As filed with the Securities and Exchange Commission on September 28, 2007

Registration No. 333-145266

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Peplin, Inc.

(Exact name of registrant as specified in its charter)

 

 

6475 Christie Avenue

Emeryville, CA 94608

(510) 653-9700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Michael D.A. Aldridge

Chief Executive Officer

6475 Christie Avenue

Emeryville, CA 94608

(510) 653-9700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said section 8(a), may determine.

 

 

 

           Shares

 

 

Common Stock

 

 

 

 

This is the initial public offering of our common stock. We are offering shares of common stock.

 

Currently, no public market exists for the shares of our common stock in the United States. The ordinary shares of our parent, Peplin Limited, are currently listed on the Australian Securities Exchange under the symbol “PEP.” Prior to the completion of this offering, we intend to acquire all of the outstanding ordinary shares of Peplin Limited as part of a reorganization in exchange for the issuance of shares of our common stock on a 1-for-20 basis. Following the exchange, we expect that our common stock will be listed on the Australian Securities Exchange under the symbol “PLI” in the form of CHESS Depository Interests that will represent 1/20^th of a share of our common stock. We have also applied to list our common stock on the NASDAQ Global Market under the symbol “PLIN” after the completion of this offering. On          , 2007, the closing price of the CHESS Depository Interests representing our common stock on the Australian Securities Exchange was A$      per interest, representing a price of $           per share of common stock, assuming a foreign currency exchange rate of           on that date. In accordance with the requirements of the Australian Securities Exchange, the offering price of the shares of common stock in this offering will be at least 80% of the average market price of the CHESS Depository Interests on the Australian Securities Exchange for the five trading days ending on the date of this prospectus, as adjusted to represent shares of common stock.

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 10 of this prospectus.

 

 

 

 

 

The underwriters may also purchase up to an additional           shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The shares of common stock will be ready for delivery on or about          , 2007.

 

 

 

 

 

 

 

 

The date of this prospectus is          , 2007.

 

TABLE OF CONTENTS

 

 

 

 

You should rely only on the information contained in this prospectus or any future free writing prospectus authorized by us. We have not, and the underwriters have not, authorized anyone to provide you with information different from or in addition to that contained in this prospectus or in any free writing prospectus authorized by us. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, prospects, financial condition and results of operations may have changed since that date.

 

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

Neither this prospectus, nor any other disclosure document in relation to shares of our common stock has been, or needs to be, lodged with the Australian Securities & Investments Commission. This prospectus is not a “Prospectus” under Chapter 6D of the Australian Corporations Act 2001, or the Corporations Act. Any offer of shares of our common stock in Australia is made only to persons to whom it is lawful to offer shares of our common stock without disclosure under one or more of the exemptions set out in section 708 of the Corporations Act, or an Exempt Person. By accepting this prospectus, an offeree represents that the offeree is an Exempt Person. No shares of our common stock will be issued or sold in circumstances that would require the giving of a “Prospectus” under Chapter 6D of the Corporations Act.

	•	a short two-to-three day treatment regimen;
	•	localized, transient and well-tolerated side effects;
	•	a unique mode of action distinct from other AK treatment modalities;
	•	a convenient, patient-applied, take-home prescription medication; and
	•	the ability to treat visible lesions and the surrounding sun-damaged skin where lesions may develop in the future.

	•	successfully developing PEP005 Topical for AK;
	•	successfully developing PEP005 Topical for BCC and pursuing additional indications;
	•	driving the adoption of our products through a direct sales and marketing effort; and
	•	acquiring or in-licensing complementary drug candidates within our area of commercial focus.

	•	We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. Our net loss for the year ended June 30, 2007 was approximately $20.6 million. As of June 30, 2007, we had an accumulated deficit of approximately $46.1 million.

	•	We have not yet submitted any products for approval by the FDA or other regulatory authorities outside the United States, and we do not currently have rights to any products that have been approved for marketing.

	•	We are dependent on the success of our lead product candidate PEP005 Topical for AK, which is in an early stage of development, and we cannot give any assurance that it will be successfully commercialized for both facial and non-facial applications.

	•	We rely on third parties to manufacture our products, conduct preclinical pharmacology and toxicology research and development, and conduct clinical trials on our products. Due to our reliance on third parties, we are unable to directly control the timing, conduct and expense of these activities.
	•	Even if our products receive regulatory approval, we may still face development and regulatory difficulties that may delay or impair future sales of our products and we would be subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit our ability to commercialize our products.

	•	We have no patent protection for the compound PEP005 itself, but instead depend upon patents for the use of PEP005 and related compounds in the treatment of certain diseases.

Common stock offered by us		Shares
Common stock to be outstanding after this offering		Shares

Use of proceeds		We expect to use the net proceeds from this offering for further clinical development of PEP005 Topical for AK, for development of commercial infrastructure necessary to support the commercialization of PEP005 Topical for AK, if regulatory approval is received, for further development of PEP005 Topical for BCC and for working capital and other general corporate purposes, including capital expenditures.

Proposed NASDAQ Global Market symbol		PLIN
Proposed ASX symbol for CDIs		PLI

	•	752,072 shares of common stock issuable upon exercise of options to acquire our common stock that will be outstanding after the Reorganization and this offering, with a weighted average exercise price of $13.58 per share;

	•	1,111,112 shares of our common stock that will be issuable in the Reorganization to certain investors that entered into subscription agreements with Peplin Limited on August 9, 2007 to acquire an aggregate of 22,222,222 shares of Peplin Limited; and

	•	an aggregate of 747,928 additional shares of our common stock reserved and available for issuance under our 2007 Incentive Award Plan.

	•	assumes the issuance by us of 9,229,068 shares of common stock in the Reorganization, based on the number of ordinary shares of Peplin Limited outstanding as of June 30, 2007 and assuming our issuance of 1 share for every 20 Peplin Limited ordinary shares;

	•	assumes our issuance of options to acquire 1,608,549 shares of our common stock, which options we expect to issue in replacement of outstanding options of Peplin Limited in connection with the Reorganization;

	•	assumes no exercise of the underwriters’ over allotment option; and

	•	assumes all dollar amounts are in U.S. dollars and have been converted from Australian dollars using the foreign currency exchange rates as set forth on page 7 below.

		Exchange Rate per Australian Dollar
		For Revenues,
		Expenses
		and Compensation				For Assets and
Year Ended June 30,		Numbers(1)				Liabilities(2)
2007		$	0.7925			$	0.8491
2006		$	0.7472			$	0.7423
2005		$	0.7568			$	0.7618
2004		$	0.7155			$	0.6952
2003		$	0.5884			$	0.6713

(1)		These exchange rates represent average exchange rates during the period.

(2)		These represent the exchange rates as of June 30.

																						Period from
																						Inception
		Year Ended June 30,																				to June 30,
		2003				2004				2005				2006				2007				2007
		(Unaudited)
		(Amounts in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Revenue		$	39			$	121			$	5,610			$	—			$	—			$	5,770
Cost of operations:
Research and development			3,062				5,624				7,163				9,265				18,238				46,278
General and administrative			1,000				1,501				1,657				2,070				4,112				11,771
Loss from operations			(4,024	)			(7,004	)			(3,210	)			(11,335	)			(22,350	)			(52,279	)
Other income (expenses)			828				1,084				472				995				1,787				6,172
Net loss before income taxes			(3,196	)			(5,920	)			(2,738	)			(10,340	)			(20,563	)			(46,107	)
Income tax expense			—				—				—				—				—				—
Net loss		$	(3,196	)		$	(5,920	)		$	(2,738	)		$	(10,340	)		$	(20,563	)		$	(46,107	)
Net loss per ordinary share(1):
Basic and diluted		$	(0.05	)		$	(0.08	)		$	(0.03	)		$	(0.09	)		$	(0.12	)
Pro forma net loss per ordinary share(2):
Basic and diluted																		$	(2.31	)

(1)		Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per ordinary share.

(2)		This information is unaudited. See Note 15 to our consolidated financial statements for further information.

		As of June 30,
		2007
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	20,246
Working capital			17,211
Total assets			24,088
Non-current liabilities			102
Stockholders’ equity			19,737

						As of June 30, 2007
										Pro Forma
		Actual				Pro Forma(1)				as Adjusted(2)
						(Unaudited)				(Unaudited)
						(Amounts in thousands)
Balance Sheet Data:
Cash		$	1			$	20,246			$
Working capital			—				17,211
Total assets			1				24,088
Long-term liabilities			—				102
Stockholders’ equity		$	1			$	19,737

(1)		On a pro forma basis to reflect the Reorganization and the issuance by us of 9,229,068 shares of our common stock to shareholders of Peplin Limited, based on 184,581,369 ordinary shares of Peplin Limited outstanding as of June 30, 2007.

(2)		Pro forma as adjusted to also reflect the sale of           shares of our common stock in this offering at an assumed public offering price of $      per share, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us. Each $1.00 increase or decrease in the offering price per share would increase or decrease, respectively, each of cash and cash equivalents, working capital, total assets and stockholders’ equity by approximately $      million, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1.0 million shares in the number of shares offered by us at the assumed offering price would increase or decrease each of cash and cash equivalents, working capital, total assets and stockholders’ equity by approximately $      million, after deducting estimated underwriting discounts and commissions payable by us.

 

RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the following risks, as well as all of the other information contained in this prospectus, before investing in our common stock. If any of the following events actually occur, our business, business prospects, cash flow, results of operations or financial condition could be harmed. In this case, the trading price of our common stock could decline, and you might lose all or part of your investment in our common stock. In assessing these risks, you should also refer to the other information contained in this prospectus, including the consolidated financial statements and related notes of Peplin Limited.

 

Risks Related to Our Business and Industry

 

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future.

 

We are a development stage pharmaceutical company with no products approved for commercial sale, and we may never be able to develop a marketable product. To date, we have funded our operations principally through the issuance of securities in Australia and other domestic and international capital raising activities. We are not profitable and have incurred losses in each year since inception in 1999. We have only generated a limited amount of grant income and license fee revenue from our collaborative relationships, and we have never generated any revenue from product sales. We do not anticipate that we will generate revenue from the sale of products in the foreseeable future. We have not yet submitted any products for approval by regulatory authorities and we do not currently have rights to any products that have been approved for marketing. We continue to incur research and development and general and administrative expenses related to our operations. Our net loss for the year ended June 30, 2007 was $20.6 million. As of June 30, 2007, we had an accumulated deficit of $46.1 million. Net cash used in operating activities was $18.3 million in the twelve months ended June 30, 2007 and $7.5 million in the three months ended June 30, 2007. We expect to continue to incur losses for the foreseeable future. We expect these losses to increase as we continue our research activities and conduct development of, and seek regulatory approvals for, our product candidates, and as we prepare for and begin to commercialize any approved products. We also expect to incur increased general and administrative expenses in support of our increased operations as well as the increased costs to operate as a company listed on the Australian Securities Exchange, or ASX, and on the NASDAQ Global Market. Over the longer term, the costs referred to above will fluctuate and will primarily depend on the number and type of clinical trials being undertaken by us at any one time. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our product candidates do not achieve market acceptance and are not successfully commercialized, we may never become profitable.

 

We are dependent on the success of our lead product candidate PEP005 Topical for AK, which is in an early stage of development, and we cannot give any assurance that it will be successfully commercialized.

 

Our business is dependent on the success of our lead product candidate, PEP005 Topical for AK. We are not permitted to market PEP005 Topical for AK in the United States until we have submitted and received approval of a new drug application, or NDA, from the U.S. Food and Drug Administration, or FDA, or in any other country, including Australia and New Zealand, until we receive the requisite approval from such countries. Before we can seek regulatory approval, we must successfully complete our clinical trials underway and future trials that we have not yet begun. We do not believe we will be able to submit an NDA until 2009, at the earliest.

 

Given the early stage of development of PEP005 Topical for AK, which contains an untested new chemical entity with a novel mode of action and is the first of a new class of investigational agents, we believe that it may be more challenging to develop and commercialize than products which incorporate either molecules of already existing classes with a well understood mode of action or which are not new chemical

entities. If these challenges prove insurmountable or if any of these risks materialize, they may cause a material adverse effect on our business, prospects, financial condition and results of operations.

 

We are actively engaged in a clinical trial related to PEP005 Topical for AK for facial applications, which is critical to advancing our regulatory approval process to the next phase of clinical development, and we cannot assure you that this product will advance to Phase IIb clinical trials or ultimately to Phase III clinical trials in a timely manner, if ever.

 

We believe the market for facial applications of our PEP005 Topical for AK is substantially larger than the market for non-facial applications. We are engaged in an ongoing open label, or non-blinded, Phase IIa clinical trial in Australia and New Zealand that is designed to evaluate the safety and efficacy of PEP005 Topical for AK as a field-directed therapy on the face and scalp. Field-directed therapy refers to the application of PEP005 Topical for AK to a broad area of sun damaged skin that includes aetinic keratosis, or AK, lesions. We believe this trial will help us determine the appropriate formulation strength for field-directed therapy on the face. Upon completion of our Phase IIa clinical trials, we expect to complete a further facial Phase IIb trial to confirm the design of our Phase III pivotal trials on the face, which we plan to run in parallel with our Phase III program. As a result, the results of our Phase IIa trial are critical to our advancement to a Phase IIb and ultimately a Phase III clinical trial program, and we do not expect to approach the FDA regarding Phase III clinical trials until our Phase IIa clinical trial is complete. Accordingly, we cannot assure you that the results from our ongoing Phase IIa clinical trial will be sufficient to support our moving forward to the next phase of clinical development. Moreover, while we recently reported preliminary results from our Phase II clinical trial of PEP005 Topical for AK in non-facial applications, those results are not necessarily indicative of the results we will obtain in our Phase II clinical trial for facial applications. Additionally, the FDA may impose greater scrutiny on the results from our Phase II clinical trial for facial application as there may be a greater safety concern for facial applications, and even if we believe the results from our Phase II clinical trial for facial applications are favorable, the FDA may disagree.

 

If we do not obtain favorable results in our clinical trials for facial applications of PEP005 Topical for AK, we may alter our strategy with the FDA to initially seek approval for PEP005 Topical for AK only for non-facial indications. If our only approved product is PEP005 Topical for AK for use in non-facial applications, our potential market and our ability to commercialize that product could be substantially reduced, which would negatively impact our business.

 

Even if we successfully complete our Phase II clinical program for PEP005 Topical for AK, if we are not able to successfully complete future Phase III clinical trials, we will not be able to commercialize that product candidate.

 

Phase II clinical trials are primarily designed to assess safety, not efficacy. The efficacy of PEP005 Topical for AK may not be demonstrated in larger Phase III clinical trials, even though the results of our Phase II clinical trials may appear compelling. The FDA generally requires successful completion of at least two adequate and well-controlled Phase III clinical trials prior to the submission of an NDA. While we believe that our Phase IIb trial for facial application will permit us to conduct one combined Phase III clinical program for facial and non-facial applications, the FDA may require us to conduct two separate Phase III trials for each of our facial and non-facial indications. We may not have adequate financial or other resources to pursue this product candidate for either or both indications through the clinical trial process or through commercialization. Additionally, any Phase III clinical trials we commence may not achieve positive results, and, even if the results are positive, may not adequately support the results of any corresponding earlier trial. If we fail to complete our clinical trials for PEP005 Topical for AK, or if these clinical trials fail to demonstrate with substantial evidence that PEP005 Topical for AK is both safe and effective, we will not be able to commercialize the product in the United States or elsewhere and our business will be significantly harmed.

