Statera Biopharma, Inc. - Annual Report: 2012 (Form 10-K)

DELAWARE		20-0077155
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

73 High Street, Buffalo, NY 14203		(716) 849-6810
(Address of principal executive offices)		Telephone No.

Title of each class		Name of each exchange which registered
Common Stock, par value $0.005 per share		NASDAQ Capital Market

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. [  ]

Large accelerated filer [  ]	Accelerated filer [x]
Non-accelerated filer [  ]	Smaller reporting company [  ]

		Page
PART I
Item 1	Business	1
Item 1A	Risk Factors	23
Item 1B	Unresolved Staff Comments	39
Item 2	Description of Properties	39
Item 3	Legal Proceedings	39
Item 4	Mine Safety Disclosure	39
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities	40
Item 6	Selected Financial Data	40
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8	Financial Statements and Supplementary Data	49
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70
Item 9A	Controls and Procedures	70
Item 9B	Other Information	70
PART III
Item 10	Directors, Executive Officers and Corporate Governance	71
Item 11	Executive Compensation	71
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13	Certain Relationships and Related Transactions, and Director Independence	71
Item 14	Principal Accountant Fees and Services	71
PART IV
Item 15	Exhibits and Financial Statement Schedules	72
SIGNATURES		73

 

 
 

Product Candidate		Indication		Description		Development Stage
Entolimod™*		Radiation Countermeasure		Radioprotectant and mitigating agent targeting increased survival from lethal exposure		Pivotal stage
Entolimod™		Targeted Cancer Treatment		TLR5 agonist inducing innate immune response to targeted tumor types and liver metastases		Phase 1
CBLB612		Neutropenia/HSCT**		Hematopoietic stem cell inducer and mobilizer to peripheral blood		Pre-clinical
Incuron Product Candidates
CBL0102		Hepatocellular Carcinoma		Quinacrine		Phase 1
CBL0137		Cancer Treatment		Small molecule targeting FACT***		Phase 1
Panacela Product Candidates
Revercom		Cancer Treatment		Chemotherapy adjuvant		Pre-clinical
Mobilan		Cancer Treatment		Immunotherapy		Pre-clinical
Arkil		Targeted Cancer Treatment		Inhibitor of Androgen receptor		Pre-clinical
Antimycon		Targeted Cancer Treatment		Inhibitor of Myc oncogene		Pre-clinical
Xenomycins		Anti-Infective		Small molecules targeting FACT***		Pre-clinical

We have successfully negotiated contracts and grants with the U.S. government totaling $85.9 million for the development and procurement of our lead compound, Entolimod™, for biodefense application as a radiation countermeasure. Of this $85.9 million, we have received development funding of approximately $44.2 million, of which we have recognized approximately $42.3 million in revenue through December 31, 2012. As of December 31, 2012, the federal government has the potential to fund an additional $41.7 million under our existing contracts and grants, including a $30 million procurement option that becomes exercisable upon FDA approval. We have performed extensive safety and efficacy studies in non-human primates (“NHPs”) and rodents and have evaluated Entolimod™’s safety profile in 150 healthy human volunteers. We have submitted a proposal to the Biomedical Advanced Research and Development Agency (“BARDA”) of the Department of Health and Human Services (“HHS”) to fund the remaining work necessary to complete a dossier of information needed to submit a Biologic License Application, or BLA, to the FDA for marketing approval. This remaining work includes: animal efficacy trials, human safety trials and biostatistical data needed to confirm proper dose conversion between NHPs and humans.

 

 

·	Department of Defense (“DoD”):

o	Joint Program Executive Office (“JPEO”): Chemical Biological Medical Systems (“CBMS”) and the Joint Vaccine Acquisition Program (“JVAP”)

o	The Defense Threat Reduction Agency (“DTRA”)

·	Department of Health and Human Services (“HHS”):

o	National Institutes of Health (“NIH”)/National Institutes of Allergy and Infectious Disease Health (“NIAID”)

o	Biomedical Advanced Research and Development Agency (“BARDA”)

·

Most biodefense countermeasures cannot ethically be studied for efficacy in humans. As a result, the FDA published a possible development route, termed the Animal Rule, whereby efficacy is determined in animal models under conditions in which the results are predictive of the human response, with safety trials conducted in healthy human subjects (see “Government Regulation –Animal Rule”); and

·	Under specific circumstances, a state of emergency may be determined by the Secretary of Health and Human Services enabling procurement of countermeasures for the Strategic National Stockpile under an Emergency Use Authorization prior to FDA approval.

