, the granting of orphan drug designation for droxidopa triggered a milestone payment to DSP of $250,000.  We made such payment in February 2007.  In February 2008, we made a milestone payment under the agreement of $500,000 related to patient dosing in a Phase III study.  In September 2011, we filed our NDA with the FDA seeking approval to market Northera in the United States, triggering a milestone payment to DSP of $750,000.  We made such payment in December 2011.  At December 31, 2013, remaining potential future milestone payments, subject to our right to terminate the license agreement, totaled $2.5 million, including $1.5 million paid upon FDA approval in the first quarter of 2014.  The DSP Agreement has no fixed term and upon expiration of the relevant royalty term, all of the licenses and rights granted to us in the applicable territory under the DSP Agreement shall become irrevocable, perpetual, fully-paid, and royalty-free.  Prior to that, the DSP Agreement provides for termination (i) upon material breach by either party if such breach remains uncured for a period of sixty days from the date the breaching party was notified of such breach, (ii) for bankruptcy by either party upon thirty days written notice and (iii) for our convenience upon sixty days written notice. 
 
Subsequent to execution of the agreement, we agreed that DSP would initiate, and we would fund, activities focused on modifying the manufacturing capabilities of DSP in order to expand capacity and comply with cGMP regulations and all existing manufacturing requirements of the FDA.  All such work had been completed  by DSP as of December 31, 2012 and we had recorded cumulative expense of approximately $3.1 million as of that date.
 
In May 2006, we entered into a development and commercialization agreement with Active Biotech AB to co-develop and commercialize the I-3D portfolio of orally active, dihydroorotate dehydrogenase (DHODH) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection. Under the terms of the development agreement, an initial payment of $1.0 million was made to Active Biotech during 2006 with such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties.  At December 31, 2006, we had expensed the entire $1.0 million payment.  At December 31, 2007, we had expensed cumulative costs of $1.0 million under the program, in excess of the initial payment of $1.0 million, related to costs of research and development.    During 2008, we ceased joint discovery efforts with Active Biotech on this portfolio and, accordingly, recorded no costs related to this program for any subsequent year, including 2013, 2012 or 2011.  In April 2008, we entered into a termination and assignment agreement with Active Biotech, whereby Active Biotech discontinued its participation in the I-3D co-development program and assigned its entire right, title and interest in the portfolio to us in exchange for royalties on future sales. The termination agreement also eliminated our obligation related to payment of potential future development milestones under the development agreement.
 
 
We have incurred negative cash flow from operations since inception. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our commercial launch of Northera in the United States, product development efforts, our clinical trials, our research and discovery efforts and our regulatory activities. 
 
Given the approval of Northera by the FDA in February 2014, we are focused on evaluating potential strategic opportunities that could include partnerships, out-licensing or the potential sale of the company.  If we are successful in completing such an arrangement, we would not anticipate that capital resources in excess of those available at December 31, 2013 would be needed during 2014, if ever, recognizing that, depending on the nature of the strategic arrangement, our operations as an independent entity might cease.  If we are unable to successfully complete a strategic transaction, we would need to evaluate additional sources of capital to pursue an independent launch of Northera.  If we are unable to obtain additional sources of capital, we would be required to delay or reduce the scope of the launch of Northera in order to extend our capital resources into early 2015.
 
Regardless of the successful completion of a potential strategic arrangement, the approval of Northera requires significant incremental spending in 2014 including a milestone payment made upon approval to our partner DSP, commencement of the post-approval confirmatory study as required by the FDA and building adequate infrastructure to support regulatory compliance requirements. In addition, we plan to secure the appropriate materials to manufacture an adequate commercial supply of Northera. 
 
Potential sources of additional liquidity include strategic relationships, out-licensing of our products, public or private sales of equity or debt, option exercises and other sources.  We might seek to access the public or private equity markets again when and if conditions are favorable.  However, it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all.  If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted.  If we are not able to locate adequate sources of additional liquidity when needed, we might be unable to carry out our business plan.  As a result, we might have to significantly delay certain activities or limit our operations and our business, financial condition and results of operations would be materially harmed. 
 