 

Our PEP005 Topical for the treatment of superficial BCC is at a much earlier stage than our AK treatment, and we cannot assure you that this product will advance to Phase III clinical trials in a timely manner, if ever.

 

We are currently developing a product for the treatment of superficial basal cell carcinoma, or superficial BCC, which we call PEP005 Topical for BCC. We are currently evaluating this product candidate when used as a lesion-directed therapy in a Phase II clinical trial designed to assess safety and dosage tolerance. We must complete this trial, and potentially others, before we can commence our Phase III clinical trials for this application. We expect that we will have to conduct at least two successful Phase III clinical trials for BCC before we can submit an NDA for this indication.

 

Results of clinical trials of PEP005 Topical for AK do not necessarily predict the results of clinical trials involving other indications. Clinical trials for PEP005 Topical for BCC may fail to show the desired safety and efficacy, despite favorable results from earlier clinical trials involving AK. Moreover, because superficial BCC is a cancerous condition, the FDA and regulatory agencies in other countries are likely to require our future BCC trials to be larger and more complex than trials for AK, which is a pre-cancerous condition. We expect these trials would be more time consuming and costly. Any failure or significant delay in completing clinical trials for PEP005 Topical for BCC would delay our ability to submit an NDA for its approval and ultimately market this product.

 

Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.

 

Our product candidates are prone to the risks of failure inherent in drug development. Before obtaining regulatory approvals for our product candidates for a target indication, we must demonstrate with substantial evidence gathered in well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product candidate is safe and effective for use for that target indication.

 

The results from the preclinical and clinical trials that we have completed for our product candidates may not be replicated in future trials, or we may be unable to demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for any product candidate. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials.

 

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

 

 

 

 

 

 

If our drug candidates are not shown to be safe and effective in clinical trials, our clinical development programs could be delayed or terminated. The FDA may also approve a product candidate for fewer or more limited indications than we request, or may grant approval contingent on the performance of post-approval clinical trials, which may be costly. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates. Any failure to obtain regulatory approval of our product candidates would limit our ability to ever generate revenues.

 

We may not be successful in obtaining Australian and other foreign country regulatory approvals for PEP005 Topical for AK.

 

The commercialization of our product candidates will be subject to regulation by governmental entities in Australia and other countries in which we intend to market our products. In particular, our products will be subject to regulation by the Therapeutics Goods Administration, or TGA, under the Australian Therapeutic Goods Act, and by comparable agencies and laws in foreign countries. Approval for inclusion in the Australian Register of Therapeutic Goods is required before a pharmaceutical drug product may be marketed in Australia. This process generally involves:

 

 

The testing and approval processes for a drug require substantial time, effort and financial resources. Furthermore, post-market surveillance must be carried out, and any adverse reactions to the drug must be reported to the TGA. We cannot make any assurances that any approval will be granted on a timely basis, if at all. Product development and approval within this regulatory framework is uncertain, could take a number of years and require the expenditure of substantial resources. Any failure to obtain regulatory approval or any delay in obtaining such approvals could have a material adverse effect on our business, financial condition and results of operations.

Delays in the commencement or completion of clinical trials are common and could result in increased costs to us and delay or limit our ability to generate revenue.

 

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

 

 

Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

 

 

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes, which could impact the cost, timing or successful completion of a clinical trial. If we experience delays in the commencement or completion of our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of a product candidate.

 

We depend on clinical investigators and clinical sites to manage our clinical trials and perform related data collection and analysis, which exposes us to potential costs and delays outside our control.

 

We do not currently conduct clinical trials on our own, and instead rely on Omnicare CR, Inc., or Omnicare, an independent CRO to provide us with clinical trial design and administration services, and on independent clinical investigators to provide services in connection with our preclinical pharmacology and toxicology research and development and our clinical trials. Our agreement with Omnicare can generally be terminated by either party upon 30 days notice. Our preclinical pharmacology and toxicology research and development and our clinical trials are conducted by several third parties at a number of different sites in different jurisdictions, including the United States, Australia and New Zealand, and these third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data. We own no laboratories or other research space and, therefore, must rely on third-parties for these services. To date, we

have been able to manage the use of these third-parties in order to effectively carry out our preclinical pharmacology and toxicology research and development and our clinical trials, despite the fact that these third-parties are not our employees, and we have limited ability to control the amount or timing of resources that they devote to our programs. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, or if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our preclinical or clinical protocols or regulatory requirements or for other reasons; our preclinical or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. In addition, the execution of research and clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another.

 

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or limit the commercial attractiveness of any approved product.

 

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities. Furthermore, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product, a number of potentially significant negative consequences could result, including:

 

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

 

Additionally, in light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of U.S. Congress, the U.S. Government Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and changes in regulatory requirements and guidance. If we experience delays in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed.

 

Even if our products receive regulatory approval, we will be subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit our ability to commercialize our products.

 

Even if we receive regulatory approval for any of our product candidates, potentially costly follow-up or post-marketing clinical trials may be required as a condition of approval to further substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory authority. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, including the FDA’s general prohibition against promoting products for unapproved or “off-label” uses, recordkeeping and submission of safety and other post-market information. In addition, manufacturers of

drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If we, or a regulatory agency, discover previously unknown problems with a product or the manufacturing facilities of our contract manufacturers, a regulatory agency may impose restrictions on that product, on us or on our third-party contract manufacturers, including requiring us to withdraw the product from the market. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

 

 

Any of the foregoing could seriously harm the commercialization of our products and our results of operations may be seriously harmed. Likewise, any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize our products.

 

In addition, the law or regulatory policies governing our products may change. New statutory requirements or additional regulations may be enacted that could prevent or delay regulatory approval of our products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action. If we are not able to maintain regulatory compliance, we might not be permitted to market our products, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

The suspension or termination of our government research grants may result in lost revenue. We may also be required to repay previously received grant revenue in certain circumstances, which would have an adverse effect on our cash position, business, prospects, financial condition and results of operations.

 

We have received $2.7 million in grant funding from the Commonwealth of Australia since inception under the R&D START Program Grant Agreement, or START Program, and the Pharmaceuticals Partnerships Program Funding Agreement, or P3 Agreement. We expect we will continue to receive funding until June 2009 under the P3 Agreement. There is a risk that we will lose entitlement to the grant payments for failing to incur eligible expenditures or failing to undertake activities associated with the applicable grant or for otherwise failing to satisfy the relevant conditions in the applicable grant agreement. Furthermore, there is a risk we will not be entitled to the grants under the P3 Agreement, including, if the Commonwealth of Australia has insufficient funding for the relevant grant program, if we fail to submit reports when required, if we have not otherwise complied with our obligations under the P3 Agreement, or if the Commonwealth of Australia is entitled to or does terminate the relevant agreements. The Commonwealth of Australia may terminate the P3 Agreement under certain circumstances, including if we are in breach of the P3 Agreement, if we fail to submit reports, if there is a change of control of us, or if we become insolvent.

 

Under the START Program, in certain circumstances where we fail to use our best endeavors to commercialize the funded project within a reasonable time of completion of the project, or upon termination of a grant due to our breach of agreement or our insolvency, the Commonwealth of Australia may require us to repay some or all of the grants received under the program. The grants under the START Program funded certain aspects of the development of our PEP005 Topical for AK and related clinical trials. We do not expect

to be required to repay the grants received under the START Program so long as we continue our efforts to commercialize the project funded by the START Program. However, if required to repay such grants, we may be required to reallocate funds needed to continue the commercialization of our products and such repayment may have an adverse effect on our cash position, business, prospects, financial condition and results of operations.

 

We will continue to need significant amounts of additional financing, which may not be available to us on favorable terms, or at all. If we fail to obtain additional financing, we may be unable to fund our operations and commercialize our product candidates.

 

We believe that the net proceeds from this offering and interest earned thereon, together with our current cash, cash equivalents and short-term deposits, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We believe such funds will be sufficient to sustain our PEP005 Topical for AK development program through the anticipated filing of our NDA with the FDA in 2009, but will be insufficient to sustain our PEP005 Topical for BCC clinical studies through completion. If our NDA for PEP005 Topical for AK is approved by the FDA, we expect we will need additional funds to develop the manufacturing, sales and marketing capabilities necessary to commercialize that product. Moreover, to receive regulatory approval for our other product candidates, we will need to conduct additional research and clinical trials, which will require funds in addition to those received in this offering.

 

Given the early stage of product development of our product candidates, currently we cannot accurately predict the additional funds that will be required to conduct additional research and trials, obtain additional regulatory approvals or to commercially launch any approved products. Our future funding requirements will depend on many factors, including:

 

 

To meet these capital raising requirements, we may raise funds through a variety of means, including:

 

 

 

 

 

If we are not able to secure additional funding in the manners described above when needed, we may be forced to delay, reduce the scope of or terminate our clinical trials.

 

Raising additional funds by issuing securities or through licensing arrangements may cause our stockholders to experience significant dilution in their ownership interest, restrict our operations or require us to relinquish proprietary rights.

 

To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. In addition, to the extent that we raise additional funds through collaborations and licensing agreements, we may have to relinquish valuable rights and controls over our technologies, research programs or products or grant licenses on terms that may not be favorable to us.

 

PEP005 Topical for AK will have to compete effectively against well-established and accepted treatment alternatives.

 

The primary treatment for AK is currently cryotherapy, which is a quick and well-established treatment where the clinician removes the individual AK lesions by applying a cryogen, or extreme cold, for a sufficient period of time to destroy the lesion. Physicians typically receive reimbursement not only for the office visit relating to the treatment, but also for the cryotherapy treatment itself. We expect that physicians will only receive reimbursement for the office visit where PEP005 Topical for AK might be prescribed. We cannot assure you what type or amount of reimbursement will be available for our PEP005 Topical for AK. If physicians do not receive attractive reimbursement for PEP005 Topical for AK, they may choose to prescribe other treatment alternatives, such as cryotherapy.

 

Moreover, there are other well-known and widely available topical agents for the treatment of AK. Our PEP005 Topical for AK will compete directly against these topical agents. To compete successfully, we must demonstrate compelling safety and efficacy data, particularly in terms of application and side effects, in comparison to that of other topical agents. To obtain appropriate comparative data, we may need to conduct a head-to-head clinical study with one or more of the competing topical agents to establish a superiority claim. Any studies of this type would be expensive and time consuming to run, and may fail to generate data sufficient to support PEP005’s superiority to these other topical agents.

 

Even if our product candidates obtain regulatory approval, they may not be accepted in the marketplace by physicians, patients and the medical community.

 

There is a risk that our product candidates, if they receive regulatory approval, may not gain market acceptance among physicians, patients and the medical community. There is a risk that certain doctors and patients will not transition to using our products from currently entrenched therapeutic alternatives. In some cases, such reluctance to transition may not be based on the relative effectiveness of our products as compared to currently available alternatives. The degree of market acceptance of our products may depend on a number of factors, which include:

 

 

 

If we are unable to obtain adequate coverage or reimbursement from third-party payers for PEP005 Topical for AK or PEP005 Topical for BCC, or any other product candidates that we may seek to commercialize, our revenues and prospects for profitability will suffer.

 

Our lead product is targeted at the treatment of a disease which is most prevalent in older populations, and many patients will not be capable of paying for our products themselves and will rely on third-party payers, such as Medicare, Medicaid and private health insurers, including managed care organizations and other third-party payers, to pay for their medical needs. As such, the commercial success of our product candidates, if approved, will be substantially dependent on whether coverage and reimbursement is available from third-party payers. Importantly, third-party payers in the United States, the European Union, Australia and other jurisdictions are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs and, as a result, they may not cover or provide adequate payment for our products.

 

Our products may not be considered cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our products to be marketed on a competitive basis. Large private payers, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payers, including Medicare, are challenging the prices charged for medical products and services, and many third-party payers limit or delay reimbursement for newly approved health care products. In particular, third-party payers may limit the covered indications. Cost-control initiatives could cause us to decrease the price we might establish for our products, which could result in lower than anticipated product revenues. If the prices for our product candidates decrease or if governmental and other third-party payers do not provide adequate coverage or reimbursement, our prospects for revenue and for profitability will suffer.

 

Furthermore, many healthcare providers, such as hospitals, receive a fixed reimbursement amount per procedure or other treatment therapy, and these amounts are not necessarily based on the actual costs incurred. As a result, these healthcare providers may choose only the least expensive therapies. We cannot guarantee that our product candidates will be the least expensive alternative and providers may decide not to use them or buy them for treatment. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize our products successfully, or at all, which would harm our business and prospects.

 

We do not expect to advance the application of PEP005 for other indications in the foreseeable future.

 

We believe that there are other potential uses for PEP005 in topical formulations, such as to treat SCC and nodular BCC, and as a therapy for certain forms of leukemia and for superficial forms of bladder cancer. While our early preclinical studies and clinical trials have indicated a potential for PEP005 to treat these skin and other cancers, our research and development efforts are at a very early stage for these indications. We do not expect to launch significant clinical trials of these indications in the foreseeable future, nor do we expect a material portion of the proceeds of this offering to be used to advance these opportunities.

 

If we are unable to establish sales, marketing and distribution capabilities or enter into and maintain arrangements with third parties to sell, market and distribute our product candidates, our business may be harmed.

 

We do not have a sales organization and have no experience as a company in the marketing, sales and distribution of our product candidates in the United States or elsewhere. To achieve commercial success for any approved product we must either develop a sales and marketing force or enter into arrangements with others to market and sell our products. Following product approval, we currently plan to establish a direct sales force to market our products in the United States, Australia and New Zealand. Our sales force will be competing with experienced and well-funded marketing and sales operations of competitors. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch. The

size and cost of the required sales force will depend on a number of future developments including results of clinical trials for PEP005 Topical for AK, the final prescribing information or label content that will dictate the scope of product promotional activities, the competitive environment for products and technologies to treat AK, the size and concentration of the various physician specialties that treat AK, the prescribing habits of those physician specialties and the number of patients seeking treatment for AK. Due to these uncertainties, we cannot currently predict the cost to us of developing such a sales force. In addition, we may not be able to develop this capacity on a timely basis, or at all. If we are unable to establish sales and marketing capabilities, we will need to contract with third parties to market and sell our approved products in these locations. To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services in the United States or other territories, our product revenue could be lower than if we directly marketed and sold our products. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate product revenue and may not become profitable.

 

Our success depends in part on our ability to protect our intellectual property. If we are not able to protect our intellectual property, trade secrets and know-how, our competitors may use it to develop competing products.

 

We have no patent protection for the compound PEP005 itself. Our basic patents are for the use of PEP005 and related compounds in the treatment of certain diseases. As a result, competitors who obtain the requisite regulatory approval may be able to offer products with the same active ingredient as PEP005 so long as they do not infringe any of our use and formulation patents. In total, we own or have exclusive rights to three patents and seven patent applications in the United States, and 13 patents and 32 patent applications (including three pending Patent Cooperation Treaty applications and two Australian provisional applications) outside the United States, relating to uses and formulations of PEP005. Our issued U.S. and non-U.S. patents expire between August 2018 and August 2021, subject to any patent term extension which might be available under the Hatch-Waxman legislation or similar laws in Europe and other foreign jurisdictions. Of these issued patents and patent applications, four and six, respectively, relate to the treatment of skin cancers, including SCC, BCC and AK. We also have patents and patent applications related to the treatment of other conditions, including solid cancers, tumors, colon cancer, bladder cancer, prostate cancer, cervical cancer, breast cancer and warts.