 

·	State and local governments;

·	Allied foreign governments, including both defense and public health agencies;

·	Non-governmental organizations and multinational companies, transportation and security companies;

·	Healthcare providers, hospitals and clinics; and

·	Nuclear power facilities.

 

 

·

Commercializing Entolimod as a radiation countermeasure. Our most advanced drug candidate, Entolimod, offers the potential to improve survival from total body irradiation and is being developed under the Animal Rule for this indication. Moreover, because Entolimod demonstrates the potential to address an unmet medical need and is intended to treat a serious or life-threatening condition, Entolimod has been granted Fast Track and Orphan Drug status by the FDA. Due to the Fast Track designation of Entolimod, we are eligible to engage in early and frequent communications with the FDA and our BLA filing will be eligible for priority review, which could result in an abbreviated review time of six months (see “Government Regulation – Fast Track Designation”). Due to the Orphan Drug designation, we may be eligible for preferential tax treatment and a period of marketing exclusivity (see “Government Regulation – Orphan Drug Designation”).

·

Utilizing U.S and other government initiatives to fund development and target initial markets. Through a multi-targeted, international approach we have leveraged governmental funding sources to further our development activities. We have successfully negotiated contracts that have provided $44.2 million in development funding from the U.S. government, with the potential to provide an additional $41.7 million, including a $30 million procurement option for Entolimod as a radiation countermeasure. And, in October 2012 we submitted a proposal to BARDA to fund the remaining activities necessary to complete the dossier of data needed for BLA submission. For more information see “Products in Development – Protectans – Entolimod – Government Funding.” In addition, we received a $4.9 million award for development of Curaxins from the Russian government through a Skolkovo Foundation grant, as well as awards of $4.6 million for development of CBLB612 and $4.8 million for development of Xenomycins from the Russian Ministry of Industry and Trade, collectively referred to as “the Russian Grants.” A table summarizing our U.S. and Russian grants and contracts is presented in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

·

Creating a corporate structure that enables us to fund and develop multiple product candidates simultaneously and cost-effectively. CBLI’s scientists possess many of the core competencies needed to further development of our pipeline candidates. As such, CBLI’s expertise is a compelling value-added proposition for our subsidiaries. Each subsidiary, using its respective funding sources, maintains a separate management team to guide development and contract needed services from CBLI, clinical/research sites and others. CBLI’s executive management is able to remain focused on the development of its core and wholly-owned product candidates and leverage key skill sets across the entire platform including a coordinated world-wide business development effort and key scientific skills. For more information on our development efforts with our subsidiaries see “Our Joint Venture Partnerships.”

 

·

Capitalizing on our knowledge and connections in the Russian Federation to expedite clinical data and, licensing of our pipeline compounds. Our familiarity with the Russian Federation enables us to capitalize on four key efficiencies: (1) access to private funding as evidenced by our financial partners in Incuron and Panacela, (2) access to public economic development funds targeted for biomedical research and product development for the Russian Federation as evidenced by the award of approximately $14.3 million in three separate grants, (3) access to patients through eight currently active clinical sites in the Russian Federation. Of note, there is less competition for eligible patients in the Russian Federation as compared with the U.S. and Europe. Consequently we can expeditiously enroll patients. And (4) Phase 3 studies in the Russian Federation are generally smaller and significantly less complex than Phase 3 studies in the U.S. and Europe, which provide for a more expedited drug application process. Finally, we are leveraging two drug development strategies. For CBL0137 we are in parallel development in both the Russian Federation and the U.S. In the Russian Federation we are using an oral delivery formulation, while in the US we are using an intravenous delivery. With our Panacela compounds we intend to develop proof-of-concept data more expeditiously, primarily given the less competition for patients, after which we intend to commence more targeted development in the U.S.

 

·

Pursuing collaborations with large pharmaceutical and biopharmaceutical partners. We are actively marketing our entire pipeline of drug candidates with large, established pharmaceutical companies. Drug development collaborations can provide attractive sources of significant capital and drug development expertise. Oncology collaborations represented 24% of total collaborations in the Pharma/biotech sector in 2012.