 
46

 
 
We do not have any unconsolidated entities, and accordingly, we have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
 
 
As of December 31, 2013, we have known contractual obligations and commitments of approximately $24.6 million, primarily related to contracted research and development for our Study 401 trial for Northera in Neurogenic OH, subject to our right to terminate the study without a financial penalty.  To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided as of December 31, 2013:
 
 
 
Payments due by period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
More than
 
Category
 
Total
 
< 1 Year
 
1-3 Years
 
3-5 Years
 
5 Years
 
Operating lease obligations
 
$
882,839
 
$
394,869
 
$
487,970
 
$
-
 
$
-
 
Purchase obligations
 
 
23,690,835
 
 
9,258,397
 
 
14,432,438
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
24,573,673
 
$
9,653,266
 
$
14,920,408
 
$
-
 
$
-
 
 
We have also entered into certain other agreements that, based on our future development and commercialization plans as of December 31, 2013, might require us to make contingent milestone payments of up to approximately $4.2 million over the life of the agreements upon the achievement of certain clinical or commercial milestones.  Such future payments are subject to our right to terminate the agreements. In the event that the milestones are not achieved, we elect not to pursue further testing of the drug candidate or we terminate such agreements, we will have no further obligations under the agreements.  The uncertainty relating to the timing and occurrence of the commitments described prevents us from including them in the table above.  A payment of $1.5 million was made in February 2014 related to a milestone due upon FDA approval of Northera. In addition, we committed to the purchase of drug substance, to be used for the commercial production of Northera drug product, from our third-party supplier in March 2014 that, given the exchange rates in affect at that date, totaled approximately $4.6 million. 
 
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K. The following accounting policies are critical in fully understanding and evaluating our reported financial results.
 
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions. We consider an accounting estimate to be critical if the accounting estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and where changes in the estimate that could occur from period to period, or use of different reasonable estimates in the current period, would have a material impact on our financial condition or results of operations.
 
 
47

 
Significant estimates and assumptions are required related to the estimated costs and estimated percentages of completion of research and development activities that are outsourced to third-party contractors, the valuation of assets and stock-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results may differ significantly from our estimates.
 
 
Research and development expenditures are expensed based upon our most recent estimate of the costs to complete these activities. We often contract with third parties contract research organizations, or CROs, to facilitate, coordinate and perform agreed upon research and development activities.  Expense recognition is based upon estimated percentage of completion at the financial statement date applied against estimated amounts to complete the project.  Estimates are calculated, maintained and presented by the CROs and are then subjected to rigorous periodic internal review and analysis to ensure reasonableness of the estimates. Such review includes difficult, subjective and complex judgments, particularly in instances of studying orphan drug candidates where prior clinical activity is limited, providing little or no historical cost information.  Given the highly variable nature of the costs involved in the completion of a clinical or pre-clinical trial, fluctuations in costs estimates can occur at any time during the trial or at its conclusion based on a number of factors including, but not limited to, the rate at which investigator sites are identified, the site locations (US versus International), the timing of site activation, the rate at which patients are enrolled into a trial, changes to the number of sites and/or patients that are targeted for the trial, the timelines for trial completion and changes in scope of the actions to be taken by the contractor. 
 
Given that the recognition of expense related to our contracted research and development activities comprise a significant component of our reported expenses during any given period, such fluctuations can be material to our results of operations and the carrying value of assets and liabilities.  The estimates to complete each contracted project are also used in the determination and disclosure of contractual obligations providing a meaningful snapshot of cash requirements arising from future contractual payment obligations based upon the best information available at the time the financial statements are published.
 
To ensure that research and development costs are expensed as incurred, we measure expense based on estimated work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.  Contracts for research and development programs typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones.  In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed.  Most fees are incurred throughout the contract period and are expensed based on their estimated percentage of completion at a particular date.  Although such fees may fluctuate during the life of a research and development program, such fluctuations are generally based on changes in or delays in the timelines for study completion.
 
These contracts generally include pass through fees.  Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing fees.  Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract period.  Fees incurred to set up the clinical trial are expensed during the setup period.  Estimating the costs of pass-through expenses for a contracted research and development program can be difficult and complex.  Judgments used in the development of these estimates include the costs of our previous clinical trials, estimates of patient recruitment rates, estimates of drop-out rates and estimates of site identification and activation rates.  Estimates of investigator payments, lab costs, database development and management and adverse event reporting are based on parameters such as number of office visits, laboratory requirements, screening failure rates, location of the investigator site and the patient related factors discussed above.  Historically, we have experienced fluctuations in the estimates of thee costs and have implemented rigorous review processes to ensure reliability of our estimates.  Fluctuations that have occurred previously have been in the range of +/- 5% of total program costs and we would anticipate that similar fluctuations could occur in the future.  Depending on the size of the trial, the estimated costs to complete and the volume of overall research and development activities during any given period, such fluctuations could be material to our results of operations and financial position.    
 