 

The additional risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

 

 

We may incur substantial costs in asserting any patent or intellectual property right and defending legal action against such rights. Such disputes could substantially delay our product development or our marketing activities.

 

In addition to patents and patent applications, we depend upon trade secrets and know-how to protect our proprietary technology. We require all employees, consultants, and collaborators to enter into non-disclosure agreements that prohibit the disclosure of confidential information to any other parties. We require that our employees and consultants disclose and assign to us their ideas, developments, discoveries and inventions. These agreements may not, however, provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.

 

We can provide no assurance that third parties will not claim that we have infringed their proprietary rights or that our products or methods will not infringe upon the patents of third parties.

 

From time to time, we may receive notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. There can be no assurance that we will prevail in these actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or prosecuted against us. Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if we were to be found to have willfully infringed a third-party’s patent) to the party claiming infringement, develop non-infringing technology, stop selling or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all.

 

Our intellectual property rights may not provide meaningful commercial protection for our products, which could enable third parties to use our technology or methods, or very similar technology or methods, and could reduce our ability to compete.

 

Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. Our patents might be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that avoids our patents. Further, we cannot guarantee that we will continue to develop our own patentable technologies. We may need to assert claims or engage in litigation to protect our proprietary rights, which could cause us to incur substantial costs, could place significant strain on our financial resources, and could divert the attention of management from our business. We may incur substantial costs in pursuing this litigation and the outcome of this litigation is uncertain. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Although we have taken steps to protect our intellectual property and proprietary technology, we cannot assure you that third parties will not be able to design around our patents. In addition, although we have entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

 

Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If our intellectual property does not provide significant protection against competition, our competitors could compete more directly with us, which could result in a decrease in our market share. All of these factors may harm our competitive position.

 

Our manufacturing operations are, in part, dependent on a single source supplier and the loss of this supplier could harm our business.

 

We rely on a single third-party supplier for the formulation and filling of our product candidates. Currently, formulation, filling and packaging is undertaken by Penn Pharmaceutical Services, or Penn, at Penn’s facilities in the United Kingdom. We operate on a purchase order basis with this supplier, and we generally have no guaranteed supply arrangement. Our reliance on this party also subjects us to other risks that could harm our business, including:

 

 

 

 

 

 

We do not believe that Penn has sufficient capacity to fulfill our anticipated requirements if we obtain regulatory approval and commence commercialization of our product candidates. We are currently in discussions with another third-party that we believe will have sufficient capacity for our anticipated commercial needs and expect to enter into a contract to replace Penn as the party responsible for the formulation and filling of our product candidates. We cannot assure you that we will enter into this contract, or if entered into, such contract will not be terminated and adversely affect our business. Furthermore, if we receive regulatory approval, it may become more difficult to quickly establish additional or replacement suppliers, particularly because of the FDA approval process. Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products.

 

PEP005 is naturally sourced. We may not be able to ensure quantity and quality of supply.

 

Plant materials used in the production of botanical drug products often are not completely characterized and defined or are prone to contamination, deterioration, and variation in composition and properties. In many cases, the active constituent in a botanical drug is not identified, nor is its biological activity well characterized. Therefore, unlike synthetic or highly purified drug products, it may be difficult to ensure the quality of a botanical drug by controlling only the corresponding drug substance and drug product. If we fail to implement adequate quality and in-process controls during manufacturing and final process validation, we may be unable to adequately ensure the quality of our product and may be unable to obtain approval to market our product candidates. This would have a material adverse effect on our business and our profitability.

 

The active pharmaceutical ingredient in PEP005 is naturally sourced from southeast Queensland, Australia. Accordingly, supply may be subject to adverse weather conditions and other natural events affecting that region, including droughts and severe storms.

 

We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing capabilities are insufficient to produce an adequate supply of products, our growth could be limited and our business could be harmed.

 

We operate our leased manufacturing plant for the drying, milling, extraction and purification of pharmaceutical grade PEP005. We outsource other manufacturing activities, such as formulation and filling, to a third-party manufacturer. We intend to continue this practice for any future clinical trials and large-scale

commercialization of any product candidates that receive regulatory approval and become commercial drugs. See “Business — Manufacturing.”

 

Our ability to develop and commercialize PEP005 Topical for AK, PEP005 Topical for BCC and any other product candidates will depend in part on our ability to arrange for third parties to manufacture our products at a competitive cost, in accordance with strictly enforced regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. We have not yet manufactured commercial batches of PEP005 Topical for AK or PEP005 Topical for BCC or any of our other product candidates. Third-party manufacturers that we select to manufacture our product candidates for clinical testing or on a commercial scale may encounter difficulties with the small and large-scale formulation and manufacturing processes required for commercialization of our product candidates. Such difficulties could result in delays in clinical trials, regulatory submissions or commercialization of our product candidates. Our inability to enter into and maintain agreements with third-party manufacturers on acceptable terms could cause shortages of clinical trial supplies of our product candidates, thereby delaying or preventing regulatory approval or commercialization of the affected product candidate, and adversely affecting our ability to generate revenue. Once a product candidate is approved and being marketed, we may need to increase our manufacturing capacity by a significant level to meet anticipated market demand. Further, development of large-scale manufacturing processes will require additional validation trials, which the FDA must review and approve. We may not successfully complete any required increase in manufacturing capacity in a timely manner or at all. Even if our products receive regulatory approval, if we are unable to manufacture a sufficient supply of product, maintain control over expenses or otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market demand and our business will suffer.

 

If we or our current or future third-party manufacturers fail to comply with FDA, state, local or foreign regulatory requirements, we may be unable to produce our products and our business could suffer.

 

We and any current or future third-party manufacturers of our products must comply with strictly enforced cGMP requirements enforced by the FDA through its facilities inspection program. These requirements apply to the manufacture of product candidates for clinical trials, as well as commercially marketed products, and include quality control, quality assurance and the maintenance of records and documentation. We or any current or future third-party manufacturers of our products may be unable to comply with cGMP requirements and with other FDA, state, local or foreign regulatory requirements. We have little control over third-party manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements by our current or future third-party manufacturers could result in the issuance of warning letters from authorities, as well as sanctions being imposed on us, including fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure, recall or withdrawal of product approval. In addition, we have limited control over these manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel. If the safety of any quantities supplied by third-parties is compromised due to their failure to adhere to applicable laws or for other reasons, we may not be able to obtain or maintain regulatory approval for, or successfully commercialize, one or more of our product candidates, and we may be held liable for any injuries sustained as a result, which would harm our business and prospects significantly. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of our product candidates, entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our current or future manufacturers fail to deliver the required commercial quantities on a timely basis and at commercially reasonable prices, we may be unable to meet demand for our products and would lose potential revenues.

 

We operate in a highly competitive industry. Organizations which compete with us may be better resourced and more competitive.

 

We operate in a highly competitive industry with intense competition coming from more established and better-resourced organizations, as well as from academic institutions, government agencies and private and public research institutions. We are seeking to develop and market products that will compete with other products and drugs that currently exist or are being developed or may be developed in the future.

 

Currently, there are many technologies, techniques and products for the treatment of AK, including cryotherapy with liquid nitrogen, photodynamic therapy, or PDT, which involves the in-office application of a topical solution to the AK lesion followed by the application of light therapy to activate the drug in the topical solution, and various topical agents such as Efudex, Solaraze, Carac, Fluoroplex and Aldara. The companies which market the topical products include Graceway Pharmaceuticals, LLC, Meda AB, iNova Pharmaceuticals (Australia) Pty Limited, Valeant Pharmaceuticals International, Dermik Laboratories, Shire plc and Bradley Pharmaceuticals, Inc. Commercial development of PDT agents is currently being pursued by a number of companies, including DUSA Pharmaceuticals, Inc., QLT Inc., Axcan Pharma Inc., Miravant, Inc., Pharmacyclics, Inc., QLT PhotoTherapeutics, Inc., medac GmbH, photonamic GmbH & Co. KG and PhotoCure ASA.

 

Many of the companies that we compete against enjoy several competitive advantages, including:

 

 

Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient, are less expensive, or that reach the market sooner than our product candidates.

 

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

 

As a manufacturer of pharmaceuticals, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payers, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and the privacy and security of individually identifiable health information are or will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the U.S. federal government and the states in which we conduct our business, without limitation. The regulations that may affect our ability to operate include, without limitation:

 

 

There also have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels that will affect our operations. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us or will, when adopted, apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

 

Changes in foreign currency exchange rates could result in fluctuations in our reported sales and earnings.

 

We are exposed to foreign exchange risk, particularly with the U.S. dollar, Australian dollar and the Great British pound, as a result of certain research and development activities that are undertaken internationally. We had foreign currency translation losses in recent periods and may have further losses in the future. Although we plan to assess annually our functional currency in accordance with GAAP, our current functional currency is the Australian dollar. Because our functional currency is the Australian dollar, our reported results are subject to fluctuation resulting from changes in the Australian to U.S. exchange rate.

 

We will need to increase the size of our operations, and we may experience difficulties in managing our growth.

 

We will need to continue to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize our product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

 

Any growth may place significant strain on our management and financial and operational resources. If we fail to manage these challenges effectively, our business could be harmed.

 

Recent proposed legislation may permit re-importation of drugs from foreign countries into the United States, including foreign countries where the drugs are sold at lower prices than in the United States, which could materially adversely affect our operating results and our overall financial condition.

 

We may face competition for our products from lower priced products from foreign countries that have placed price controls on pharmaceutical products. The Medicare Modernization Act of 2003, or MMA, contains provisions that may change U.S. importation laws and expand consumers’ ability to import lower priced versions of our and competing products from Canada, where there are government price controls. These

changes to U.S. importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changes will lead to substantial savings for consumers and will not create a public health safety issue. The Secretary of Health and Human Services has not yet announced any plans to make the required certification. Even if the changes do not take effect, and other changes are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the U.S. Customs Service, and other government agencies. For example, Pub. L. No. 109-295, which was signed into law on October 4, 2006 and provides appropriations for the Department of Homeland Security for fiscal year 2007, expressly prohibits the U.S. Customs Service from using funds to prevent individuals from importing from Canada less than a 90-day supply of a prescription drug for personal use, when the drug otherwise complies with the Federal Food, Drug and Cosmetic Act. Further, several states and local governments have implemented importation schemes for their citizens, and, in the absence of federal action to curtail such activities, we expect other states and local governments to launch importation efforts. The importation of foreign products that compete with our own product candidates could negatively impact our business and prospects.

 

Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to sell our product candidates profitably.

 

In both the United States and certain foreign jurisdictions, there have been, and we anticipate there will continue to be, a number of legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably. In particular, the MMA added an outpatient prescription drug benefit to Medicare, a publicly funded health insurance program in the United States generally for the elderly and disabled, which became effective on January 1, 2006. Drug benefits under this new benefit are administered through private plans that negotiate price concessions from pharmaceutical manufacturers. We cannot be certain that our drug candidates will successfully be placed on the list of drugs covered by particular health plan formularies, nor can we predict the negotiated price for our drug candidates, which will be determined by market factors.

 

The MMA also changed the formula for determining payment for certain drugs provided in physician offices and other outpatient settings. Further, with respect to the Medicaid program, the Deficit Reduction Act of 2005 made changes to certain formulas used to calculate pharmacy reimbursement which could lead to reduced payments to pharmacies. Many states have also created preferred drug lists and include drugs on those lists only when the manufacturers agree to pay a supplemental rebate. If our current or future drug candidates are not included on these preferred drug lists, physicians may not be inclined to prescribe them to their Medicaid patients, thereby diminishing the potential market for our products.

 

We may enter into collaborative relationships and conflicts may arise between us and our collaborators that could delay or prevent the development or commercialization of our product candidates.

 

We may enter into collaborative agreements to develop and commercialize our products. These agreements may require our partners to undertake or fund certain research and development activities, make payments to us on achievement of certain milestones and pay royalties or make profit-sharing payments when and if a product is marketed.

 

Conflicts may arise between our collaborators and us, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with existing or future collaborators, they may act in their self-interest, which may be adverse to our best interests. In addition, collaborative agreements may be terminable by our industry partners. Suspension or termination of collaborative agreements may have a material and adverse impact on our business, prospects, financial condition and results of operations.

Our future growth may depend on our ability to identify and acquire or in-license additional products. If we do not successfully identify and acquire or in-license related product candidates or integrate them into our operations, we may have limited growth opportunities.

 

We believe that an important part of our business strategy will be to develop a pipeline of product candidates by acquiring or in-licensing products, businesses or technologies that we believe are a strategic fit for our business.

 

We have limited resources to identify, evaluate and execute the acquisition or in-licensing of third-party products, businesses and technologies and to integrate them into our current infrastructure. In particular, we may compete with larger pharmaceutical companies and other competitors in our efforts to establish new collaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Our competitors may have stronger relationships with certain third parties with whom we are interested in collaborating or may have more established histories of developing and commercializing products. As a result, our competitors may have a competitive advantage in entering into partnering arrangements with those third parties. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.

 

A loss of key executives or failure to attract qualified personnel could limit our growth and adversely effect our business.

 

Our future success depends in part on the continued service of our executive officers, including, in particular, Mr. Aldridge, Dr. Bertolino and Dr. Welburn. Although we have entered into employment agreements with each of our executive officers, including, Mr. Aldridge, Dr. Bertolino and Dr. Welburn, we employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason, with notice. The notice requirements for termination range from 1 month to 12 months. In addition, with the exception of Mr. Aldridge and Dr. Welburn, we do not have key person insurance on any of our executives. The loss of any one or more of our executive officers could place a significant strain on our remaining management team and would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement. Furthermore, our future growth will depend in part upon our ability to identify, hire and retain additional key personnel, including qualified management, research and other highly skilled technical personnel. Competition for such skilled personnel is intense, and the loss of services of a number of key individuals, or our inability to hire new personnel with the requisite skill sets, could harm and/or delay our research and development programs, including the commercialization of some or all of our product candidates.

 

We use hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.

 

We use hazardous materials, such as ethanol, which could be dangerous to human health and safety or the environment. Our operations also produce hazardous waste products. Federal, state and local, including Australian, laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our drug development efforts.

 

In addition, we cannot entirely eliminate the risk of accidental injury from improper use of our products or otherwise or from contamination from these materials or wastes. If one of our employees was accidentally injured from the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment would be covered by our workers’ compensation insurance policy. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could significantly exceed our insurance coverage, which is limited to $4,052,000 for pollution cleanup, and we are uninsured for third-party contamination injury. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

We face costs associated with importing our products into markets outside of Australia and our business may become subject to economic, political, regulatory and other risks associated with international operations.

 

The cultivation of the plants extracted for use in our product candidates is substantially undertaken in southeast Queensland, Australia. As much as our product is likely to be manufactured in Australia, we may face difficulties in importing our products into various jurisdictions as a result of, among other things, import inspections, incomplete or inaccurate import documentation or defective packaging. There may be significant costs associated with importing and exporting our product.

 

In addition, our business is subject to risks associated with conducting business internationally, in part due to our suppliers being located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

 

 

If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and damage to our reputation.

 

Our clinical trials might potentially expose us to product liability claims in the event our products in development have unexpected effects on subjects. In addition, if any of our products are approved for sale, we may face exposure to claims by an even greater number of persons than were involved in the clinical trials once we begin marketing, distribution and sales of our products commercially.