 

·

Leveraging our relationship with leading research and clinical development institutions. We are able to leverage our in-house R&D capabilities as well as those of RPCI, CCF and CCIA through our collaborative relationships to further the research and development of our current product candidates, to determine new indications for our current products and to potentially develop new product candidates. For more information on our collaborative relationships see “Intellectual Property – License Agreements and Collaborations.”

(a)	Temporary and reversible suppression of apoptosis in normal cells to protect healthy tissues from stress-induced damage using compounds categorized as Protectans; and

(b)	Reactivation of apoptosis in tumor cells to eliminate cancer using compounds categorized as Curaxins.

Notably, the gene expression programs that are blocked in Curaxin-treated cells include several that are known to be critical for tumor cell survival (e.g., HIF-1a-, HSF1- and NF-kB-regulated genes) (Gasparian, et al., 2011. Curaxins: anti-cancer compounds that simultaneously suppress NF-kB and activate p53 by targeting FACT. Sci Transl Med. PubMed PMID: 21832239). The multi-targeted nature of Curaxins suggests that they may be useful for treatment of many different types of cancer with greater efficacy and substantially lower risk of development of drug resistance. In addition, since we believe that Curaxins will not cause DNA damage, we anticipate that Curaxins may be much safer than many conventional chemotherapeutics.

In a search for apoptosis suppressors, we took advantage of natural products of microorganisms that are part of the human microflora. Having coexisted with humans in symbiotic relationships for millions of years, these microorganisms have developed mechanisms to suppress apoptosis of their host cells as part of their survival strategy. By screening factors produced by various representatives of the human microflora, we identified a series of compounds that were capable of inhibiting apoptosis by activating NF-kB pathway, a powerful anti-apoptotic/pro-survival signal transduction pathway that also controls all aspects of immunity. Our subsequent R&D efforts have been predominantly focused on two drug candidates (which we refer to as Protectans): Entolimod and CBLB612. These compounds are injectable biologics that act via stimulation of specific mammalian cell surface receptors that regulate innate immunity, Toll-like receptors 5 and 2 (TLR5 and TLR2), respectively.

 

·	Significant improvement of survival following lethal irradiation;

·	Efficacious as a single injection given over a very broad time window, including administration as late as 72 hours post-irradiation;

·	Significant reduction of radiation damage to both HP and GI tissues and improves tissue regeneration;

·	Stability, storage and administration characteristics consistent with requirements for stockpiling and emergency civilian or military field use; and

·	High-yield manufacturing process.

The mechanism of action of Entolimod is well understood and dose-dependent biomarkers of Entolimod efficacy that are relevant to its mechanism of action have been identified and agreed to by the FDA. A framework has been established to use the response of these biomarkers to convert the experimentally established NHP efficacious dose to a predicted human efficacious dose.

 

·	Conducting remaining pivotal animal efficacy studies in accordance with FDA guidelines.

·	Performing additional clinical studies as advised by the FDA; and

·	Filing a BLA.

Agency		Title		Contract Value			Period of Performance
DoD		Advanced Development of a Medical Radiation Countermeasure		$	48,322,695	*	09/2010 - 09/2013
HHS		CBLB502 as a therapy for Hematopoietic Syndrome, Bone Marrow Stromal Cell Loss, and Vascular Injury Resulting From Acute Exposure to Ionizing Radiation			15,800,136		09/2008 - 02/2011
DoD		Development of CBLB502 as Medical Radiation Countermeasure			8,346,083		05/2008 - 09/2010
NIH		Mechanisms of Mitigation of Radiation Damage of GI Tract by Protectan CBLB502			5,329,543		09/2009 - 09/2011
DoD		CBLB502: Mechanism of Action and Therapeutic Optimization as Medical Countermeasure			2,359,548		01/2011 - 10/2013
Various		Various			5,790,905		Various
		Total U.S. Federal Government funding		$	85,948,910

Temporary loss of blood flow (ischemia) causes tissue damage in a number of medical conditions, such as cerebral stroke, heart attack and acute renal failure. This damage results from induction of apoptotic cell death. In a study performed in collaboration with investigators from CCF, we found that a single injection of Entolimod effectively prevented acute renal failure and subsequent death in a mouse model of ischemia-reperfusion renal injury (Fukuzawa, et al., 2011. A TLR5 agonist inhibits acute renal ischemic failure. J Immunol. PubMed PMID: 21890657).

·	Performing one or two initial human efficacy studies on a small number of cancer patients;

·	Performing additional efficacy studies on a larger number of cancer patients; and

·	Filing a BLA with the FDA.