 
48

 
We had previously contracted with a third-party to manufacture commercial quantities of Northera prior to receipt of the 2012 CRL. We might perform similar activities with other product candidates in the future.  The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for marketing by the appropriate regulatory agencies on a timely basis, or ever.  As such, until final approval to market any our product candidates is received from the appropriate regulatory agencies, such costs are expensed to research and development.
 
Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.
 
 
We account for our stock options utilizing the fair value based method of accounting for stock options or similar equity instruments. In determining the fair value of the equity instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the underlying shares and (v) anticipated future forfeitures.  To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our awards.  We estimate the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted.  The expected dividends reflect our current and expected future policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we analyze the historical volatility of our stock price over a period equal to the expected life of the options.  We plan to continue to analyze the expected stock price volatility and expected term assumption at each grant date. 
 
As of January 1, 2011, taking into consideration hiring completed and planned by us and the potential impact of forfeitures given the roles of these newly filled positions, we estimated a forfeiture rate of 3%.  Given the events of 2012 and the corporate restructuring announced in July 2012 that have negatively impacted our staffing levels, the estimated forfeiture rate was changed to 24% for the first six months of 2012 and the impact of this change in estimate was recognized as a cumulative catch-up and serves to reduce the stock-based compensation costs for the quarter ended June 30, 2012.  In July 2012 and in January 2013, we again reviewed our estimated forfeiture rate, based upon the adjusted staffing levels resulting from the corporate restructuring and, effective at those dates, modified our estimated forfeiture rate to 11.5% and 10%, respectively.  In periods prior to 2011, our rate of forfeiture was immaterial to the recognition of compensation expense for options.
 
Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants utilizing this method. We expect to record additional non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.
 
 
We invest our cash in a variety of financial instruments in order to preserve principal and liquidity while maximizing returns and we do not invest in financial instruments or their derivatives for trading or speculative purposes.  To minimize the exposure due to adverse shifts in interest rates, we maintain investments of shorter maturities.  Our investment guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting our investments to high quality debt instruments with relatively short maturities.  A portion of our cash is maintained in non-interest bearing accounts at federally insured financial institutions.  Prior to December 31, 2012, under the Transaction Account Guarantee Program of the Federal Deposit Insurance Corporation, or FDIC, such deposits were fully insured.  Subsequent to that date, coverage is limited to $250,000 for each financial institution at which the Company has deposited funds and although our funds on deposit might exceed the FDIC limitation at times, we feel confident that the financial stability and strength of the financial institutions utilized for our commercial banking needs provide sufficient security for these funds.   We maintained and continue to maintain funds on deposit in commercial accounts that include non-interest bearing commercial checking accounts, fully liquid interest-bearing money market accounts, money market funds and Treasury funds that typically are liquid or have maturities of six months or less.  All deposits and investments to date have been made in U. S. dollars and, accordingly, have no exposure to foreign currency rate fluctuations on these investments. 
 
 
49

 
Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since our investments are and will be in short-term investments.  Currently, the returns on such liquid, short-term investments are at historic lows.  Accordingly, we estimate that any sensitivity experienced due to fluctuations of interest rates in the United States for such investments would have no material impact on our consolidated financial position or results of operations.
 
 
(a)  The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K.  An index of the financial statements filed herewith is found on page 54.
 
(b)   The unaudited quarterly financial data for the two-year period ended December 31, 2013 is as follows:
 
 
 
 
Year ended December 31, 2012
 
 
 
First
 
Second
 
 
Third
 
Fourth
 
 
 
Quarter
 
Quarter
 
 
Quarter
 
Quarter
 
Operating expenses
 
$
15,587,992
 
$
7,889,879
 
$
6,088,374
 
$
2,237,258
 
Loss from operations
 
 
(15,587,992)
 
 
(7,889,879)
 
 
(6,088,374)
 
 
(2,237,258)
 
Other income (expense)
 
 
28,774
 
 
17,594
 
 
12,076
 
 
9,150
 
Net loss
 
 
(15,559,218)
 
 
(7,872,285)
 
 
(6,076,298)
 
 
(2,228,108)
 
Basic and diluted net loss per share (a)
 
 
(0.23)
 
 
(0.13)
 
 
(0.09)
 
 
(0.03)
 
 
 
 
Year ended December 31, 2013
 
 
 
First
 
Second
 
Third
 
Fourth