 

Regardless of merit or eventual outcome, liability claims may result in:

 

 

We maintain a group of Australian denominated insurance policies covering our global clinical trial programs of up to approximately $8.78 million per occurrence annually (as converted using the foreign currency exchange rate on September 27, 2007). We also maintain insurance policies providing us with an additional $1,000 annual coverage limit per person for medical expenses and an additional $1,000,000 annual aggregate coverage limit, each in connection with product liability claims occurring in the United States. Although we believe that our existing policies are adequate, we cannot assure you that our insurance would fully protect us from the financial impact of defending against any product liability claim. Any product liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future.

Our compliance efforts may not be sufficient to meet the rules of the ASX and NASDAQ, subjecting us to liability, fines and lawsuits.

 

Following the completion of the Reorganization, the shares of our common stock will be publicly traded on the ASX in the form of CHESS Depository Interests, or CDIs. As a result, we must comply with the ASX Listing Rules, in addition to the rules of NASDAQ Stock Market, LLC, or NASDAQ. We have policies and procedures that we believe are designed to provide reasonable assurance of our compliance with the ASX Listing Rules and the NASDAQ rules. If, however, we do not follow those procedures and policies, or they are not sufficient to prevent non-compliance, we could be subject to liability, fines and lawsuits.

 

Risks Related to this Offering and Our Common Stock

 

The price of our common stock may fluctuate significantly and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to the Reorganization, Peplin Limited’s shares were quoted on the ASX. Following the Reorganization, we expect our shares to continue to be quoted on the ASX in the form of CDIs. We also have applied to list our shares on the NASDAQ Global Market. The trading price of Peplin Limited’s shares on the ASX have historically experienced volatility and the trading price of our common stock is likely to continue to experience volatility. The high and low closing prices for Peplin Limited’s shares on the ASX were A$18.00 and A$6.19, respectively, for the fiscal year ended June 30, 2006 and A$17.80 and A$12.40, respectively, for the fiscal year ended June 30, 2007, as adjusted to reflect the effects of the 1-for-20 exchange in the Reorganization. Moreover, we cannot predict the extent to which investor interest will lead to the development of an active U.S. trading market in our common stock once our common stock is listed on the NASDAQ Global Market. If an active market does not develop in the United States, or if our stock price experiences volatility in either the U.S. or Australian market, or both, you may have difficulty selling shares of our common stock. Volatility in the market price of our common stock may prevent you from being able to sell your shares at prices equal to or greater than your purchase price. The market price of our common stock could fluctuate significantly for various reasons, including:

 

 

In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many

companies, including companies in our industry. The changes frequently occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our business.

 

Our holding company structure makes us dependent on our subsidiaries for our cash flow and subordinates the rights of our stockholders to the rights of creditors of our subsidiaries in the event of an insolvency or liquidation of any of our subsidiaries.

 

We are a holding company and, accordingly, all of our operations are conducted through our subsidiaries. Our subsidiaries are separate and distinct legal entities. As a result, our cash flow in the future may depend upon the earnings of our subsidiaries. The ability of our subsidiaries to provide us with funds may be limited by other obligations. In addition, we depend on the distribution of earnings, loans or other payments by our subsidiaries to us. Our subsidiaries have no obligation to provide us with funds for our payment obligations. If there is an insolvency, liquidation or other reorganization of any of our subsidiaries, our stockholders will have no right to proceed against their assets. Creditors of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before we, as a shareholder, would be entitled to receive any distribution from that sale or disposal.

 

Substantial sales of our common stock, or the perception that such sales are likely to occur, could cause the price of our common stock to decline.

 

After the completion of this offering, we will have approximately     shares of common stock outstanding. Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that such sales could occur, could substantially decrease the market price of our common stock. All the shares sold in this offering, other than any shares purchased by our affiliates, will be freely tradable. Substantially all of the remaining shares of common stock may be available for resale in the public market, subject to the restrictions on sale or transfer imposed by Rule 144 under the Securities Act of 1933, as amended, and the 90-day lock-up period after the date of this prospectus. These lock-up agreements are subject to a number of important exceptions. See “Shares Eligible for Future Sale.” As restrictions on resale end or upon registration of any of these shares for resale, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them.

 

As a new investor, you will incur substantial dilution as a result of this offering and the exercise of outstanding stock options and warrants.

 

The initial public offering price is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate and substantial dilution of $      net tangible book value per share, assuming this offering is priced at the public offering price of $      per share. After giving effect to the Reorganization, investors who purchase shares in this offering will contribute approximately     % of our total capital contribution, but will only own     % of the shares of our common stock outstanding. In addition, we have issued options to acquire shares of our common stock at prices below the initial public offering price. As of June 30, 2007, the weighted average exercise price of these options was $13.58 per share. To the extent these outstanding options are ultimately exercised, there will be further dilution to investors in this offering.

 

We will incur significant increased costs as a result of having to comply with the Sarbanes-Oxley Act of 2002 and maintaining two exchange listings, and as a result of the increasing complexity of our business as we grow and execute our strategies.

 

The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and the rules of NASDAQ, have imposed various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We have no experience with the various requirements of public companies in the United States, and will need to devote a substantial amount of time to these new compliance

initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. Furthermore, we expect to incur additional costs related to implementation of suitable finance and accounting systems, procedures and controls as we grow.

 

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, for the year ended June 30, 2009, we will need to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of, and to allow our auditors to provide an attestation as to the effectiveness of, our internal controls over financial reporting for that fiscal year, as required by Section 404 of the Sarbanes-Oxley Act of 2002. As a result of our compliance with Section 404, we will incur substantial accounting expense, expend significant management efforts and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure such compliance.

 

We also intend to list our securities on both the ASX and the NASDAQ Global Market. As a result, we will be subject to ongoing listing and other requirements under both exchanges. We have no experience in maintaining two exchange listings. Compliance with these ongoing listing requirements can be expensive and time consuming and may cause us to incur ongoing additional expenses.

 

Securities analysts may not initiate coverage of our common stock or may issue negative reports, and this may have a negative impact on the market price of our common stock.

 

Securities analysts may elect not to provide research coverage of our common stock after the completion of this offering. If securities analysts do not cover our common stock after the completion of this offering, the lack of research coverage may adversely affect the market price of our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our common stock, the stock price would likely decline rapidly. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules under the Sarbanes-Oxley Act of 2002 and a global settlement reached in 2003 between the Securities and Exchange Commission, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for companies such as us, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our common stock.

 

Circumstances may change, leading us to exercise our discretion to use the proceeds of this offering in a manner different from that currently envisaged, and we may not use the proceeds effectively, which could affect the results of operations and cause the price of our common stock to decline.

 

We currently expect to use the net proceeds from this offering for the further development and commercialization of PEP005 Topical for AK and PEP005 Topical for BCC and for the preclinical development of our product pipeline. We currently expect to use any remaining net proceeds from this offering to accelerate the commercialization of our candidate products, investigate additional indications for our candidate products and for working capital and general corporate purposes. We have not determined the exact amounts or timing of these expenditures and our directors and executive officers may be required to exercise their discretion, in our best interests, in utilizing the net proceeds of this offering. We may use the proceeds in ways that are different from our current intentions and you may not agree with the uses we choose. We may use the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our shares of common stock. The failure to apply these funds effectively could result in financial losses that could cause the price of our common stock to decline and delay the development of our candidate products.

Our certificate of incorporation and by-laws contain provisions that could discourage a third-party from acquiring us and could consequently decrease the market value of an investment in our common stock.

 

Our certificate of incorporation and by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following:

 

 

These provisions could discourage proxy contests, make it more difficult for our stockholders to elect directors and take other corporate actions and may discourage, delay or prevent a change in control or changes in our management that a stockholder might consider favorable. Any delay or prevention of a change in control or change in management that stockholders might otherwise consider to be favorable could deprive holders of our common stock of the opportunity to sell their common stock at a price in excess of the prevailing trading price and cause the trading price of our common stock to decline.

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any stockholder who owns, or at any time in the last three years owned, 15% or more of the company’s outstanding voting stock, referred to as an interested stockholder, for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

 

We have never paid a dividend and we do not intend to pay dividends in the foreseeable future which means that stockholders may not receive any return on their investment from dividends.

 

We have never declared or paid any cash dividends on shares of our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Dividends may only be paid out of our profits, and will depend upon our results of operations, financial condition, current and anticipated cash needs, contractual restrictions, restrictions imposed by applicable law and such other factors that our board of directors deems relevant. Payment of any future cash dividends will be at the discretion of our board of directors. As a result, capital appreciation, if any, of our common stock will be our stockholders’ only source of gain.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

 

In addition, in this prospectus, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “predict,” “potential,” and similar expressions, as they relate to our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the cautionary statements in this prospectus, particularly in the section entitled “Risk Factors.” However, new factors emerge from time to time and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Forward-looking statements speak only as of the date the statements are made. You should not place undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $      million from the sale of           shares of common stock by us in this offering, or approximately $      million if the underwriters exercise their over allotment option in full, based on an assumed public offering price of $      per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed public offering price of $      per share, would increase or decrease, respectively, the net proceeds to us from this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and expenses payable by us.

 

We currently expect to use the net proceeds from this offering as follows:

 

 

 

We do not believe such funds will be sufficient to sustain our PEP005 Topical for BCC clinical studies through completion. We may also use a portion of our net proceeds to enter into future collaborations or to invest in businesses or technologies that we believe are complementary to our own. We have no present understandings, commitments or agreements to enter into any potential acquisitions, collaborations or investments at this time.

 

The amount and timing of our actual expenditures may vary significantly depending on numerous factors, including the status of our product development, clinical results, rate of progress, timing and costs of preclinical studies and clinical trials, regulatory requirements and our commercialization efforts, the amount of proceeds actually raised in this offering, and the amount of proceeds generated, if any, by entering into future collaborations. The ultimate use of our cash resources may vary significantly from the estimated uses outlined above. Accordingly, we will retain broad discretion over the use of net proceeds of this offering.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all of our future earnings to finance the growth and development of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, current and anticipated cash needs, contractual restrictions, restrictions imposed by applicable law, operating results, capital requirements and such other factors as our board of directors deems relevant.

 

CAPITALIZATION

 

The following table sets forth our capitalization:

 

 

 

 

You should read this table in conjunction with the consolidated financial statements and the related notes of Peplin Limited, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and “Balance Sheet of Peplin, Inc.” and the related notes included elsewhere in this prospectus.

 

 

 

 

The actual, pro forma and pro forma as adjusted amounts in the above table exclude:

 

 

 

 

DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Net tangible book value per share is determined by dividing the number of outstanding shares of our common stock into our total tangible assets (total assets less intangible assets) less total liabilities. As of June 30, 2007, Peplin Limited had a historical net tangible book value of $19,737,129, or approximately $0.11 per share. Our pro forma net tangible book value assumes we were incorporated as of June 30, 2007 and gives effect to the acquisition of Peplin Limited and the issuance by us of 9,229,068 shares of our common stock to shareholders of Peplin Limited in the Reorganization. As of June 30, 2007, our pro forma net tangible book value was $19,737,129, or approximately $2.14 per share.

 

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered in this offering at an assumed public offering price of $      per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2007 would have been approximately $      million, or approximately $      per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $      per share to existing stockholders, and an immediate dilution of $      per share to investors participating in this offering. The following table illustrates this per share dilution:

 

 

Each $1.00 increase or decrease in the assumed public offering price of $      per share, would increase or decrease, respectively, our pro forma as adjusted net tangible book value by approximately $      million, or approximately $      per share, and the pro forma dilution per share to investors in this offering by approximately $      per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1.0 million shares in the number of shares offered by us at the assumed offering price would increase or decrease each of our pro forma as adjusted net tangible book value by approximately $      million, or approximately $      per share, and the pro forma dilution per share to investors in this offering by approximately $      per share, after deducting estimated underwriting discounts and commissions payable by us.

 

If the underwriters exercise their over allotment option in full to purchase           additional shares of common stock in this offering, the pro forma as adjusted net tangible book value after the offering would be $      per share, the increase in the pro forma net tangible book value to existing stockholders would be $      per share and the pro forma dilution to new investors purchasing common stock in this offering would be $      per share.

 

The above discussion and table exclude:

 

 

 

 

Because the exercise price of the outstanding options are significantly below the assumed offering price of $      per share, investors purchasing common stock in this offering will suffer additional dilution when and if these options are exercised. Assuming the exercise in full of the           outstanding options, pro forma net tangible book value before this offering at June 30, 2007 would be $      per share, representing an immediate increase of $      to our existing stockholders, and, after giving effect to the sale of shares of common stock in this offering, there would be an immediate dilution of $      per share to new investors in this offering.

 

Effective upon the closing of this offering, an aggregate of          shares of our common stock will be reserved for future issuance under our benefit plans. To the extent that any of these options are exercised, new options are issued under our benefit plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

 

SELECTED FINANCIAL DATA

 

Prior to the Reorganization, Peplin, Inc. will have had no business or operations. As of the date of this prospectus, the business and operations of Peplin, Inc. consist solely of the business and operations of Peplin Limited.

 

Peplin Limited

 

The selected financial information set out below has been derived from the consolidated financial statements of Peplin Limited. We derived the audited consolidated statements of operations data presented below for each of the three years ended June 30, 2005, 2006 and 2007 and for the period from inception to June 30, 2007 from the consolidated financial statements of Peplin Limited included elsewhere in this prospectus. We derived the audited consolidated balance sheet data as of June 30, 2006 and 2007 from the consolidated financial statements of Peplin Limited included elsewhere in this prospectus. We derived the unaudited consolidated statement of operations data for the year ended June 30, 2003, the audited consolidated statements of operations data for the year ended June 30, 2004, the unaudited consolidated balance sheet data as of June 30, 2003 and the audited consolidated balance sheet data as of June 30, 2004 and 2005 from the consolidated financial statements of Peplin Limited not included in this prospectus. The unaudited financial statements have been prepared on a basis consistent with the audited financial statements. You should read this financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and accompanying notes of Peplin Limited, which are included elsewhere in this prospectus, and “Balance Sheet of Peplin, Inc.”

 

 

 

 

 

 

Peplin, Inc.

 

The actual balance sheet data set forth below has been derived from the audited balance sheet of Peplin, Inc. as of the date of its incorporation, July 31, 2007.

 

 

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 “Selected Financial Data” and the consolidated financial statements and related notes of Peplin Limited and the Balance Sheet of Peplin, Inc. and related notes included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We do not have any intention or obligation to update forward-looking statements in this prospectus after the date of this prospectus, except as required by law.

 

Overview

 

We are a development stage specialty pharmaceutical company focused on advancing and commercializing innovative medical dermatology products. We are currently developing PEP005, which is the first in a new class of compounds and which is derived from the sap of Euphorbia peplus, or E. peplus, a rapidly growing, readily-available plant commonly referred to as petty spurge or radium weed. E. peplus has a long history of traditional use for a variety of conditions, including the topical self-treatment of various skin disorders, including skin cancer and pre-cancerous skin lesions. Our lead product candidate is a patient-applied topical gel containing PEP005, a compound the use of which we have patented for the treatment of actinic keratosis, or AK. The product candidate is currently in Phase II clinical trials and is referred to as PEP005 Topical for AK. AK is generally considered the most common pre-cancerous skin condition and typically appears on sun-exposed areas of the skin as small, rough, scaly patches. If left untreated, AK lesions may progress to a form of skin cancer called squamous cell carcinoma, or SCC. We believe that PEP005 Topical for AK, once developed and if approved for commercialization by the appropriate regulatory authorities, could offer patients an effective and well-tolerated treatment alternative for AK with a short, two-to-three day application regimen that could be performed by the patient at home.