Preclinical studies have shown that the efficacy of CBLB612 exceeds that of G-CSF (Amgen’s Neupogen®), the market leading drugs used for stimulation of white blood cell regeneration. CBLB612’s HSC stimulatory activity outweighed that of G-CSF when the drugs were administered either as monotherapies or in combination with Plerixafor (Genzyme’s Mozobil®, a chemokine receptor antagonist approved by the FDA as an HSC mobilizer) in either mice or NHPs. However, the highest degree of HSC mobilization, a 12-fold greater than that induced by the current clinical standard of G-CSF+Plerixafor, was observed when CBLB612 was used in combination with both G-CSF and Plerixafor. The strong synergistic effect of this triple drug combination provides further support for development of CBLB612 as a valuable stem cell mobilizing agent.

·	Conducting IND-enabling GLP animal safety studies;

·	Submitting an IND application and receiving allowance from the FDA to conduct clinical trials;

·	Performing a Phase 1 dose-escalation human safety study;

·	Performing human efficacy studies using the dose of CBLB612 selected from the previous studies as being safe in humans; and

·	Filing an NDA.

In addition to strengthening our intellectual property position, this mechanistic knowledge provided additional rationale for the use of Curaxins as cancer agents either alone or in combination with other drugs that target pathways impacted by Curaxins. For example, the cellular heat shock response controlled by HSF-1-induced genes is a pro-survival pathway that is frequently activated in tumor cells due to proteotoxic stress (accumulation of misfolded or unfolded proteins). HSF-1 induces expression of heat shock proteins (HSPs) that help cells deal with this stress by refolding proteins or targeting them for degradation. Therefore, compounds that enhance proteotoxic stress or block heat shock response have been explored as potential anti-cancer treatments. Since Curaxins block HSF-1-mediated induction of HSPs, we believe that the efficacy of such treatments may be enhanced by applying them in combination with Curaxins. We have validated this concept in preliminary animal studies.

 

 

 

A companion diagnostic has been created to measure FACT expression in tumors, making them potentially more responsive to CBL0137 treatment. This diagnostic is also being used to measure patient response to CBL0137 in ongoing trials.

Our policy is to seek patent protection for the inventions that we consider important to the development of our business. As of December 31, 2012, we owned or held exclusive licenses to U.S., Patent Cooperation Treaty (“PCT”) and foreign patents and patent applications relating to our product candidates. Some of our issued patents, and the patents that may be issued based on our patent applications, may be eligible for patent life extension under the Drug Price Competition and Patent Term Restoration Act of 1984 in the U.S., supplementary protection certificates in the EU, or similar mechanisms in other countries or territories. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

In August 2004, we entered into a cooperative research and development agreement (“CRADA”), with (a) the Uniformed Services University of the Health Sciences, which includes the Armed Forces Radiobiology Research Institute, (b) the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc., and (c) CCF, to evaluate one of our radioprotective product candidates and its effects on intracellular and extracellular signaling pathways. As a collaborator under this agreement, we were able to use the laboratories of the Armed Forces Radiobiology Research Institute to evaluate radioprotection efficacy of Entolimod and perform analysis of HP stem cell mobilization in NHPs. This agreement expires in August 2015, but may be unilaterally terminated by any party upon 30 days prior written notice with or without cause.

·	two exclusive license and option agreements effective December 2007 and September 2011;

·	various sponsored research agreements entered into between January 2007 to present; and

·	an asset transfer and clinical trial agreement entered into in December 2011.

In September 2011, Panacela entered into an agreement with CCIA to exclusively license certain rights to our Antimycon technology. In consideration for this exclusive license, Panacela agreed to make certain milestone, royalty and sublicense royalty payments. Under this agreement, Panacela has the right to exclusively license any inventions developed by CCIA relating to the Panacela compounds. CCIA may terminate the license upon a material breach by us, as specified in the agreement. However, we may avoid such termination if we cure the breach within 90 days of receipt of a termination notice. The license does not have a specified term, however, the royalty term is 20 years.

Chemotherapy is the second largest cancer drug category. These treatments are the foundation for treatment of all cancer types and used in most combination regimens. Drugs in this category include, among others, irinotecan, carboplatin, taxanes and doxorubicin. These drugs act on various cell division pathways and ultimately cause cell death. This cell division pathway may not always be specific to the cancer cell but often effects normal cells such as red blood cells, white blood cells and other healthy tissues. Although these drugs as a treatment category in general carry higher toxicities than targeted therapies, they are none the less an important drug category for improving patient survival.

·	Completion of non-clinical laboratory studies, animal studies and formulation and manufacturing studies according to GLP or other applicable regulations;

·	Submission of an IND application to the FDA, which must be allowed before human clinical trials may begin;

·

Performance of adequate and well-controlled human clinical trials according to GLP in the case of clinical trials and according to GLP in the case of animal efficacy studies under the Animal Rule and other applicable requirements to establish the safety and efficacy of the proposed drug for its intended use;

·	Submission to the FDA of an NDA or BLA;

·

Satisfactory completion of an FDA inspection of the manufacturing facility or facilities in which the drug is produced to assess compliance with cGMP to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity or to meet standards designed to ensure the biologic’s continued safety, purity and potency;

·	Satisfactory completion of FDA inspections of clinical trial sites as well, in the case of the Animal Rule, of the animal testing facility(-ies) in which the drug is tested for pivotal efficacy; and

·	FDA review and approval of the NDA or BLA.

·	Phase 1: The drug is introduced into healthy human subjects or patients (in the case of certain inherently toxic products for severe or life-threatening diseases such as cancer) and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

·	Phase 2: Involves studies in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

·

Phase 3: Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide, if appropriate, an adequate basis for product labeling.

In 2002, the FDA amended its requirements applicable to BLAs to permit the approval of certain drugs and biologics that are intended to reduce or prevent serious or life-threatening conditions based on evidence of safety from trial in healthy subjects and effectiveness from appropriate animal studies when human efficacy studies are not ethical or feasible. These regulations, which are known as the “Animal Rule”, authorize the FDA to rely on evidence from animal studies to provide evidence of a product’s effectiveness under circumstances where there is a reasonably well-understood mechanism for the activity of the agent. Under these requirements, and with the FDA’s prior agreement, drugs used to reduce or prevent the toxicity of chemical, biological, radiological or nuclear substances may be approved for use in humans based on evidence of effectiveness derived from appropriate animal studies and any additional supporting data. Products evaluated for effectiveness under this rule are evaluated for safety under preexisting requirements for establishing the safety of new drug and biological products. Under certain circumstances, a single animal species may be acceptable if that animal model is sufficiently well-characterized for predicting a response in humans. The animal study endpoint must be clearly related to the desired benefit in humans and the information obtained from animal studies must allow for selection of an effective dose in humans. Products approved under the Animal Rule are subject to additional requirements including post-marketing study requirements, restrictions imposed on marketing or distribution or requirements to provide information to patients.

Entolimod has been granted Fast Track designation by the FDA for reducing the risk of death following total body irradiation during or after a radiation disaster. The FDA’s Fast Track designation program is designed to facilitate the development and review of new drugs, including biological products that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs for the conditions. Fast Track designation applies to a combination of the product and the specific indication for which it is being studied. Thus, it is the development program for a specific drug for a specific indication that receives Fast Track designation. The sponsor of a product designated as being in a Fast Track drug development program may engage in early communication with the FDA, including timely meetings and early feedback on clinical trials and may submit portions of an NDA or BLA on a rolling basis rather than waiting to submit a complete application. Products in Fast Track drug development programs also may receive priority review or accelerated approval, under which an application may be reviewed within six months after a complete NDA or BLA is accepted for filing or sponsors may rely on a surrogate endpoint for approval, respectively. The FDA may notify a sponsor that its program is no longer classified as a Fast Track development program if the Fast Track designation is no longer supported by emerging data or the designated drug development program is no longer being pursued.

Market exclusivity provisions under the Federal Food, Drug, and Cosmetic Act can delay the submission or the approval of certain applications. The Federal Food, Drug, and Cosmetic Act provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (“ANDA”) or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The Federal Food, Drug, and Cosmetic Act also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the pre-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Our internet website address is http://www.cbiolabs.com/. Through our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, any amendments to those reports, proxy and registration statements, and all of our insider Section 16 reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission, or the SEC. These SEC reports can be accessed through the “Investors” section of our website. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. Paper copies of our SEC reports are available free of charge upon request in writing to Corporate Secretary, Cleveland BioLabs, Inc. 73 High Street, Buffalo NY 14203. The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

·	our ability to obtain adequate sources of continued financing;

·	our ability to obtain approval for, and if approved, to successfully commercialize, Entolimod;

·	our ability to bring to market other proprietary drugs that are progressing through our development process;

·	our R&D efforts, including the timing and cost of clinical trials; and

·	our ability to enter into favorable alliances with third-parties who can provide substantial capabilities in clinical development, manufacturing, regulatory affairs, sales, marketing and distribution.