 

We are also developing a product candidate containing PEP005, the use of which we have patented for the treatment of superficial basal cell carcinoma, or superficial BCC. The product candidate is currently in Phase IIa clinical trials and is referred to as PEP005 Topical for BCC. BCC is the most commonly occurring cancerous lesion and can present in two forms, nodular BCC, which appears as a shiny bump or nodule that may be confused with a mole, and superficial BCC, which has a slightly raised, ulcerated or crusted surface. Our development of PEP005 Topical for BCC is at an earlier stage than that of PEP005 Topical for AK. However, we believe that this product candidate, once developed and if approved for commercialization by the appropriate regulatory authorities, could offer patients an effective and well-tolerated treatment alternative for superficial BCC with a short, two-to-three day application regimen that would be applied in the physician’s office by the physician or a clinician.

 

We recently completed a Phase IIb clinical trial designed to evaluate the safety, tolerability and efficacy of three different dosages of PEP005 Topical for AK when used as a field-directed therapy for the treatment of AK on the trunk, extremities and scalp. The results of this trial, which we call PEP005-006, suggest that a single application of PEP005 Topical for AK, each day for two or three consecutive days, presents a favorable safety profile and is well tolerated. In addition, the trial demonstrated statistically significant lesion clearance by all measures and at all doses studied. These results suggest a clear relationship between activity of the drug and dosage in all treatment groups. We are also conducting a Phase IIa trial of PEP005 Topical for AK as a field-directed therapy on the face and scalp. Furthermore, we are currently evaluating PEP005 Topical for BCC in a Phase IIa clinical trial.

 

Subject to input from the U.S. Food and Drug Administration, or FDA, we expect to complete a further facial Phase IIb trial to confirm the design of our PEP005 Topical for AK Phase III pivotal trials on the face, which we plan to run in parallel with our Phase III program. We anticipate beginning our Phase III clinical program in the first quarter of 2008 with a non-facial trial, and filing our new drug application, or NDA, for both facial and non-facial indications, by the end of 2009, assuming completion of the Phase III clinical trials.

We operate our manufacturing facility for the drying, milling, extraction and purification of PEP005 in Southport, Queensland, Australia. Other activities relating to manufacturing are undertaken by various outside contractors. Currently, clinical batches are manufactured, packaged and labeled by a single third-party in the United Kingdom. The clinical supplies are then shipped to locations designated by us or our clinical research organization for use in trials. We believe we will need to increase our manufacturing capacity if any of our product candidates are approved for commercialization.

 

To date we have not generated any revenue from the sale of our products and have funded our operations primarily through the sale of equity securities and government grants. We have experienced net losses in each year since our inception. As of June 30, 2007, we had an accumulated deficit of $46.1 million. We expect our net losses to continue and to increase as the continued development of our PEP005 products will require significant additional expenditures for a variety of activities, including continued preclinical studies, clinical trials, research and development, manufacturing development and regulatory approvals. We do not expect to generate revenue from the sale of our products until one or more of our product candidates is approved for sale by the FDA, which we do not expect to occur prior to 2010. We cannot assure you that any of our product candidates will obtain FDA approval in a timely manner, or at all. Our product candidates are based on an untested new chemical entity with a novel mode of action. We may not obtain regulatory approval for many reasons, including, among others:

 

 

 

 

 

 

If we are unable to obtain regulatory approval of any of our product candidates, we will be unable to generate revenue and may never become profitable.

 

We were formed for the purpose of reorganizing our parent company, Peplin Limited, into the United States. Peplin Limited, formerly known as Peplin Biotech Ltd, was formed in 1999 as an Australian company. Prior to the closing of this offering, we intend to acquire all the outstanding shares of Peplin Limited pursuant to a Scheme of Arrangement. We refer to this transaction as the Reorganization. Following the Reorganization, Peplin Limited will be our wholly-owned subsidiary and our business will consist solely of the business of Peplin Limited.

 

Critical Accounting Estimates and Judgments

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies are critical to the process of making significant estimates and judgments in preparation of our financial statements.

Revenue Recognition

 

We apply the revenue recognition criteria outlined in Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition and Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables. In applying these revenue recognition criteria, we consider a variety of factors in determining the appropriate method of revenue recognition under our revenue arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

 

Our revenue consists of amounts received under a license and collaboration agreement with Allergan, Inc., or Allergan, entered into in November 2002. Revenue under the agreement included a non-refundable upfront payment, quarterly installment payments and subsequent milestone payments based on performance. Upon receipt, all payments, including the milestone payments that we deemed to be inseparable from the overall license fee, were recorded as deferred license fee income and recognized as revenue ratably over the term of the license. The license and collaboration agreement also provided for Allergan to reimburse us for certain research and development activities performed by us. Reimbursed amounts were reflected in research and development expense. The agreement was cancelled in October 2004 and Allergan paid a cancellation fee of $1.3 million, which we recognized as revenue. Pursuant to a termination agreement, Allergan may receive certain future royalties from Peplin Limited (refer to Note 8 of our consolidated financial statements included elsewhere in this prospectus). Additionally, at the date of cancellation, we recognized as revenue all amounts that had been recorded as deferred license fee income.

 

Government Grant Income

 

Government grants, which support our research efforts in specific projects, generally provide for reimbursement of approved costs incurred. Grant receipts are recognized by us as other income when research and development expenditures to which the particular grant relates have been incurred.

 

We received two grants under from the Australian Government under its R&D START program where the grant payments were made quarterly in advance based on estimated expenditures. In these instances, the advance payments received were classified as deferred income until the qualified expenditures had been incurred. The final START grant was completed in August 2004.

 

In 2006, we were awarded a research grant under the Australian Government’s Pharmaceuticals Partnerships Program, or P3 program. Under the terms of the P3 program, we received grant proceeds in arrears. Where qualifying expenses have been incurred and grant proceeds not yet received, a receivable for grant income is recorded in the balance sheet. There are no unfulfilled conditions or contingencies attaching to this grant nor are there any repayment provisions.

 

Stock-Based Compensation

 

We account for stock-based employee compensation arrangements using the fair value based method as prescribed in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R, Accounting for Stock Based Compensation (revised 2004). We have recently adopted SFAS No. 123R and applied the measurement and valuation provisions to all stock options granted since our inception. Stock based compensation cost for employees is measured at the grant date, based on the fair value of the award and is recognized as an expense over the period awards are expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

 

Options granted to consultants and other non-employees are accounted for in accordance with EITF consensus No. 96-18, Accounting for Equity Instruments that are issued to Other than Employees for Acquiring, or in Connection with Selling Goods or Services. Compensation cost for stock options granted to non-employees is measured at the earlier of the date at which the commitment for performance by the consultant or non-employee to earn the equity instrument is reached or the date at which the consultant’s or

non-employee’s performance is complete. The fair value of stock options is calculated using a Black-Scholes valuation model and are expensed over the performance period.

 

The fair value of all options granted to employees, directors and contractors were computed at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

The Black-Scholes option pricing model was developed for use in estimating the fair value of options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The expected term of the options used in the estimation of the fair value of non-traded options has been determined based on the mid point between the vesting date and the end of the contractual term. For those options issued prior to June 30, 2006, we have utilized an average volatility based on peer companies within the biotechnology sector.

 

Income Tax

 

We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes, or SFAS 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period that it includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will be not realized.

 

Financial Overview

 

Revenue

 

From our inception to June 30, 2007, our revenue consisted of license fees received under a license and collaboration agreement with Allergan entered into in November 2002. License fees included a non-refundable upfront payment, quarterly installment payments and milestone payments based on achieving certain predefined milestones. Upon receipt, all such payments, including the milestone payments which we deemed to be inseparable from the overall license fee, were recorded as deferred license fee income and were recognized as revenue ratably over the term of the license. The agreement was cancelled in October 2004 and Allergan, Inc. paid a cancellation fee of $1.3 million which was recognized as revenue. At that time, all amounts previously recorded as deferred income that had not been recognized were recognized as revenue.

 

Research and Development Expenses

 

Our research and development expenses primarily consist of expenses related to the development of PEP005, the compound used in our product candidates, including preclinical studies, toxicology, clinical trials, regulatory expenses and manufacturing materials used in clinical trials and other trials. We also incur significant expenses to operate our clinical trials including trial design, clinical site reimbursement, data management and associated travel expenses. Our research and development expenses also include fees for design services, contractors and materials, expenses associated with clinical trial materials and employee compensation, including stock-based compensation. From our inception through June 30, 2007, we have incurred $46.3 million in research and development expenses relating to the development of PEP005, net of

$1.3 million in product development income received from Allergan. Our license and collaboration agreement with Allergan also provided for Allergan to reimburse us for a portion of the costs of research and development activities performed by us. These amounts were recorded in research and development expense as income.

 

General and Administrative

 

Our general and administrative expenses primarily consist of compensation for our executive, financial, marketing and administrative personnel, including stock-based compensation, as well as compensation for our board of directors. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent related costs and professional fees for legal, consulting and accounting services. From our inception through June 30, 2007, we have incurred $11.8 million for general and administrative expenses.

 

Other Income (Expense)

 

Total other income consists of grants received from the Australian government under a number of grant arrangements including its R&D START program and its Pharmaceuticals Partnerships Program, or P3 Program. Our most recent START grant completed in August 2004. Total income to-date recognized under the START grants was $2.1 million. The amount recognized under the P3 Program from inception to June 30, 2007 was $0.6 million.

 

Total other income also consists of interest income earned on our cash and cash equivalents and short-term deposits.

 

Income Taxes

 

Since inception, we have incurred operating losses and, accordingly, have not recorded a provision or benefit for income taxes for any of the periods presented. As of June 30, 2007, we had net operating loss carry-forwards of $19.3 million. The majority of these net operating loss and tax credit carryforwards were incurred in Australia and will carry forward subject to the satisfaction of either a continuity of ownership or business test as applied in that country. Utilization of net operating loss carryforwards may be subject to annual limitation due to Australian Tax Office requirements that are applicable if we experience an “ownership change” that may occur, for example, as a result of this offering aggregated with certain other sales of our stock before or after this offering. Due to our lack of earnings history, realization of these deferred tax assets is not more likely than not, therefore the deferred tax assets have been fully offset by a valuation allowance.

 

Results of Operations

 

Our functional currency for accounting purposes is the Australian dollar. However, our reporting currency is the U.S. dollar. As a result, in preparing our financial statements for purposes of this prospectus, and going forward in our annual and quarterly reports, we must convert the amounts recorded in our functional currency to our reporting currency. For revenues and expenses reported during any period, we use the average foreign currency exchange rate during that period. For assets and liabilities, we use the foreign currency exchange rate as of the end of such period. Given the fluctuations in foreign currency exchange rates, we may experience changes in reported amounts from period to period that occur primarily as a result of these fluctuations and that are not reflective of actual changes in our business or operations.

 

Comparison of Years Ended June 30, 2006 and 2007

 

Revenue.  We recorded no revenue for the years ended June 30, 2006 and 2007.

 

Research and Development Expenses.  Research and development expenses increased 97% from $9.3 million in the year ended June 30, 2006 to $18.2 million in the year ended June 30, 2007. The increase in the year ended June 30, 2007 was due primarily to the commencement of our PEP005-006 and PEP005-007 Phase II clinical trials, which resulted in increased costs of $4.8 million, increased spending of approximately

$3.6 million on preclinical studies, clinical trials and additional internal research efforts and increased staffing and other personnel related costs, and approximately $0.6 million in non-cash stock-based compensation.

 

Research and development expenses represented 82% of total operating expenses for each of the years ended June 30, 2006 and 2007. We expect research and development expenses to increase as we devote substantial resources to research and development to support the continued development of our product candidates, including our Phase III clinical program for PEP005 Topical for AK, which includes our Phase IIb facial trial, and our ongoing Phase II clinical trials for PEP005 Topical for BCC, to expand our research and development efforts and to expand our manufacturing development. We expect to commence our Phase III clinical program for PEP005 Topical for AK in the first quarter of 2008. We do not expect to commence the Phase III clinical program for PEP005 Topical for BCC before 2010.

 

General and Administrative Expenses.  General and administrative expenses increased 99% from $2.1 million in the year ended June 30, 2006 to $4.1 million in the year ended June 30, 2007. This increase was primarily due to increased staffing necessary to manage and support our growth, particularly in connection with establishing our U.S. office, as well as approximately $0.8 million in non-cash stock-based compensation in the year ended June 30, 2007.

 

We expect that our general and administrative expenses will increase in absolute dollar amounts as we expand our legal and accounting staff, add infrastructure and incur additional costs related to operating as a U.S. public company, including directors’ and officers’ insurance, investor relations programs, increased director fees and increased professional fees.

 

Other Income (Expense).  Total other income was $1.0 million for the year ended June 30, 2006 and $1.8 million for the year ended June 30, 2007. This increase was primarily due to increased average cash balances in 2006 due to our raising of approximately $27.8 million in net proceeds from the sale of our ordinary shares to various investors in mid and late calendar year 2006. We received $0.4 million and $0.2 million related to government grants during the years ended June 30, 2006 and 2007, respectively.

 

Comparison of Years Ended June 30, 2005 and 2006

 

Revenue.  Revenue decreased from $5.6 million in the year ended June 30, 2005 to $0 in the year ended June 30, 2006. The decrease was primarily attributable to the termination of our license and collaboration agreement with Allergan, which occurred in October 2004 and the related recognition of deferred revenue associated with those fees in the year ended June 30, 2005.

 

Research and Development Expenses.  Research and development expenses increased 29% from $7.2 million in the year ended June 30, 2005 to $9.3 million in the year ended June 30, 2006. The increase primarily related to the commencement of three phase IIa clinical trials in March 2005, one for each of AK, superficial BCC and nodular BCC. These trials reported in November 2005, May 2006 and July 2006, respectively. We also continued to invest in research and development relating to PEP005 Topical and to the use of PEP005 for other indications, such as leukemia. Research and development expenses represented 81% of total operating expenses in the year ended June 30, 2005 and 82% of total operating expenses in the year ended June 30, 2006, respectively.

 

General and Administrative Expenses.  General and administrative expenses increased 24% from $1.7 million in the year ended June 30, 2005 to $2.1 million in the year ended June 30, 2006. The increase primarily related to costs associated with our investor relations or other indirect costs associated with capital raising and our establishment of U.S. operations, as well as the hiring of additional staff to assist us in managing and supporting our growth.

 

Other Income (Expense).  Total other income was $0.5 million in the year ended June 30, 2005 and $1.0 million in the year ended June 30, 2006. The increase in other income was attributable to an increase in government grant income from $0.1 million in the year ended June 30, 2005 to $0.4 million in the year ended June 30, 2006 related to the approval and subsequent receipt of grant funding under the Australian government’s P3 Program and an increase in interest income as a result of greater average cash balances

during 2006 due to our capital raisings in August, September and December of 2005. Interest income increased from $0.3 million in the year ended June 30, 2005 to $0.5 million in the year ended June 30, 2006.

 

Liquidity and Capital Resources

 

Since inception, we have financed our operations primarily through placements of equity securities, receiving aggregate net proceeds from such placements totaling $59.1 million and income primarily from Allergan totaling $5.8 million and from Australian Government grants totaling $2.7 million. As of June 30, 2007, we had $20.2 million in cash and cash equivalents. Our cash and investment balances are held in a variety of interest bearing instruments, including money market accounts with high credit rated Australian banks. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation.