Our R&D expenses are subject to uncertainty.

·	the number and outcome of pre-clinical studies and clinical trials we are planning to conduct; for example, our R&D expenses may increase based on the number of pivotal animal studies and clinical trials that we may be required to conduct;

·

the number of products entering into development from late-stage research; for example, there is no guarantee that internal research efforts will succeed in generating sufficient data for us to make a positive development decision or that an external drug candidate will be available on terms acceptable to us and some promising product candidates may not yield sufficiently positive pre-clinical results to meet our stringent development criteria;

·	in-licensing activities, including the timing and amount of related development funding or milestone payments; for example, we may enter into agreements requiring us to pay a significant up-front fee for the purchase of in-process R&D that we may record as R&D expense; or

·	future levels of revenue; R&D expenses as a percentage of future potential revenues can fluctuate with the changes in future levels of revenue and lower revenues can lead to less spending on R&D efforts.

 

·	pre-clinical study or clinical trial results may show the product to be less effective than desired (e.g., the study failed to meet its primary objectives) or to have harmful or problematic side effects;

·

we fail to receive the necessary regulatory approvals or there is a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies, length of time to achieve study endpoints, additional time requirements for data analysis or an NDA or BLA preparation, discussions with the FDA, an FDA request for additional pre-clinical or clinical data or unexpected safety or manufacturing issues;

·	they fail to conform to a changing standard of care for the diseases they seek to treat;

·	they are less effective or more expensive than current or alternative treatment methods;

·	of manufacturing costs, pricing or reimbursement issues, or other factors that make the product not economically feasible; or

·	proprietary rights of others and their competing products and technologies may prevent our product from being commercialized.

We anticipate substantial reliance upon strategic collaborations for marketing and commercialization of our product candidates and we may rely even more on strategic collaborations for R&D of our other product candidates. Our business depends on our ability to sell drugs to both government agencies and to the general pharmaceutical market. Offering our product candidates for non-medical applications to government agencies does not require us to develop new sales, marketing or distribution capabilities beyond those already existing in the company. Selling oncology and anti-infective drugs, however, requires a more significant infrastructure. We plan to sell oncology and anti-infective drugs through strategic partnerships with pharmaceutical companies. If we are unable to establish or manage such strategic collaborations on terms favorable to us in the future, our revenue and drug development may be limited. To date, we have not entered into any strategic collaborations with third parties capable of providing these services. In addition, we have not yet marketed or sold any of our product candidates or entered into successful collaborations for these services in order to ultimately commercialize our product candidates. We also rely on third-party collaborations with our manufacturers. Manufacturers producing our product candidates must follow current Good Manufacturing Practice (“cGMP”) regulations enforced by the FDA and foreign equivalents.

·	regulators or institutional review boards (“IRB”) may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site or an institutional animal care and use committee (“IACUC”) may not authorize us to commence an animal study at a prospective study site;

·	we may decide, or regulators may require us, to conduct additional pre-clinical testing or clinical trials, or we may abandon projects that we expect to be promising, if our pre-clinical tests, clinical trials or animal efficacy studies produce negative or inconclusive results;

·	we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable safety risks;

·	regulators or IRBs may require that we hold, suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or if it is believed that the clinical trials present an unacceptable safety risk to the patients enrolled in our clinical trials;

·	the cost of our clinical trials or animal studies could escalate and become cost prohibitive;

·	any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable;

·	we may not be successful in recruiting a sufficient number of qualifying subjects for our clinical trials or certain animals used in our animal studies or facilities conducting our studies may not be available at the time that we plan to initiate a study; and

·	the effects of our product candidates may not be the desired effects, may include undesirable side effects, or the product candidates may have other unexpected characteristics.

 

 

We do not own or operate manufacturing facilities. Consequently, we rely on third parties as sole suppliers of our product candidates. We do not expect to establish our own manufacturing facilities and we will continue to rely on third-party manufacturers to produce clinical supplies and commercial quantities of any products or product candidates that we market or may supply to our collaborators. Our dependence on third parties for the manufacture of our product candidates may adversely affect our ability to develop and commercialize any product candidates on a timely and competitive basis.

·	Contract manufacturers may encounter difficulties in achieving volume production, quality control and quality assurance and also may experience shortages in qualified personnel and obtaining active ingredients for our product candidates.

·

If, for any circumstance, we are required change manufacturers, we could be faced with significant monetary and lost opportunity costs with switching manufacturers. Furthermore, such change may take a significant amount of time. The FDA and foreign regulatory agencies must approve these manufacturers in advance. This requires prior approval of regulatory submissions as well as successful completion of pre-approval inspections to ensure compliance with FDA and foreign regulations and standards.

·

Contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and state and foreign agencies or their designees to ensure strict compliance with cGMP and other governmental regulations and corresponding foreign standards. We do not have control over compliance by our contract manufacturers with these regulations and standards. Our contract manufacturers may not be able to comply with cGMP and other FDA requirements or other regulatory requirements outside the United States. Failure of contract manufacturers to comply with applicable regulations could result in delays, suspensions or withdrawal of approvals, seizures or recalls of product candidates and operating restrictions, any of which could significantly and adversely affect our business.

·	Contract manufacturers may breach the manufacturing agreements that we have with them because of factors beyond our control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient to us.

The testing, marketing and manufacturing of any product for use in the U.S. will require approval from the FDA. We cannot predict with any certainty the amount of time necessary to obtain FDA approval and whether any such approval will ultimately be granted. Pre-clinical studies and clinical trials may reveal that one or more products are ineffective or unsafe, in which event, further development of such products could be seriously delayed, terminated or rendered more expensive. Moreover, obtaining approval for certain products may require testing on human subjects of substances whose effects on humans are not fully understood or documented.

 

 

·	perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drugs;

·	published studies demonstrating the safety and effectiveness of our drugs;

·	adequate reimbursement for our products from payors; and

·	effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.

 

For example, in May 2011, we announced that we had concluded advanced stages of contract negotiation with BARDA for the funding of certain development activities relating to Entolimod for biodefense applications in our 2010 proposal to BARDA. BARDA indicated that further contract-related negotiations will require clarification of the development path for Entolimod for biodefense applications with the FDA, which is in the process of actively reviewing our IND application for Entolimod. BARDA indicated that we may resubmit an updated proposal upon confirmation from the FDA that they do not have any objections to us proceeding with our development plan as a result of this review. We received a confirmatory letter from the FDA in late 2011 and submitted a white paper to BARDA under its currently open Broad Agency Announcement (the “BAA”). In April 2012, we announced that BARDA had declined to invite the Company to submit a full proposal pursuant to the white paper submitted. After further discussions with both the FDA and BARDA, we announced in October 2012, that the Company had submitted a proposal to BARDA under the BAA for the remaining development steps needed for FDA licensure of Entolimod as a medical radiation countermeasure. However, as with any federal contract proposal, there is no assurance that BARDA will make a positive decision with regard to funding our proposal. Additionally, there is no assurance that BARDA will review our proposal or award a contract (if one is awarded) in a timely manner.

·	the need to devote substantial time and attention of management and key employees to the preparation of bids and proposals for contracts that may not be awarded to us;

·	the need to accurately estimate the resources and cost structure that will be required to perform any contract that we might be awarded;

·	the risk that the government will issue a request for proposal to which we would not be eligible to respond;

·	the risk that third parties may submit protests to our responses to requests for proposal that could result in delays or withdrawals of those requests for proposal;

·

the expenses that we might incur and the delays that we might suffer if our competitors protest or challenge contract awards made to us pursuant to competitive bidding and the risk that any such protest or challenge could result in the resubmission of bids based on modified specifications, or in termination, reduction or modification of the awarded contract; and

·	the risk that review of our proposal or award of a contract or an option to an existing contract could be significantly delayed for reasons including, but not limited to, the need for us to resubmit our proposal or limitations on available funds due to government budget cuts.

 

 

·	suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;

·	terminate our existing contracts;

·	reduce the scope and value of our existing contracts;

·	audit and object to our contract-related costs and fees, including allocated indirect costs;

·	control and potentially prohibit the export of our products; and

·	change certain terms and conditions in our contracts.

 

Moreover, the cost to us of any litigation or other proceeding relating to our patents and other intellectual property rights, even if resolved in our favor, could be substantial and the litigation would divert our management’s efforts and our resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

 

The biopharmaceutical industry is characterized by rapid and significant technological change. Our success will depend on our ability to develop and apply our technologies in the design and development of our product candidates and to establish and maintain a market for our product candidates. In addition, there are many companies, both public and private, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions engaged in developing pharmaceutical and biotechnology products. Many of these companies have substantially greater financial, technical, research and development resources and human resources than us. Competitors may develop products or other technologies that are more effective than those that are being developed by us or may obtain FDA or other governmental approvals for products more rapidly than us. If we commence commercial sales of products, we still must compete in the manufacturing and marketing of such products, areas in which we have no experience.

·	decreased demand for our product candidates;

·	injury to our reputation;

·	withdrawal of clinical trial participants;

·	costs of related litigation;

·	diversion of our management’s time and attention;

·	substantial monetary awards to patients or other claimants;

·	loss of revenues;

·	the inability to commercialize product candidates; and

·	increased difficulty in raising required additional funds in the private and public capital markets.

We currently have product liability insurance and intend to expand such coverage from coverage for clinical trials to include the sale of commercial products if marketing approval is obtained for any of our product candidates. However, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage that will be adequate to satisfy any liability that may arise.

 

Compliance with the FCPA and similar foreign anti-bribery laws is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, such anti-bribery laws present particular challenges in the biotech or pharmaceutical industry, because, in many countries, hospitals are operated by the government and doctors and other hospital employees may be considered foreign officials.

·	our progress in developing and commercializing our products;

·	price and volume fluctuations in the overall stock market from time to time;

·	fluctuations in stock market prices and trading volumes of similar companies;

·	actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts;

·	general economic conditions and trends;

·	major catastrophic events;

·	sales of large blocks of our stock;

·	departures of key personnel;

·	changes in the regulatory status of our product candidates, including results of our pre-clinical studies and clinical trials;

·	status of contract and funding negotiations relating to our product candidates;

·	events affecting CCF, RPCI or our other collaborators;

·	announcements of new products or technologies, commercial relationships or other events by us or our competitors;

·	regulatory developments in the U.S. and other countries;

·	failure of our common stock to be listed or quoted on the NASDAQ Capital Market, other national market system or any national stock exchange;

·	changes in accounting principles; and

·	discussion of us or our stock price by the financial and scientific press and in online investor communities.

 

The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world, has experienced periods of considerable instability and has been subject to abrupt downturns. Although the Russian economy showed positive trends until 2008, including annual increases in the gross domestic product, a relatively stable currency, strong domestic demand, rising real wages and a reduced rate of inflation, these trends were interrupted by the global financial crisis in late 2008, in which Russia experienced adverse economic and financial effects including a substantial decrease in the growth rate of gross domestic product, depreciation of local currency and a decline in domestic and international demand for its products and services. More recently, the negative trends of the global economy and volatility in the financial markets, partially due to the recent debt crisis in Europe, have resulted in a decreased growth outlook for those countries dependent on Western Europe for trade. The Russian government has taken certain anti-crisis measures including using the “stabilization fund” and hard currency reserves to soften the impact of the global economic downturn on the Russian economy and support the value of the Russian ruble. Should global economic conditions deteriorate significantly, it is possible that the Russian economy could continue to decline in the near future. Further economic instability in Russia where we operate through our consolidated subsidiaries and any future deterioration in the international economic situation could materially adversely affect our business, financial condition and results of operations.

 

 

 

·	Level 1 – Quoted prices for identical instruments in active markets.

·	Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations where inputs are observable or where significant value drivers are observable.

 

 

Other Income and Expenses

 

 

We anticipate our revenue over the next year will continue to be derived mainly from government grants and contracts. We plan to submit or have submitted proposals for additional government grants and contracts to funding sources that have awarded grants and contracts to us in the past, but there can be no assurance that we will receive future funding awards. The following table sets forth information regarding our currently active contracts:

 

(1)	Includes a $30M conditional purchase option for 37,500 doses of Entolimod as a radiation countermeasure, exercisable upon approval.

(2)	The contracts received from Russian government entities are denominated in Russian Rubles (RUR). The contract value above is calculated based on the cumulative revenue recognized to date plus our backlog valued at the December 31, 2012 exchange rate.