 

Net cash used in operating activities was $5.7 million, $8.8 million and $18.3 million in the years ended June 30, 2005, 2006 and 2007, respectively. The net cash used in each of these periods primarily reflects net loss for these periods, offset in part by depreciation, non-cash stock-based compensation and non-cash changes in operating assets and liabilities.

 

Net cash used in investing activities was $0.3 million, $1.1 million and $0.7 million in the years ended June 30, 2005, 2006 and 2007, respectively. Investing activities consist primarily of purchases and sales of short-term deposits and plant and equipment purchases. A significant portion of the purchases of plant and equipment relates to our expansion into a leased facility for manufacturing in Southport, Queensland, Australia. We expect to continue to make investments in the purchase of property and equipment to support our expanding operations.

 

Net cash provided by financing activities was $6.5 million, $20.5 million and $18.8 million in the years ended June 30, 2005, 2006 and 2007, respectively. Financing activities consist primarily of proceeds from the sale of our shares, as well as movements in our restricted cash balances.

 

On August 9, 2007, Peplin Limited issued an aggregate of 22,222,222 ordinary shares, or 1,111,112 shares, giving effect to the Reorganization, for an aggregate consideration of approximately $17,111,111. In addition, Peplin Limited agreed to reimburse MPM BioVentures IV LLC for up to $14,700 of its legal costs incurred in connection with the transaction. For a more complete description of this transaction, see “Certain Relationships and Related Party Transactions — Sales of Securities.”

 

We believe that the net proceeds from this offering and interest earned thereon, together with our current cash, cash equivalents and short-term deposits, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect. Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including:

 

 

 

We may need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

 

Contractual Obligations and Commitments

 

Our future contractual obligations at June 30, 2007 were as follows:

 

 

 

 

On October 7, 2004, we entered into a termination and settlement agreement with Allergan in order to terminate the license and collaboration agreement entered into with Allergan in November 2002. Pursuant to the terms of the termination agreement, Allergan paid us $1.3 million in satisfaction of its outstanding obligations under the license and collaboration agreement and retained no residual rights to PEP005. Furthermore, should we relicense PEP005 Topical to another party, we agree to pay Allergan 25% of any license or similar fees we receive prior to the commercialization of a PEP005 product, subject to a cap of $3.0 million, and 25% of royalties and similar revenue we receive following the commercialization of the product subject to a cap of $4.0 million; however, the combination of pre-commercialization license fees and post-commercialization royalties will not exceed $4.0 million. Alternatively, if we or our affiliates sell PEP005 Topical for specified indications in the United States, Canada, Mexico and certain other countries, we will pay Allergan up to $4.0 million by way of a 10% royalty on net sales. In no event will our total payments to Allergan under the termination agreement exceed $4.0 million.

 

Related Party Transactions

 

For a description of our related party transactions, see the section of this prospectus entitled “Certain Relationships and Related Party Transactions.”

 

Off Balance Sheet Arrangements

 

We have not engaged in off balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Recent Accounting Pronouncements

 

In July 2006, the Financial Accounts Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of July 1, 2007 as required. The application of FIN 48 is not expected to have a material impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 157 is not expected to have a material impact on our consolidated financial statements.

 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the company’s balance sheets and statements of operations and the related financial statement disclosures. Early application of the guidance in SAB No. 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, we do not expect the adoption of SAB No. 108 to have a material impact on our consolidated results of operations and financial condition.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. This statement gives entities the option to record certain financial assets and liabilities at fair value with the changes in fair value recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a material impact on our consolidated financial statements.

 

In March 2007, the EITF issued Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services to be used in Future Research and Development Activities. EITF 07-03 clarifies that non-refundable advance payments for future research and development activities should be deferred and capitalized. It provides guidance that amounts should be recognized as an expense as the goods are delivered or the related services are performed. The issue notes if an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The Task Force reached a tentative conclusion that the issue should be effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact of EITF 07-03 on our consolidated financial statements.

 

Quantitative and Qualitative Disclosure About Market Risk

 

Our exposure to market risk is confined to our cash and cash equivalents, which have maturities of less than three months. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents. As of June 30, 2007, we had cash and cash equivalents of $20.2 million. Because of the short-term maturities of our cash equivalents, we do not believe that an increase in market rates would have any negative impact on the realized value of our cash equivalents.

During fiscal year 2004, we entered into a foreign currency forward facility with the Commonwealth Bank of Australia. The facility was secured with a deposit, which we recorded as non-current restricted cash as at June 30, 2004 and 2005. This facility was established to hedge the foreign currency exchange risk of specific U.S. dollar receivables into Australian dollars, our functional currency. No contracts have been entered since fiscal year 2004.

 

Currently, we are exposed to foreign exchange risk, particularly with the U.S. dollar, Australian dollar and the Great British pound, as a result of certain research and development activities that are undertaken internationally. It is our policy to minimize the use of financial derivatives and achieve risk mitigation through natural hedges. These natural hedges include the maintenance of a U.S. dollar, Australian dollar and Great British pound bank accounts and deposits to primarily facilitate the payment of research and development activities. In addition we attempt to denominate contracts in Australian dollars whenever possible, regardless of the country in which work will be performed. Because our functional currency is the Australian dollar, our reported financial results are subject to fluctuation resulting from changes in the Australian to U.S. exchange rate.

 

BUSINESS

 

Overview

 

We are a development stage specialty pharmaceutical company focused on advancing and commercializing innovative medical dermatology products. We are currently developing PEP005, which is the first in a new class of compounds and which is derived from the sap of Euphorbia peplus, or E. peplus, a rapidly growing, readily-available plant commonly referred to as petty spurge or radium weed. E. peplus has a long history of traditional use for a variety of conditions, including the topical self-treatment of various skin disorders, including skin cancer and pre-cancerous skin lesions. Our lead product candidate is a patient-applied topical gel containing PEP005, a compound the use of which we have patented for the treatment of actinic keratosis, or AK. This product candidate is currently in Phase II clinical trials and is referred to as PEP005 Topical for AK. AK is generally considered the most common pre-cancerous skin condition and typically appears on sun-exposed areas of the skin as small, rough, scaly patches. If left untreated, AK lesions may progress to a form of skin cancer called squamous cell carcinoma, or SCC. We believe that PEP005 Topical for AK, once developed and if approved for commercialization by the appropriate regulatory authorities, could offer patients an effective and well-tolerated treatment alternative for AK with a short, two-to-three day application regimen that could be performed by the patient at home.

 

We are also developing a product candidate containing PEP005, the use of which we have patented for the treatment of superficial basal cell carcinoma, or superficial BCC. This product candidate is currently in Phase IIa clinical trials and is referred to as PEP005 Topical for BCC. BCC is the most commonly occurring cancerous lesion and can present in two forms, nodular BCC, which appears as a shiny bump or nodule that may be confused with a mole, and superficial BCC, which has a slightly raised, ulcerated or crusted surface. Our development of PEP005 Topical for BCC is at an earlier stage than that of PEP005 Topical for AK. However, we believe that this product candidate, once developed and if approved for commercialization by the appropriate regulatory authorities, could offer patients an effective and well-tolerated treatment alternative for superficial BCC with a short, two-to-three day application regimen that would be applied in the physician’s office by the physician or a clinician.

 

In pursuit of U.S. Food and Drug Administration, or FDA, approval, we recently completed a Phase IIb clinical trial designed to evaluate the safety, tolerability and efficacy of three different dosages of our lead product candidate, PEP005 Topical for AK, when used as a field-directed therapy for the treatment of non-facial AK lesions, including lesions on the scalp. Field-directed therapy refers to the application of PEP005 Topical for AK to a broad area of sun damaged skin that includes AK lesions. We believe that the results of this trial, which we call PEP005-006, suggest that a single application of PEP005 Topical for AK, each day for two or three consecutive days, presents a favorable safety profile and is well tolerated. In addition, the trial demonstrated a statistically significant and clinically meaningful lesion clearance by all measures evaluated and at all doses studied. The results also demonstrated a clear dose-response relationship between activity of the drug and dosage for all treatment groups. We are also investigating PEP005 Topical for AK as a field-directed therapy on the face and scalp in our PEP005-007 trial. Furthermore, we are currently evaluating PEP005 Topical for BCC when used as tumor-directed therapy in a Phase IIa clinical trial called PEP005-009.

 

Subject to input from the FDA, we expect to complete a further facial Phase IIb trial to confirm the design of our PEP005 Topical for AK Phase III pivotal trials on the face, which we plan to run in parallel with our Phase III program. We anticipate beginning our Phase III clinical program in the first quarter of 2008 with a non-facial trial, and filing our NDA, for both facial and non-facial indications, by the end of 2009, assuming completion of the Phase III clinical trials. We do not expect to commence the superficial BCC Phase III clinical program until at least 2010.

 

We own patents and have filed applications that relate to the use of PEP005 and related molecules and pharmaceutical compositions of those molecules from plants in the genus Euphorbiaceae in the treatment of cancers, AK, pre-cancers and other diseases, in the United States, Australia, New Zealand, as well as several other markets around the world, including in the European Union. In addition, we have filed patents which protect certain aspects of our product formulations. We plan to develop a direct sales and marketing

organization to commercialize and market PEP005 Topical for AK to the dermatology community if it receives regulatory approval. Initially, we anticipate that our sales representatives will target high prescribing dermatologists in the United States, and dermatologists and other clinicians that treat AK in Australia and New Zealand. As a result, we believe a relatively modest sales organization can effectively penetrate this market.

 

We were formed for the purpose of reorganizing our parent company, Peplin Limited, into the United States. Peplin Limited, formerly known as Peplin Biotech Ltd, was formed in 1999 as an Australian company. Prior to the closing of this offering, we intend to acquire all the outstanding shares of Peplin Limited pursuant to a Scheme of Arrangement. We refer to this transaction as the Reorganization. Following the Reorganization, Peplin Limited will be our wholly-owned subsidiary and our business will consist solely of the business of Peplin Limited.

 

Pre-Cancerous Skin Lesions and Skin Cancer

 

Repeated or prolonged exposure to ultraviolet light, the invisible but intense rays of the sun, can result in skin damage. Some of the effects, such as suntan or sunburn, are quickly visible. However, other skin changes, including liver spots and deep wrinkles, appear slowly and worsen over time. With repeated and long-term sun exposure, skin damage, particularly in fair skinned people, may result in skin disorders including pre-cancerous skin lesions and various skin cancers.

 

AK is generally considered the most common pre-cancerous skin condition. AK usually appears as small, rough, scaly areas on the face, lips, ears, back of hands, forearms, scalp or neck. If left untreated, AK lesions may progress to a form of skin cancer called squamous cell carcinoma, or SCC. The Lewin Group, Inc., estimates that the total direct costs for AK in the United States was $1.2 billion in 2004, and in 2002 there were approximately 8.2 million office visits for the treatment of AK with a cost to the U.S. healthcare system of approximately $1.2 billion. The Lewin Group also estimated that there were 58 million people in the United States living with AK in 2004. According to a May 2006 issue of The Journal of Family Practice, in northern hemisphere populations, 11% to 25% of adults have at least one AK lesion, compared with 40% to 60% of adults in Australia, which has the highest prevalence of AK worldwide.

 

Melanoma, SCC and BCC, are the three primary forms of skin cancer, all of which typically develop on areas of the body that are exposed to the sun. Given its propensity to rapidly spread to other organs of the body, melanoma is the most serious and difficult to treat of all skin cancers. According to the American Academy of Dermatology, melanoma accounts for approximately 4% of all new cases of skin cancer each year. SCC usually develops in the epidermis, the upper layer of the skin, and accounts for approximately 16% of all new cases of skin cancer annually. BCC develops in the basal, or lower, layer of the epidermis, and accounts for approximately 80% of all new cases of skin cancer annually. BCC can present in two forms, nodular BCC, which appears as a shiny bump or nodule that may be confused with a mole, and superficial BCC, which has a slightly raised, ulcerated or crusted surface. SCC and BCC, together, are often referred to as non-melanoma skin cancers. The Lewin Group estimates that there were 1.2 million individuals with non-melanoma skin cancer in the United States, with treatment costs to the U.S. healthcare system of $1.4 billion in 2004. Estimates suggest that the incidence of non-melanoma skin cancer increased an average of 3% to 8% per year over the period from the 1960’s to the 1990’s.

 

AK and BCC are, respectively, the most commonly occurring pre-cancerous and cancerous skin lesions, and we expect their incidence to increase at a significant rate, given societal trends that emphasize tanning and clothing styles that expose skin, increased participation in outdoor activities and increased longevity. We are initially developing a topical gel based on our lead compound, PEP005, to treat AK and superficial BCC. However, we also intend to evaluate the utility of PEP005 in treating other skin disorders, including nodular BCC, SCC and cutaneous warts.

 

Existing Treatments and their Limitations

 

Existing treatment alternatives for AK and BCC range from surgical or ablative procedures, where lesions or tumors are destroyed or cut out of the skin, to topical treatments that are designed to clear the lesion

or tumor through repeated application, to combinations of surgical or ablative procedures with topical therapies. Currently, the primary treatment for AK is cryotherapy and the primary treatment for BCC is surgical excision. The following briefly discusses the range of existing treatment alternatives from the most invasive to least invasive.

 

Surgery.  Surgical procedures range from curettage and desiccation, or scraping and burning of the lesion, to simple excision, to the sophisticated surgical techniques of Mohs’ surgery, which involves repetitive removal of tissue over several stages while maintaining as much of the surrounding healthy tissue as possible. Surgery is generally used to treat BCC, with long-term clearance rates up to 95% for Mohs’ surgery, depending on the nature of the tumor and the form of surgical intervention. However, results are dependent on operator experience and technique, and physician follow-up may be needed to monitor healing. Given that other less invasive treatment alternatives are effective in treating AK, it is not typically treated using surgical excision. Some surgical techniques, such as Mohs’ surgery, can be costly and time consuming and can cause pain, scarring and other unsatisfactory cosmetic outcomes, which may be particularly undesirable for treatments on the face or neck.

 

Cryotherapy.  Cryotherapy is a quick and well-established treatment alternative in which the clinician removes individual clinically-obvious AK lesions by applying a cryogen, or extreme cold, for a sufficient period of time to destroy the lesion. The International Journal of Dermatology reported that the overall complete response rate for cryotherapy was 67.2%, ranging from 39% to 83%, depending on the freezing time. Cryotherapy has no therapeutic benefit on the surrounding area of sun damaged skin and can result in unwanted damage to surrounding healthy tissue, pain, blistering and loss of skin pigmentation, leaving permanent white spots. Like surgery, cryotherapy can lead to unsatisfactory cosmetic outcomes, particularly for treatments on the face or neck. In addition, because there is no standardized treatment protocol for cryotherapy, results may not be uniform. Cryotherapy is currently the most common treatment alternative used for AK. Cryotherapy can also be used to remove small, superficial BCC tumors, but its use in BCC is not typical because surgical approaches are generally more effective.

 

Photodynamic therapy, or PDT.  PDT involves the in-office application of a topical solution to the AK lesions followed by the application of light therapy to activate the drug in the topical solution. Typically, a patient will visit the physician’s office in the morning, where the topical solution will be applied to the affected area. The patient will then be asked to return several hours later to receive the treatment. During this waiting period, the drug is absorbed into the skin. The patient is advised to avoid being exposed to bright light while the drug is being absorbed and, generally, for up to 40 hours after the procedure. Once the drug has been absorbed, the physician applies the light therapy. When the treated area of skin is exposed to a light source of an appropriate wave length and energy, the drug will attack and clear the AK lesions. To perform PDT procedures, the physician must make an upfront capital investment to acquire the appropriate light source and make repeated purchases of the drug. In published clinical studies for one type of PDT, marketed as Levulan Kerastick, PDT has demonstrated complete clearance of all treated AK lesions in 66% of patients, eight weeks after initial treatment. Following a second treatment, 85% of patients had complete clearance. PDT is not indicated for the treatment of BCC in the United States.

 

Topical agents.  As AK lesions typically emerge in an area of sun damaged skin, the goal of topical therapy has been to treat not only the obvious lesions but also the surrounding transformed cells in the sun damaged skin to reduce the development of new or recurrent lesions. Surgery, cryotherapy and PDT are targeted at the clearance of clinically obvious AK lesions. Topical agents are generally considered a field-directed therapy for AK because they are applied to an entire area of skin to treat clinically obvious lesions and the surrounding sun-damaged skin where lesions may develop. The following are the primary FDA-approved topical agents for treatment of AK or BCC:

 

 

 

Currently, cryotherapy is the most common treatment alternative used for AK. It is used as the sole approach in approximately 75% of the treatments for AK lesions, and in combination with pharmacotherapy in approximately 9% of the treatments. Topical drugs are used alone in approximately 16% of AK treatments. Cryotherapy can also be used to remove small, superficial BCC tumors, but its use in BCC is not typical because surgical approaches are generally more effective. We believe that treatment of AK will continue to grow primarily as a function of factors such as:

 

 

We believe that existing topical therapies for AK, while successful in the marketplace, face barriers to broader adoption. The primary and most significant limitations of existing topical agents are the generally long courses of therapy, which can range from 2 weeks to 16 weeks, and the unsightly side effects of these topical agents, which persist in the treatment area throughout the course of treatment. We believe these limitations result in general patient dissatisfaction and poor patient compliance with treatment regimens, which ultimately can result in poor treatment outcomes.

 

Our Solution — PEP005

 

We are developing a new class of naturally occurring compounds that we believe have the potential to treat certain skin cancers and pre-cancerous lesions, while addressing some of the limitations of existing treatment alternatives. These compounds are small molecules that we extract and purify from the sap of Euphorbia peplus, a rapidly growing, readily-available plant commonly referred to as petty spurge or radium weed. E. peplus has a long history of traditional use for a variety of conditions, and particularly topical self-treatment of various skin disorders, including skin cancer. We refer to our lead compound derived from E. peplus as PEP005.

 

In our preclinical studies for PEP005 we have observed that the topical application of PEP005 has two distinct and complementary mechanisms of action. First, application of PEP005 topically to a tumor resulted in the rapid swelling of mitochondria in the tumor cells, ultimately resulting in necrosis, or tumor cell death. Second, PEP005 activates the body’s immune system, causing neutrophils, a type of white blood cell, to infiltrate the treated site. The white blood cells activated as a result of PEP005 treatment appear to target and destroy any residual tumor cells, which appears to limit or prevent relapse of tumors.

 

Our lead product candidate is a patient-applied topical gel for the treatment of actinic keratosis, or AK, which we refer to as PEP005 Topical for AK. We are also developing a physician-applied topical gel for the treatment of superficial BCC, which we refer to as PEP005 Topical for BCC. We also intend to evaluate the utility of PEP005 in a topical formulation for treating other skin disorders, including nodular BCC, SCC and cutaneous warts.

 

PEP005 Topical for AK

 

We recently completed our PEP005-006 Phase IIb clinical trial of our PEP005 Topical for AK as a field-directed therapy for non-facial AK lesions, including lesions on the scalp. Preliminary results from the trial of 222 patients suggest that the drug presents a favorable safety profile and is well tolerated at all tested doses. Preliminary results are results that have been confirmed by us, but have not yet been presented to the FDA in a final report. The trial involved a single application of either 0.025% or 0.05% of PEP005 Topical for AK each day, for two or three consecutive days. The most common side effects were local skin responses, such as redness, flaking or scaling and crusting. Local skin responses typically resolved in two to four weeks after cessation of treatment. The trial evaluated three efficacy measures based on various clearance rates. On the primary efficacy measure, partial AK clearance rate, 75% of the patients in the highest dose group cleared three quarters or more of their lesions 57 days post-treatment and 56% of patients in the lowest dose group cleared three quarters or more of their lesions 57 days post-treatment. The two secondary efficacy measures were complete AK clearance and baseline AK clearance rate. In the highest dose group the complete AK clearance rate and baseline AK clearance rate were 54% and 58%, respectively, and in the lowest dose group were 40% and 42%, respectively. We must successfully complete additional trials before we can commercialize this product candidate.

 

As compared with other treatment alternatives, we believe that PEP005 Topical for AK could offer a combination of attractive benefits to patients seeking treatment of AK, including:

 

 

 

AK is predominantly treated using either cryotherapy alone, cryotherapy in conjunction with topical agents or topical agents alone. We believe the shortcomings of current topical treatments have limited their broader adoption. We believe PEP005 Topical for AK could address these shortcomings and has the potential to expand the markets for both topical agents used in conjunction with cryotherapy, and topical agents used alone, to treat AK.

 

PEP005 Topical for BCC

 

The preliminary results from our most recent PEP005-003 Phase IIa clinical trial of PEP005 Topical for BCC, suggest that this drug candidate presents a favorable safety profile and is well tolerated. Further, 71% of superficial BCC tumors were cleared with just two applications of 0.05% PEP005 Topical for BCC and the result was statistically significant. We intend to develop PEP005 Topical for BCC as an in-office, physician-applied treatment procedure for superficial BCC tumors. We are presently conducting a further Phase II trial of PEP005, which we call PEP005-009, a dose escalation clinical trial in which we are increasing the dosage of PEP005 Topical for BCC to establish the maximum tolerated doses when administered as a single application and when administered as two applications one week apart. We are also evaluating the tumor clearance rate at the maximum tolerated doses. We must successfully complete these and other trials before we can seek regulatory approval to commercialize this product candidate. We do not expect to commence our Phase III clinical program for PEP005 Topical for BCC until at least 2010.

 

The vast majority of BCC tumors are treated by surgical methods. However, we believe that the associated pain and morbidity, together with the potential for long term surgical scars that accompany surgery represent an important short coming of this treatment approach. Further, we believe that physicians and their patients would embrace an effective and well tolerated topical alternative to surgery. We believe PEP005 Topical for BCC has the potential to be a prominent treatment option for smaller and well demarcated superficial BCC tumors.

 

While we believe PEP005 Topical for the treatment of AK and BCC offers advantages to other currently existing treatment options, the potential side effects of PEP005 Topical include redness, flaking or scaling, crusting, swelling, blistering, ulceration, changes in pigmentation and scarring. The side effects from PEP005 Topical for AK and BCC may last as long as four weeks. Moreover, patients may believe that treatment with PEP005 will be uncomfortable or inconvenient. Physicians and patients may perceive that the side effects of our products outweigh the benefits of their use and, and as result, may be unwilling to change their current treatment regimens. Furthermore, even if approved by the FDA, physicians may not prescribe our products until we do have long term data regarding their safety and efficacy.

 

Our Strategy

 

Our objective is to build a specialty pharmaceutical company focused on the development and commercialization of products for selected medical dermatology markets in the United States, Australia and New Zealand. Key aspects of our strategy include:

 

 

an in-office clinician applied treatment procedure for the treatment of superficial BCC. We believe that PEP005 in topical formulation has potential in a number of indications beyond AK and superficial BCC, particularly SCC and cutaneous warts, and plan to evaluate the attractiveness of pursuing such additional indications.

 

 

 

Clinical Development Program

 

PEP005 Topical for AK

 

We are developing PEP005 Topical for AK as a prescription, patient-applied, take-home, topical medication available in single-use tubes. We expect that commercial packages will consist of two or three tubes and be sufficient for a course of treatment of a 25 cm² area, which, for example, approximates half the sun damaged area to be treated on the typical forehead or cheek. We are currently defining an optimized treatment regimen in which the course of therapy is once a day application for two or three consecutive days.

 

Clinical Overview.  We are developing PEP005 Topical for AK under an Investigational New Drug, or IND, application filed with the FDA in June 2004. To date, we have completed five clinical trials in our AK program with a total of 463 patients treated with active drug, including our most recent Phase IIb clinical trial of 222 patients with non-facial field treatment, which we refer to as our PEP005-006 trial, that included 162 patients on active drug. Our early trials focused on evaluating the safety and preliminary efficacy of PEP005 Topical for AK as a lesion-directed therapy for non-facial AK lesions, including lesions on the scalp. Lesion-directed therapy, in this case, refers to the application of PEP005 Topical for AK to the AK lesion and immediate peri-lesional skin area only. As our clinical trials for AK progressed, we have transitioned from the evaluation of PEP005 Topical for AK as a lesion-directed therapy for both facial and non-facial AK lesions to its evaluation as a field-directed therapy for non-facial and facial AK lesions. Field-directed therapy refers to the application of PEP005 Topical for AK to a broader area of sun damaged skin that includes the AK lesions.

 

In each of our clinical trials, PEP005 Topical for AK has suggested a favorable safety profile. Localized redness, flaking or scaling and crusting were the most common skin responses or skin reactions reported in our trials. All of these reactions were transient and generally cleared within two to four weeks following treatment. Significantly, no scarring or other longer term complications have been observed. Moreover, no drug-related serious adverse events have been reported. Our trials indicate that PEP005 Topical for AK may clear AK lesions with a single application applied each day for a period of two or three days.

 

Evaluation Metrics.  We evaluate safety based on the occurrence of adverse events and serious adverse events, or adverse events that are life threatening in nature. Potential side effects include redness, flaking or scaling, crusting, swelling, blistering, ulceration, changes in pigmentation and scarring. We also evaluate the patient’s skin response at the treatment site based on a subjective evaluation made by the investigator using a scale of none, mild, moderate and severe. Some response at the treatment site is desirable,

because it indicates the site is responding to treatment. We believe that an optimal response is mild to moderate. A severe rating indicates that patient’s skin was highly responsive to the treatment, but does not necessarily indicate the occurrence of an adverse event.

 

We evaluate clearance rates in our PEP005-006 and PEP005-007 clinical trials using three efficacy metrics:

 

 

PEP005-006 Clinical Trial.  Our PEP005-006 clinical trial was a multi-center, randomized, double-blind, double-dummy, vehicle-controlled trial, designed to assess safety, tolerability and efficacy of PEP005 Topical for AK as a field-directed treatment in non-facial locations. The trial treated 222 patients, 178 male and 44 female, with a mean age of 67 years. Patients were randomized into one of four treatment groups:

 

 

A vehicle-controlled study compares the result of a product against its vehicle, which is the portion of the product that does not contain an active pharmaceutical ingredient. The vehicle in the PEP005-006 trial was applied to a 25cm² area of skin containing four to eight AK lesions on the arm, shoulder, chest, back or scalp. Patients applied the treatment themselves, with at least the initial treatment occurring under physician supervision. Our vehicle was an isopropyl alcohol gel. We believe our vehicle reaction is consistent with that observed in most topical dermatologic trials of AK.

 

Safety and Tolerability.  At all doses, PEP005 Topical for AK suggested a favorable safety profile and was well tolerated by the patients enrolled in the trial. Across all active treatment groups, 24 patients of a total 159, were reported not eligible to apply the third day dose due to response to the drug, the majority of which received the highest formulation strength. There were no drug related serious adverse events reported. The most common side-effects were localized skin responses at the treatment site, compromising redness, flaking or scaling and crusting. Local skin responses resolved spontaneously and generally within two to four weeks following treatment. No patients have discontinued the trial due to adverse events. Investigators in the trial reported that the majority of patient skin responses to treatment were either mild or moderate, with approximately 19% of patients in the highest dosage treatment group experiencing a severe response.

Efficacy.  Efficacy was evaluated 57 days post-treatment using a modified intent to treat patient population, which consisted of all patients that received at least one dose and had at least one assessment following the baseline assessment. The statistical significance of the difference in the clearance rates of active treatment groups compared to vehicle treatment groups is presented in terms of p-value in the chart below.

 

 

Subjective assessment.  As part of the assessment, patients were asked to evaluate the convenience and ease of use of the treatment, cosmetic outcome of the treatment, their satisfaction with the treatment compared to prior AK treatments and their overall level of satisfaction. Patients ranked their response on a scale from 1, very negative, to 7, very positive, with 4 being neutral. At the highest dose group, the average patient score measuring satisfaction in comparison with prior AK treatments was 5.7, and at the lowest dose group was 5.5. The average patient score for overall satisfaction at the highest dose group was 6.0, and at the lowest dose group was 6.1.

 

PEP005-007 Clinical Trial.  Our PEP005-007 clinical trial is an open label, or non-blinded, Phase IIa trial currently ongoing at sites in Australia and New Zealand. The trial is designed to evaluate the safety and efficacy of PEP005 Topical for AK at various formulation strengths when applied as a field-directed therapy to sun-damaged areas on the face and scalp. Patients apply PEP005 Topical for AK for two or three days to treatment fields of 25cm² containing four to eight lesions. Efficacy is being evaluated based on partial and complete clearance rates in the treated field. We plan to evaluate efficacy on the 57th day after treatment and at other post-treatment visits, and side effects will be evaluated at various points in time. We expect to report an analysis of interim data in October 2007.

 

AK Clinical Development Plan.  We expect the clinical safety and efficacy data from our Phase II clinical trials in AK patients to allow us to define the appropriate formulation strength and treatment regimen for facial and non-facial field directed therapy. Following completion of our PEP005-006 and PEP005-007 clinical trials we expect to meet with the FDA to review our preclinical, manufacturing and clinical data and to discuss the design of our Phase III pivotal clinical trials and other registration trials required to support an NDA approval for PEP005 Topical for AK. We plan to treat both facial and non-facial AK lesions in our Phase III program, which we expect will require a minimum of one non-facial and two facial pivotal trials. The PEP005-007 trial will help us determine whether the same formulation strength will be appropriate for field-directed therapy on and off the face or a lower formulation strength will be appropriate for field-directed therapy on the face as compared to off the face. Subject to input from the FDA, we expect to complete a further facial Phase IIb trial to confirm the design of our Phase III pivotal trials on the face, which we plan to run in parallel with our Phase III program. We anticipate beginning our Phase III clinical program in the first quarter of 2008 with a non-facial trial, and filing our NDA, for both facial and non-facial indications, by the end of 2009, assuming completion of the Phase III clinical trials.

 

PEP005 Topical for BCC

 

We are developing PEP005 Topical for BCC as an in-office, physician-applied, tumor-directed treatment procedure for superficial BCC that is designed for application using a delivery device to accurately administer a quantity of drug calibrated to tumor size and volume. We are currently evaluating various treatment regimens in which PEP005 Topical for BCC is applied to tumors at either one or two office visits, with the two office visits occurring a week apart, at drug quantities that vary depending on the size of the tumor.

 

Clinical Overview.  We are developing PEP005 Topical for BCC under a separate IND filed with the FDA in June 2004. To date, we have completed two, Phase IIa, clinical trials in the BCC program with a total of 118 patients treated, and have a third Phase IIa trial of approximately 50 patients that is ongoing. We also

plan to commence and complete a Phase IIb trial before we begin planning our Phase III pivotal clinical trials. We relied on data from our AK Phase I trials to enable initiation of the program for superficial BCC at a more advanced stage. Our trials have focused on tumor-directed therapy for both facial and non-facial superficial BCC tumors. Unlike our AK clinical development program, we do not intend to evaluate PEP005 Topical for BCC as a field-directed therapy.

 

Across our completed BCC trials, PEP005 Topical for BCC has suggested a favorable safety profile, with the most common local skin reaction being redness. Moreover, no drug-related serious adverse events have been reported in these trials, and no patients have discontinued the trial due to adverse events. Preliminary efficacy evaluation has shown that lesion clearance may be achieved with one to two doses of PEP005 Topical for BCC.

 

PEP005-003 Clinical Trial.  PEP005-003 was a Phase IIa, multi-center, double-blind, randomized, vehicle-controlled, parallel group trial designed to assess the safety of PEP005 Topical for BCC at three formulation strengths. The trial’s secondary objectives were to determine an appropriate treatment regimen and to provide preliminary efficacy evaluation of PEP005 Topical for BCC.

 

We enrolled 60 patients in the trial and randomized them to one of two treatment arms: one that received treatment on days one and two, and one that received treatment on days one and eight. Each treatment arm consisted of four treatment groups with each group receiving one of the following formulation strengths: 0.0025%, 0.01%, 0.05% or vehicle. Patients were required to have a biopsy-confirmed superficial BCC located on the arm, shoulder, chest, face, neck, leg or back. The median tumor diameter was nine millimeters, with a range of 4 to 15 millimeters. PEP005 Topical for BCC in the amount of 70 or 100 microliters, depending on tumor size, was applied to the superficial BCC once daily on the two treatment days. All applications of PEP005 Topical for BCC were performed in a physician’s office by a clinician. Patients were then monitored for 12 weeks. All but two patients completed their two day courses of therapy.

 

The preliminary results of the trial demonstrated that PEP005 Topical for BCC was well-tolerated with a favorable safety profile. The majority of local skin reactions were mild to moderate. The most frequently reported local skin response was redness. Local skin responses typically resolved within four weeks and all local skin responses were resolved by the end of the trial. There were no drug-related serious adverse events reported.

 

The primary evaluation of efficacy was the clearance rate determined from examination of excised treatment sites at the 12-week evaluation visit. The trial suggested a dose related response to the drug. The most effective concentration of PEP005 Topical for BCC was the highest formulation strength. In the group that received treatment on days one and two, 71% of superficial BCCs out of a total number of seven were completely cleared versus 0% of the six in the vehicle group. This difference was statistically significant with a p-value of 0.02.

 

PEP005-009 Clinical Trial.  Our PEP005-009 clinical trial is an ongoing Phase II dose escalation trial designed to determine the maximum tolerable dose of PEP005 Topical for BCC. A total of 13 patients are currently in the dose escalation phase of this trial. PEP005 Topical for BCC is being administered to superficial BCC tumors on the trunk as either a single application or two applications occurring one week apart. Secondary objectives of this trial include an evaluation of tumor clearance rates. We intend to enroll an additional 25 patients, to be treated at the two respective maximum tolerated doses, in each arm of the trial to provide a confidence interval around the observed clearance rate. All applications of PEP005 Topical for BCC are being performed in a physician’s office by a clinician. We expect to report the results of this trial in 2008.

 

BCC Clinical Development Plan.  We expect the clinical safety and preliminary efficacy data from our PEP005-009 and future Phase II trials in superficial BCC patients to allow us to define an appropriate formulation strength and treatment regimen. We anticipate that the Phase III clinical program will likely include two identical vehicle-controlled pivotal trials. We plan to assess histologic clearance as well as clinical clearance. In addition, we expect to conduct an open-label, five-year, trial with active treatment only and without excision of the treatment sites. We expect to assess two-year recurrence rates at an interim point in this trial to form the basis for the NDA submission at that time. The remaining trial period (three years) is

required to assess post-approval, long-term recurrence rates. Prior to initiation of the Phase III program, we will meet with the FDA to review preclinical, manufacturing and clinical data and to discuss the design of Phase III pivotal and other registration trials. We do not expect to commence the superficial BCC Phase III clinical program before 2010.

 

Other Indications

 

We believe that there are other potential uses for PEP005 in topical formulations for treatment of skin conditions, such as cutaneous warts and other non-melanoma skin cancers, such as SCC and nodular BCC. Of these potential indications, we have completed initial clinical trials for SCC in situ and nodular BCC. These initial clinical trials have demonstrated the potential of PEP005 to clear these skin cancers following two applications.

 

In addition, PEP005 has shown potential anti-cancer activity in preclinical tests against certain forms of leukemia and bladder cancers. We plan to pursue initial clinical trials of PEP005 as an intravenous therapy for certain forms of leukemia and as an intra-cavitary formulation for superficial forms of bladder cancer. We continue to support research in several of these areas with studies based on preclinical, clinical, regulatory and marketing criteria that we have established through our strategic planning processes. Once we demonstrate clinical proof of principle in one or more of these indications, we plan to collaborate on the further development and commercialization of these oncology products.

 

Third-Party Independent Contract Research Organizations

 

We do not currently conduct clinical trials on our own, and instead rely on Omnicare CR, Inc., or Omnicare, an independent clinical research organization to provide us with clinical trial design and administration services. Pursuant to a Clinical Master Services Agreement with Omnicare, we submit project protocols on an as needed basis to Omnicare which then administers the trial pursuant to the terms of the protocol and our directions. The Clinical Master Services Agreement, or any project protocol, is terminable by either party on 30 days notice, provided that Omnicare cannot terminate if a project remains incomplete. We also depend on independent clinical investigators to provide services in connection with our preclinical pharmacology and toxicology research and development and our clinical trials. Our preclinical pharmacology and toxicology research and development and our clinical trials are conducted by a number of third parties at a number of different sites in different jurisdictions, including the United States, Australia and New Zealand, and these third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data. We own no laboratories or other research space and, therefore, must rely on third parties for these services. To date, we have been able to manage the use of these third parties in order to effectively carry out our preclinical pharmacology and toxicology research and development and our clinical trials.

 

Intellectual Property

 

We own patents and have filed applications that relate to the use of PEP005 and related molecules and pharmaceutical compositions of those molecules from plants in the genus Euphorbiaceae in the treatment of cancers, AK, pre-cancers and other diseases in the United States, Australia, New Zealand, as well as several other markets around the world, including in the European Union. In addition, we have filed patents which protect certain aspects of our product formulations. In total, we own or have exclusive rights to three patents and seven patent applications in the United States, and 13 patents and 32 patent applications (including three pending Patent Cooperation Treaty applications and two Australian provisional applications) outside the United States, relating to uses and formulations of PEP005. We also have three pending Patent Cooperation Treaty applications relating to our products. Our issued U.S. and non-U.S. patents expire between August 2018 and August 2021, subject to any patent term extension which might be available under the Hatch-Waxman legislation or similar laws in Europe and other foreign jurisdictions. Of these issued patents and patent applications, four and six, respectively, relate to the treatment of skin cancers, including SCC, BCC and AK. We also have patents and patent applications related to the treatment of other conditions, including solid cancers, tumors, colon cancer, bladder cancer, prostate cancer, cervical cancer, breast cancer and warts. In

addition, we rely on trade secrets and contractual arrangements to protect certain aspects of our proprietary information and products.

 

We believe that we were the first to document, in a controlled setting, the clinical utility of the sap of E. peplus in the treatment of certain forms of skin cancer and pre-cancerous lesions and further to isolate, characterize and validate the single molecular entity responsible for the anti-skin cancer effects of the plant sap. We believe our patents protect our proprietary rights to the use of PEP005 and related molecules, generally, angeloyl substituted ingenanes, whether obtained or obtainable from the sap of E. peplus, in the treatment of skin cancer, pre-cancerous lesions, cancer in general and a variety of other conditions and diseases.

 

We own patents and patent applications related to the following:

 

 

Manufacturing

 

We operate our leased manufacturing plant for the drying, milling, extracting and purifying of pharmaceutical grade PEP005 from E. peplus, a rapidly growing plant. The production process involves cultivation, extraction, purification and formulation and filling. E. peplus grows on a number of continents, including Australia, North America and Europe. We currently contract with five growers which are disbursed throughout Queensland, Australia to obtain our raw supply E. peplus. We expect that the supply from these growers will be adequate for the next several years. In Australia, E. peplus can be grown for approximately nine months of the year and it typically takes 16 weeks from the time of planting to the harvest of the mature plant. We also store dried E. peplus from our suppliers to manage potential supply variations. We are continually seeking alternative suppliers and expect to look for alternatives, including supplies outside of Queensland, Australia to meet our potential future large-scale commercial needs.

 

Following receipt of the raw E. peplus, we use a proprietary extraction and purification technology to produce isolated crystalline PEP005 under Good Manufacturing Practices, or cGMP, and to specified purity. Synthetic production technologies have been evaluated, but rejected as too complex and expensive. Our manufacturing plant is located in Southport, Queensland, Australia. Horticultural and other activities are undertaken by various outside contractors based in southeast Queensland, Australia.

 

The drug product used in clinical trials is a non-sterile gel in which crystalline PEP005 is completely dissolved. Gel formulations prepared for topical clinical trials and cGMP stability trials consist of the drug dissolved in benzyl alcohol then added to isopropyl alcohol and mixed with citrate buffer and hydroxyethyl cellulose. All process parts are manufactured separately then combined under controlled mixing conditions to form a homogeneous bulk product.

 

Currently, formulation and filling for clinical trial supplies of finished product is undertaken by Penn Pharmaceutical Services, or Penn, a contract manufacturing organization in the United Kingdom. Clinical batches are manufactured, packaged and labeled under cGMP conditions at Penn’s facilities, in the United Kingdom on a purchase order basis. The clinical supplies are then shipped to locations designated by us or our clinical research organization for use in trials. We do not believe that Penn has sufficient capacity to fulfill our anticipated requirements if we obtain regulatory approval and commence commercialization. We are currently in discussions with another third party for supplying us with PEP005 Topical for AK in quantities we believe to be sufficient for our Phase III clinical trials as well as the commercial launch of our product candidates upon receiving regulatory approval. We anticipate replacing Penn with this supplier upon the finalization of a supply agreement.

Sales and Marketing

 

We own patents and have filed applications that relate to the use of PEP005 and related molecules and pharmaceutical compositions of those molecules from plants in the genus Euphorbiaceae in the treatment of cancers, AK, pre-cancers and certain other diseases in the United States, Australia, New Zealand, as well as several other markets around the world, including in the European Union. In addition, we have filed patents which protect certain aspects of our product formulations. We plan to develop a sales and marketing organization to commercialize PEP005 Topical for AK and to promote it to the dermatology community when it receives regulatory approval. Initially, we anticipate that our sales representatives will target high prescribing dermatologists in the United States, and dermatologists and other clinicians who treat AK in Australia and New Zealand. We regard these markets as our target markets. We estimate that there are 10,000 board certified dermatologists in the United States and that high prescribers are well defined and can be targeted with a modest sales force. Accordingly, we believe a relatively modest sales organization can effectively penetrate this market. We intend to utilize various marketing strategies to enhance the market understanding and appreciation of the various attractive features of our products, including, engendering and leveraging support of key opinion leaders in the field of dermatology, maintaining an active presence at scientific and industry conferences and developing a robust body of scientific data supporting the safety and efficacy of our products.

 

In addition, it is our intention to seek collaborative development and licensing arrangements with leading companies in geographic regions outside of our core selected target markets in order to develop and commercialize products incorporating PEP005 in non-core markets. We believe this is the most effective way for us to leverage the maximum value for our product candidates consistent with the resources that we have available to us.

 

Competition

 

There are many technologies, techniques and products for the treatment of AKs, including cryotherapy with liquid nitrogen, PDT, and topical products, such as Carac, Efudex, Solaraze, Fluoroplex and Aldara. The companies that market topical products include Graceway Pharmaceuticals, LLC, Meda AB, iNova Pharmaceuticals (Australia) Pty Limited, Valeant Pharmaceuticals International, Dermik Laboratories, Shire plc and Bradley Pharmaceuticals, Inc. Other AK therapies are also known to be under development by a number of companies such as Medigene (GmbH), Heidelberg Pharma AG, Curis and others.

 

Commercial development of PDT agents is currently being pursued by a number of companies. These include: DUSA Pharmaceuticals, Inc., QLT Inc., Axcan Pharma Inc., Miravant, Inc., Pharmacyclics, Inc., QLT PhotoTherapeutics, Inc., medac GmbH, photonamic GmbH & Co. KG, and PhotoCure ASA, which has FDA approval to market for the treatment of AK in the United States and who entered into a marketing agreement with Galderma S.A. for countries outside of Nordic countries for certain dermatology indications.

 

The pharmaceutical industry is highly competitive, and many of our competitors have substantially greater financial, technical and marketing resources than we have. In addition, several of these companies have significantly greater experience than we do in developing products, conducting preclinical and clinical testing and obtaining regulatory approvals to market products for healthcare. Our competitors may succeed in developing products that are safer or more effective than ours and in obtaining regulatory marketing approval of future products before we do. Our competitiveness may also be affected by our ability to manufacture and market our products and by the level of reimbursement for the cost of our drug and treatment by third-party payers, such as insurance companies, health maintenance organizations and government agencies.

 

Third-Party Reimbursement

 

In both domestic and foreign markets, our ability to commercialize successfully and attract strategic partners for our product candidates depends in significant part on the availability of adequate coverage and reimbursement from third-party payers, including, in the United States, governmental payers such as the Medicare, Medicaid and Veterans Affairs programs, as well as private health insurers, including managed care organizations, and other third-party payers. Third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs as well as examining their cost

effectiveness. Any third-party payer determination that our product candidates are not cost-effective or any significant cost containment measures could have a material adverse effect on our ability to operate profitably.

 

In addition, political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes, and we are unable to predict legislation, regulations or policies, if any, relating to our industry and products may be enacted in the future. For instance, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act, or MMA, which, among other things, changed significantly the way that Medicare covers and reimburses certain pharmaceutical products. The new law created a new Part D prescription drug benefit which, beginning January 1, 2006, provided Medicare beneficiaries with subsidized prescription drug coverage from private sector providers, or Part D plan sponsors. Under the MMA, plan sponsors can limit the number of prescription drugs that will be covered in each therapeutic category and class on their formularies.

 

Once we obtain FDA clearance or approval for our products and begin to market them, we anticipate that Medicare will cover PEP005 Topical for AK under the Part D prescription drug benefit as a new class of patient self-administered therapy and will cover PEP005 Topical for BCC under the Medicare Part B program as it is an in-office, physician-applied treatment. We cannot be certain, however, that any of our product candidates will successfully be placed on Part D plan formularies, nor can we predict the negotiated price for our drug candidates under Part D, which will be determined by market factors. In addition, we cannot predict whether any of our drug candidates will be covered under Medicare Part B.

 

Government Regulation

 

United States

 

Prescription drug products are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and promotion of such products under the Federal Food Drug and Cosmetic Act, or FFDCA, and its implementing regulations, and by comparable agencies and laws in foreign countries. Failure to comply with applicable FDA or other requirements may result in civil or criminal penalties, recall or seizure of products, partial or total suspension of production or withdrawal of the product from the market. FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed in the United States. All applications for FDA approval must contain, among other things, information relating to pharmaceutical formulation, stability, manufacturing, processing, packaging, labeling, and quality control.

 

New Drug Application.  Approval of a New Drug Application, or NDA, by the FDA is required before a drug may be marketed in the United States. This process generally involves: