RISK FACTORS
An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following
information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements and related notes hereto and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations," before deciding to invest in our common stock. The occurrence of any of the following risks could harm our business, financial
condition, results of operations and prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this prospectus and those we may make
from time to time. In these circumstances, the market price of our common stock could decline; and you may lose all or part of your investment. We cannot assure you that any of the events discussed
below will not occur.
Risks Related to Our Financial Position and Capital Needs
We have incurred significant operating losses since inception and anticipate that we will continue to incur
substantial operating losses for the foreseeable future and may never achieve or maintain profitability.
Since inception in January 2016, we have incurred significant operating losses. Our net loss was $4.3 million and $16.5 million
for the years ended December 31, 2017 and 2018, respectively and $27.9 million for the nine months ended September 30, 2019. As of September 30, 2019, we had an accumulated
deficit of $49.1 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Since inception, we have devoted substantially all of
our efforts to research and preclinical and clinical development of our product candidates, organizing and staffing our company, business planning, raising capital, establishing our intellectual
property portfolio and conducting clinical trials. To date, we have never obtained regulatory approval for, or commercialized, any drugs. It could be several years, if ever, before we have a
commercialized drug. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as,
we:
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continue the ongoing and planned development of our product candidates;
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initiate, conduct and complete any ongoing, anticipated or future preclinical studies and clinical trials for our current and future product
candidates;
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seek marketing approvals for any product candidates that successfully complete clinical trials;
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establish a sales, marketing, manufacturing and distribution infrastructure to commercialize any current or future product candidate for which
we may obtain marketing approval;
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seek to discover and develop additional product candidates;
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continue to build a portfolio of product candidates through the acquisition or in-license of drugs, product candidates or technologies;
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maintain, protect and expand our intellectual property portfolio;
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hire additional clinical, regulatory and scientific personnel; and
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add operational, financial and management information systems and personnel, including personnel to support our product development and planned
future commercialization efforts.
Furthermore,
we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did
not incur as a private company.
To
become and remain profitable, we must succeed in developing and eventually commercializing drugs that generate significant revenue. This will require us to be successful in a range of
challenging activities, including completing preclinical studies and clinical trials of our current and future product
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candidates,
obtaining regulatory approval, procuring commercial-scale manufacturing, marketing and selling any products for which we obtain regulatory approval (including through third parties), as
well as discovering or acquiring and developing additional product candidates. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if
we do, may never generate revenues that are sufficient to offset our expenses and achieve profitability.
Because
of the numerous risks and uncertainties associated with drug development, we are unable to accurately predict the timing or amount of expenses or when, or if, we will be able to
achieve profitability. If we are required by regulatory authorities to perform studies in addition to those currently expected, or if there are any delays in the initiation and completion of our
clinical trials or the development of any of our product candidates, our expenses could increase.
Even
if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease
the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our
common stock could also cause you to lose all or part of your investment.
Our limited operating history may make it difficult for you to evaluate the success of our business to date
and to assess our future viability.
We are a clinical-stage company founded in January 2016, and our operations to date have been largely focused on raising capital, organizing and
staffing our company, identifying and developing our product candidates, and undertaking preclinical and clinical development for our product candidates. As an organization, we have not yet
demonstrated an ability to successfully complete clinical development, obtain regulatory approvals, manufacture a commercial-scale product or conduct sales and marketing activities necessary for
successful commercialization, or arrange for a third-party to conduct these activities on our behalf. Consequently, any predictions about our future success or viability may not be as accurate as they
could be if we had a longer operating history.
We
may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will need to transition at some
point from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
Additionally,
we expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are
beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.
We will require substantial additional funding to finance our operations. If we are unable to raise capital
when needed, we could be forced to delay, reduce or terminate certain of our development programs or other operations.
As of September 30, 2019, our cash, cash equivalents and marketable securities was $33.0 million. Based on our research and
development plans, we believe that our existing cash and cash equivalents as of September 30, 2019, will be sufficient to fund our operations through at least the next 12 months from the
date the financial statements were issued. However, we will need to obtain substantial additional funding in connection with our continuing operations and planned research and clinical development
activities. Our future capital requirements will depend on many factors, including:
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the timing, progress and results of our ongoing preclinical studies and clinical trials of our product candidates;
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the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials of other product candidates that we
may pursue;
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our ability to establish collaborations on favorable terms, if at all;
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the costs, timing and outcome of regulatory review of our product candidates;
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the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our
product candidates for which we receive marketing approval;
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the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
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the cost of any milestone and royalty payments with respect to any approved product candidates;
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and
defending any intellectual property-related claims;
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the costs of operating as a public company; and
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the extent to which we acquire or in-license other product candidates and technologies.
Identifying
potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we
may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success.
Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on
additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to
favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. If we are unable to raise capital when needed or on
attractive terms, we could be forced to delay, reduce or altogether terminate our research and development programs or future commercialization efforts.
Raising additional capital may cause dilution to our stockholders, including investors in this offering,
restrict our operations or require us to relinquish rights to our product candidates.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through public or private equity
or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these
approaches. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest in
our company may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt and equity financings, if available,
may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as redeeming our shares, making investments, incurring additional debt, making capital
expenditures, declaring dividends or placing limitations on our ability to acquire, sell or license intellectual property rights.
If
we raise additional capital through future collaborations, strategic alliances or third-party licensing arrangements, we may have to relinquish valuable rights to our intellectual
property, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital when needed, we may
be required to delay,
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limit,
reduce or terminate our drug development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.
The Tax Cuts and Jobs Act, or the Tax Act, could adversely affect our business and financial condition.
In December 2017, President Trump signed into law the Tax Act that significantly reformed the Internal Revenue Code of 1986, as amended. The Tax
Act, among other things, contains significant changes to corporate taxation, including (i) reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%,
(ii) limitation of the tax deduction for interest expense to 30% of adjusted earnings (with certain exceptions, including for certain small businesses), (iii) limitation of the deduction
for post-2017 net operating losses, or NOLs, to 80% of current-year taxable income and elimination of net operating loss carrybacks for post-2017 NOLs, (iv) one-time taxation of offshore
earnings at reduced rates regardless of whether they are repatriated, (v) immediate deductions for certain new investments instead of deductions for depreciation expense over time and
(vi) modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for
rare diseases or conditions generally referred to as "orphan drugs"). Our federal net operating loss carryovers will be carried forward indefinitely pursuant to the Tax Act. We continue to examine the
impact the Tax Act may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition
could be adversely affected. This prospectus does not discuss the Tax Act or the manner in which it might affect us or purchasers of our common stock. We urge our stockholders, including purchasers of
common stock in this offering, to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.
Our ability to use our net operating losses to offset future taxable income may be subject to certain
limitations.
We have incurred substantial losses since inception and do not expect to become profitable in the near future, if ever. In general, under
Section 382 of the United States Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize
its pre-change NOLs to offset future taxable income. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of subsequent changes in our
stock ownership (some of which shifts are outside our control). As a result, if, and to the extent that we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income
may be subject to limitations.
The
Tax Act, among other things, includes changes to U.S. federal tax rates and the rules governing net operating loss carryforwards. For NOLs arising in tax years beginning after
December 31, 2017, the Tax Act limits a taxpayer's ability to utilize NOL carryforwards to 80% of taxable income. In addition, NOLs arising in tax years ending after December 31, 2017
can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation,
and NOLs generated in tax years ending before January 1, 2018 will continue to have a two-year carryback and 20-year carryforward period. Deferred tax assets for NOLs will need to be measured
at the applicable tax rate in effect when the NOL is expected to be
utilized. The changes in the carryforward/carryback periods, as well as the new limitation on use of NOLs may significantly impact our ability to utilize our NOLs to offset taxable income in the
future.
In
order to realize the future tax benefits of our NOL carryforwards, we must generate taxable income, of which there is no assurance. Accordingly, we have a full valuation allowance for
deferred tax assets as of December 31, 2018 and September 30, 2019.
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The report of our independent registered public accounting firm included a "going concern" explanatory
paragraph.
The report of our independent registered public accounting firm on our financial statements as of and for the year ended December 31,
2018 that was issued prior to our IPO included an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern. Given our planned expenditures,
including expenditures in connection with our clinical trials, management and our independent registered public accounting firm may conclude, in connection with the audit of our financial statements
for the year ended December 31, 2019 or any other subsequent period, that there is substantial doubt regarding our ability to continue as a going concern. The inclusion of a going concern
explanatory paragraph by our independent registered public accounting firm may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual
relations with third parties and otherwise execute our development strategy, which may cause us to delay, reduce or eliminate some or all of our research and development programs. If we are unable to
continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our
financial statements.
Risks Related to the Development and Commercialization of Our Product Candidates
Our future success is substantially dependent on the successful clinical development, regulatory approval and
commercialization of our product candidates. If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates and our ability to generate product
revenue will be adversely affected.
We have invested a significant portion of our time and financial resources in the development of AT-001, AT-003 and AT-007. Our business is
dependent on our ability to successfully complete development of, obtain regulatory approval for, and, if approved, successfully commercialize our product candidates in a timely manner. We may face
unforeseen challenges in our drug development strategy, and we can provide no assurances that our drug design will prove to be effective, that we will be able to take advantage of expedited regulatory
pathways for any of our product candidates, or that we will ultimately be successful in our future clinical trials.
We
have not obtained regulatory approval for any product candidate, and it is possible that any product candidates we may seek to develop in the future will not obtain regulatory
approval. Neither we nor any future collaborator is permitted to market any product candidates in the United States or abroad until we receive regulatory approval from the FDA or applicable foreign
regulatory agency. The time required to obtain approval or other marketing authorizations by the FDA and comparable foreign regulatory authorities is unpredictable and typically takes many years
following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the
type and amount of clinical data necessary to gain approval may change during the course of a product candidate's clinical development and may vary among jurisdictions.
Prior
to obtaining approval to commercialize any product candidate in the United States or abroad, we must demonstrate with substantial evidence from well-controlled clinical trials, and
to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidate is safe and effective for its intended uses. Results from preclinical studies and clinical
trials can be interpreted in different ways. Even if we believe that the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by
the FDA and other regulatory authorities. The FDA may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or it
may object to elements of our clinical development program, requiring their alteration.
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Of
the large number of products in development, only a small percentage successfully complete the FDA or comparable foreign regulatory authorities approval processes and are
commercialized. The lengthy approval or marketing authorization process as well as the unpredictability of future clinical
trial results may result in our failing to obtain regulatory approval or marketing authorization to market our product candidates, which would significantly harm our business, financial condition,
results of operations and prospects.
Even
if we eventually complete clinical testing and receive approval of a new drug application, or NDA, or foreign marketing application for our product candidates, the FDA or the
comparable foreign regulatory authorities may grant approval or other marketing authorization contingent on the performance of costly additional clinical trials, including post-market clinical trials.
The FDA or the comparable foreign regulatory authorities also may approve or authorize for marketing a product candidate for a more limited indication or patient population than we originally request,
and the FDA or comparable foreign regulatory authorities may not approve or authorize the labeling that we believe is necessary or desirable for the successful commercialization of a product
candidate. Any delay in obtaining, or inability to obtain, applicable regulatory approval or other marketing authorization would delay or prevent commercialization of that product candidate and would
adversely impact our business and prospects.
In
addition, the FDA or comparable foreign regulatory authorities may change their policies, adopt additional regulations or revise existing regulations or take other actions, which may
prevent or delay approval of our future product candidates under development on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our
ability to obtain approvals, increase the costs of compliance or restrict our ability to maintain any marketing authorizations we may have obtained.
Furthermore,
even if we obtain regulatory approval for our product candidates, we will still need to develop a commercial organization, establish a commercially viable pricing structure
and obtain approval for coverage and adequate reimbursement from third-party and government payors, including government health administration authorities. If we are unable to successfully
commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.
The development of additional product candidates is risky and uncertain, and we can provide no assurances
that we will be able to replicate our approach to drug development for other disease indications.
Efforts to identify, acquire or in-license, and then develop, product candidates require substantial technical, financial and human resources,
whether or not any product candidates are ultimately identified. Our efforts may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical
development, approved products or commercial revenues for many reasons, including the following:
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the methodology used may not be successful in identifying potential product candidates;
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competitors may develop alternatives that render any product candidates we develop obsolete;
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any product candidates we develop may be covered by third parties' patents or other exclusive rights;
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a product candidate may be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or
otherwise does not meet applicable regulatory criteria;
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a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
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a product candidate may not be accepted as safe and effective by physicians, patients, the medical community or third-party payors.
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We
have limited financial and management resources and, as a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later
prove to have greater market potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. If we do not accurately
evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty
arrangements in circumstances
under which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. In addition, we may not be successful in replicating our
approach to drug development for other disease indications. If we are unsuccessful in identifying and developing additional product candidates or are unable to do so, our business may be harmed.
Success in preclinical studies or earlier clinical trials may not be indicative of results in future clinical
trials and we cannot assure you that any ongoing, planned or future clinical trials will lead to results sufficient for the necessary regulatory approvals.
Success in preclinical testing and earlier clinical trials does not ensure that later clinical trials will generate the same results or
otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Preclinical studies and Phase 1 clinical trials are primarily designed to test safety, to study
pharmacokinetics and pharmacodynamics and to understand the side effects of product candidates at various doses and schedules. Success in preclinical studies and earlier clinical trials does not
ensure that later efficacy trials will be successful, nor does it predict final results. Our product candidates may fail to show the desired safety and efficacy in clinical development despite
positive results in preclinical studies or having successfully advanced through earlier clinical trials.
In
addition, the design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent
until the clinical trial is well advanced. As an organization, we have limited experience designing clinical trials and may be unable to design and execute a clinical trial to support regulatory
approval. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical
testing and earlier clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition,
we may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of our product candidate development. Any such delays could
negatively impact our business, financial condition, results of operations and prospects.
Clinical drug development involves a lengthy and expensive process. We may incur additional costs and
encounter substantial delays or difficulties in our clinical trials.
We may not commercialize, market, promote or sell any product candidate without obtaining marketing approval from the FDA or other comparable
regulatory authority, and we may never receive such approvals. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans and will receive regulatory
approval. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must complete preclinical development and then conduct extensive clinical trials to
demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, is difficult to design and implement,
can take many years to complete and is uncertain as to outcome. For example, we intend to conduct an additional Phase 1 clinical trial of AT-007 for the treatment of galactosemia in a pediatric
population upon successful completion of the Phase 1 clinical trial in adults. Successful completion of the trial in adults may take longer than we expect, and the FDA may express additional
concerns or require additional trials in adults, which may delay our clinical development plans for AT-007.
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A
failure of one or more clinical trials can occur at any stage of testing. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and
many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.
We
may experience numerous unforeseen events prior to, during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize
our product candidates, including the following:
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delays in reaching a consensus with regulatory authorities on the design or implementation of our clinical trials;
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regulators or institutional review boards, or IRBs, may not authorize us or our investigators to commence a clinical trial or conduct a
clinical trial at a prospective trial site;
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delays in reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites;
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the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical
trials may be slower than we anticipate, participants may drop out of these clinical trials at a higher rate than we anticipate or fail to return for post-treatment follow-up or we may fail to recruit
suitable patients to participate in a trial;
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clinical trials of our product candidates may produce negative or inconclusive results;
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imposition of a clinical hold by regulatory authorities as a result of a serious adverse event, concerns with a class of product candidates or
after an inspection of our clinical trial operations, trial sites or manufacturing facilities;
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occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
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changes in regulatory requirements and guidance that require amending or submitting new clinical protocols; or
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we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs.
Any
inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate revenue from future drug sales or
other sources. In addition, if we make manufacturing or formulation changes to our product candidates, we may need to conduct additional testing to bridge our modified product candidate to earlier
versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our product candidates, if approved, or allow our competitors to bring
competing drugs to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business, financial condition, results of operations and
prospects.
Additionally,
if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our product candidates, we
may:
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be delayed in obtaining marketing approval, or not obtain marketing approval at all;
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obtain approval for indications or patient populations that are not as broad as intended or desired;
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obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
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be subject to additional post-marketing testing requirements;
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be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;
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have regulatory authorities withdraw, or suspend, their approval of the drug or impose restrictions on its distribution in the form of a
modified risk evaluation and mitigation strategy, or REMS;
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be subject to the addition of labeling statements, such as warnings or contraindications;
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be sued; or
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experience damage to our reputation.
Our
product development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical
trials will begin as planned, need to be restructured or be completed on schedule, if at all.
Further,
we, the FDA or an IRB may suspend our clinical trials at any time if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory
requirements, including the FDA's current Good Clinical Practice, or GCP, regulations, that we are exposing participants to unacceptable health risks, or if the FDA finds deficiencies in our
investigational new drug applications, or INDs, or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials.
If we experience delays in the commencement or completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our product candidates could be
negatively impacted, and our ability to generate revenues from our product candidates may be delayed.
All of our current product candidates that have proceeded to clinical trials target inhibition of aldose
reductase. There can be no assurance that aldose reductase inhibitors will ever receive regulatory approval.
All of our current product candidates that have proceeded to clinical trials target inhibition of the aldose reductase enzyme. There are no
currently approved aldose reductase inhibitors on the market outside Japan, India and China, and there can be no assurance that aldose reductase inhibitors will ever receive regulatory approval. Prior
attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. Our current product candidates,
including AT-001, AT-003 and AT-007, may face similar or different challenges that prevent their successful commercialization.
We may not be able to obtain or maintain rare pediatric disease designation or exclusivity for our product
candidates, which could limit the potential profitability of our product candidates.
We have obtained orphan drug designation and we may seek rare pediatric disease designation from the FDA for AT-007 for the treatment of
galactosemia. For the purposes of the rare pediatric disease program, a "rare pediatric disease" is a serious or life-threatening disease in which the serious or life-threatening manifestations
primarily affect individuals aged from birth to 18 years or a rare disease or conditions within the meaning of the Orphan Drug Act. Under the FDA's rare pediatric disease priority review
voucher, or RPD-PRV, program, upon the approval of an NDA for the treatment of a rare pediatric disease, the sponsor of such application would be eligible for an RPD-PRV that can be used to obtain
priority review for a subsequent NDA. The sponsor of the application may transfer (including by sale) the RPD-PRV to another sponsor. The voucher may be further transferred any number of times before
the voucher is used, as long as the sponsor making the transfer has not yet submitted the application. Congress has extended the RPD-PRV program until September 30, 2020, with potential for
vouchers to be granted until 2022. This program has been subject to criticism, including by the FDA, and it is possible that even if we obtain approval for AT-007 for the treatment of galactosemia and
qualify for a RPD-PRV, the program may no longer be in effect
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at
the time of approval. Also, although priority review vouchers may be sold or transferred to third parties, there is no guaranty that we will be able to realize any value if we were to sell a
priority review voucher.
A breakthrough therapy designation by the FDA for a product candidate may not lead to a faster development or
regulatory review or approval process, and it would not increase the likelihood that the product candidate will receive marketing approval.
We may seek a breakthrough therapy designation for one or more product candidates. A breakthrough therapy is defined as a product candidate that
is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product candidate
may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For
product candidates that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for
clinical development while minimizing the number of patients placed in ineffective control regimens. Product candidates
designated as breakthrough therapies by the FDA are also eligible for priority review if supported by clinical data at the time of the submission of the NDA.
Designation
as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe that one of our product candidates meets the criteria for designation as a
breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in
a faster development process, review or approval compared to product candidates considered for approval under conventional FDA procedures and it would not assure ultimate approval by the FDA. In
addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the product candidate no longer meets the conditions for qualification or it
may decide that the time period for FDA review or approval will not be shortened.
We may seek fast track designation from the FDA for AT-001 for DbCM. Even if granted, fast track designation
may not actually lead to a faster development, regulatory review or approval process.
If a product candidate is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to address unmet
needs for this condition, the sponsor may apply for FDA fast track designation. If fast track designation is obtained, the FDA may prioritize interactions with the sponsor concerning the designated
development program and initiate review of sections of an NDA before the application is complete, known as "rolling review." Fast track designation would not ensure that we would experience a faster
development, regulatory review or approval process compared to conventional FDA procedures or that we would ultimately obtain regulatory approval. Additionally, the FDA may withdraw fast track
designation if it believes that the designation is no longer supported by data from our clinical development program.
Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could
be delayed, made more difficult or rendered impossible by multiple factors outside our control.
Identifying and qualifying patients to participate in our clinical trials is critical to our success. We may encounter difficulties in enrolling
patients in our clinical trials, thereby delaying or preventing development and approval of our product candidates. Even once enrolled, we may be unable to retain a sufficient number of patients to
complete any of our trials. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing
body of safety and efficacy data, the number and nature of competing treatments and ongoing clinical trials of competing therapies for the same indication, the proximity of
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patients
to clinical sites and the eligibility criteria for the trial. Because our focus includes rare disorders, there are limited patient pools from which to draw in order to complete our clinical
trials in a timely and cost-effective manner. Accordingly, enrollment of our clinical trials could take significantly longer than projected, which would delay any potential approval of AT-007.
Furthermore, even if we are able to enroll a sufficient number of patients for our clinical trials, we may have difficulty maintaining enrollment of such patients in our clinical trials.
For
example, upon successful completion of the planned Phase 1 clinical trial in adults, we intend to conduct an additional Phase 1 clinical trial of AT-007 for the
treatment of galactosemia in a pediatric population. We are doing this in order to obtain data on patients representing the most vulnerable subset of our intended population. Such pediatric patients
may be difficult to enroll in this trial, and the lack of data on these patients may negatively impact the approvability or labeling of galactosemia.
Our
efforts to build relationships with patient communities may not succeed, which could result in delays in patient enrollment in our clinical trials. Any negative results we may report
in clinical trials of our product candidates may make it difficult or impossible to recruit and retain patients in other clinical trials of that same product candidate. Delays or failures in planned
patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop our product candidates or could render further
development impossible. In addition, we may rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements
governing their services, we will be limited in our ability to ensure their actual performance.
Our product candidates may cause undesirable side effects or have other properties that could delay or
prevent their regulatory approval, limit their commercial potential or result in significant negative consequences following any potential marketing approval.
During the conduct of clinical trials, patients report changes in their health, including illnesses, injuries and discomforts, to their doctor.
Often, it is not possible to determine whether or not the product candidate being studied caused these conditions. Regulatory authorities may draw different conclusions or require additional testing
to confirm these determinations, if they occur.
In
addition, it is possible that as we test our product candidates in larger, longer and more extensive clinical trials, or as use of these product candidates becomes more widespread if
they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in
previous trials, will be reported by subjects or patients. Many times, side effects are only detectable after investigational drugs are tested in
large-scale pivotal trials or, in some cases, after they are made available to patients on a commercial scale after approval. If additional clinical experience indicates that any of our product
candidates have side effects or cause serious or life-threatening side effects, the development of the product candidate may fail or be delayed, or, if the product candidate has received regulatory
approval, such approval may be revoked, which would harm our business, prospects, operating results and financial condition.
Interim, "top-line" and preliminary data from our clinical trials that we announce or publish from time to
time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publish interim, "top-line" or preliminary data from our clinical trials. Interim data from clinical trials that we
may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary or "top-line"
data also remain subject to audit and verification procedures that
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may
result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data
are available. Differences between preliminary or interim data and final data could significantly harm our business prospects and may cause the trading price of our common stock to fluctuate
significantly.
The incidence and prevalence for target patient populations of our product candidates have not been
established with precision. If the market opportunities for our product candidates are smaller than we believe they are or any approval we obtain is based on a narrower definition of the patient
population, our business may suffer.
We currently focus our drug development on product candidates for the treatment of diseases with high unmet medical need. Our eligible patient
population and pricing estimates may differ significantly from the actual market addressable by our product candidates. Our estimates of both the number of people who have these diseases, as well as
the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on our beliefs and analyses. These estimates have been derived from a
variety of sources, including the scientific literature, patient foundations or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of
the diseases we are targeting. The number of patients may turn out to be lower than expected. Likewise, the potentially addressable patient population for
each of our product candidates may be limited or may not be receptive to treatment with our product candidates, and new patients may become increasingly difficult to identify or access. If the market
opportunities for our product candidates are smaller than we estimate, we may not be able to achieve our forecast revenue, which could hinder our business plan and adversely affect our business and
results of operations.
We may face substantial competition, which may result in others developing or commercializing drugs before or
more successfully than us.
The development and commercialization of new drugs is highly competitive. We may face potential competition with respect to our current product
candidates and may face competition with respect to any other product candidates that we may seek to develop or commercialize in the future from pharmaceutical and biotechnology companies, academic
institutions, government agencies and other public and private research institutions.
Our
competitors may have an advantage over us due to their greater size, resources and institutional experience. In particular, these companies have greater experience and expertise in
securing reimbursement, government contracts and relationships with key opinion leaders, conducting testing and clinical trials, obtaining and maintaining regulatory approvals and distribution
relationships to market products and marketing approved drugs. These companies also have significantly greater research and marketing capabilities than we do. If we are not able to compete effectively
against existing and potential competitors, our business and financial condition may be harmed.
As
a result of these factors, our competitors may obtain regulatory approval of their drugs before we are able to, which may limit our ability to develop or commercialize our product
candidates. Our competitors may also develop therapies that are safer, more effective, more widely accepted or less expensive than ours, and may also be more successful than we are in manufacturing
and marketing their drugs. These advantages could render our product candidates obsolete or non-competitive before we can recover the costs of such product candidates' development and
commercialization.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and
early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in
recruiting
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and
retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs.
We may explore strategic collaborations that may never materialize or we may be required to relinquish
important rights to and control over the development and commercialization of our product candidates to any future collaborators.
Over time, our business strategy includes acquiring or in-licensing additional product candidates for treatments of diseases with high unmet
medical need. As a result, we intend to periodically explore a variety of possible strategic collaborations in an effort to gain access to additional product candidates or resources. These strategic
collaborations may include partnerships with large strategic partners, particularly for the development of DPN treatments using AT-001. At the current time however, we cannot predict what form such a
strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and strategic collaborations can be complicated and time consuming to
negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic collaborations
because of the numerous risks and uncertainties associated with establishing them.
Future
collaborations could subject us to a number of risks, including:
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we may be required to undertake the expenditure of substantial operational, financial and management resources;
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we may be required to issue equity securities that would dilute our stockholders' percentage ownership of our company;
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we may be required to assume substantial actual or contingent liabilities;
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we may not be able to control the amount and timing of resources that our strategic collaborators devote to the development or
commercialization of our product candidates;
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strategic collaborators may select indications or design clinical trials in a way that may be less successful than if we were doing so;
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strategic collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate,
repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing;
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strategic collaborators may not pursue further development and commercialization of products resulting from the strategic collaboration
arrangement or may elect to discontinue research and development programs;
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strategic collaborators may not commit adequate resources to the marketing and distribution of our product candidates, limiting our potential
revenues from these products;
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disputes may arise between us and our strategic collaborators that result in the delay or termination of the research, development or
commercialization of our product candidates or that result in costly litigation or arbitration that diverts management's attention and consumes resources;
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strategic collaborators may experience financial difficulties;
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strategic collaborators may not properly maintain, enforce or defend our intellectual property rights or may use our proprietary information in
a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
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business combinations or significant changes in a strategic collaborator's business strategy may adversely affect a strategic collaborator's
willingness or ability to complete its obligations under any arrangement;
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strategic collaborators could decide to move forward with a competing product candidate developed either independently or in collaboration with
others, including our competitors; and
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strategic collaborators could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of
developing our product candidates.
Even
if any product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community
necessary for commercial success.
Even
if any product candidates receive marketing approval, they may fail to gain market acceptance by physicians, patients, third-party payors and others in the medical community. If
such product candidates
do not achieve an adequate level of acceptance, we may not generate significant drug revenue and may not become profitable. The degree of market acceptance of any product candidate, if approved for
commercial sale, will depend on a number of factors, including but not limited to:
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the convenience and ease of administration compared to alternative treatments and therapies;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the efficacy and potential advantages compared to alternative treatments and therapies;
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the effectiveness of sales and marketing efforts;
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the strength of our relationships with patient communities;
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the cost of treatment in relation to alternative treatments and therapies, including any similar generic treatments;
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our ability to offer such drug for sale at competitive prices;
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the strength of marketing and distribution support;
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the availability of third-party coverage and adequate reimbursement;
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the prevalence and severity of any side effects; and
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any restrictions on the use of the drug together with other medications.
Our
efforts to educate physicians, patients, third-party payors and others in the medical community on the benefits of our product candidates may require significant resources and may
never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness of our product candidates. Because we expect sales of our product
candidates, if approved, to generate substantially all of our revenues for the foreseeable future, the failure of our product candidates to find market acceptance would harm our business.
Even if we obtain regulatory approvals for our product candidates, they will remain subject to ongoing
regulatory oversight.
Even if we obtain regulatory approvals for our product candidates, such approvals will be subject to ongoing regulatory requirements for
manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for
our product candidates may also be subject to a REMS,
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limitations
on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including
Phase 4 trials, and surveillance to monitor the quality, safety and efficacy of the drug. Such regulatory requirements may differ from country to country depending on where we have received
regulatory approval.
In
addition, drug manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for
compliance with current good manufacturing practices, or cGMP, requirements and adherence to commitments made in the NDA or foreign marketing application. If we, or a regulatory authority, discover
previously unknown problems with a drug, such as adverse events of unanticipated severity or frequency, or problems with the facility where the drug is manufactured or if a regulatory authority
disagrees with the promotion, marketing or labeling of that drug, a regulatory authority may impose restrictions relative to that drug, the manufacturing facility or us, including requesting a recall
or requiring withdrawal of the drug from the market or suspension of manufacturing.
If
we fail to comply with applicable regulatory requirements following approval of our product candidates, a regulatory authority may:
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issue an untitled letter or warning letter asserting that we are in violation of the law;
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seek an injunction or impose administrative, civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve a pending NDA or comparable foreign marketing application or any supplements thereto submitted by us or our partners;
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restrict the marketing or manufacturing of the drug;
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seize or detain the drug or otherwise require the withdrawal of the drug from the market;
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refuse to permit the import or export of product candidates; or
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refuse to allow us to enter into supply contracts, including government contracts.
Moreover,
the FDA strictly regulates the promotional claims that may be made about drug products. In particular, a product may not be promoted for uses that are not approved by the FDA
as reflected in the product's approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have
improperly promoted off-label uses may be subject to significant civil, criminal and administrative penalties.
Any
government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of
any event or penalty described above may inhibit our ability to commercialize our product candidates and harm our business, financial condition, results of operations and prospects.
The
FDA's and other regulatory authorities' policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product
candidates. If we are not able to maintain regulatory compliance with the Cures Act, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which
would adversely affect our business, prospects, financial condition and results of operations.
In
addition, we cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the
United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including
the issuance of a
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number
of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA's ability to engage in routine regulatory and oversight activities such as implementing
statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions, including the executive orders, will be
implemented and the extent to which they will affect the FDA's ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA's ability to engage in oversight
and implementation activities in the normal course, our business may be negatively impacted.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to
market and sell our product candidates, we may not be successful in commercializing them, if and when they are approved.
To successfully commercialize any product candidate that may result from our development programs, we will need to build out our sales and
marketing capabilities, either on our own or with others. The establishment and development of our own commercial team or the establishment of a contract sales force to market any product candidate we
may develop will be expensive and time-consuming and could delay any drug launch. Moreover, we cannot be certain that we will be able to successfully develop this capability. We may seek to enter into
collaborations with other entities to utilize their established marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If any
current or future collaborators do not commit sufficient resources to commercialize our product candidates, or we are unable to develop the necessary capabilities on our own, we may be unable to
generate sufficient revenue to sustain our business. We compete with many companies that currently have extensive, experienced and well-funded marketing and sales operations to recruit, hire, train
and retain marketing and sales personnel. We will likely also face competition if we seek third parties to assist us with the sales and marketing efforts of our product candidates. Without an internal
team or the support of a third-party to perform marketing
and sales functions, we may be unable to compete successfully against these more established companies.
Even if we obtain and maintain approval for our product candidates from the FDA, we may never obtain approval
outside the United States, which would limit our market opportunities.
Approval of a product candidate in the United States by the FDA does not ensure approval of such product candidate by regulatory authorities in
other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Sales of our product
candidates outside the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product
candidate, comparable foreign regulatory authorities also must approve the manufacturing and marketing of the product candidate in those countries. Approval procedures vary among jurisdictions and can
involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries
outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for any product
candidates, if approved, is also subject to approval. Obtaining approval for our product candidates in the European Union from the European Commission following the opinion of the European Medicines
Agency, or the EMA, if we choose to submit a marketing authorization application there, would be a lengthy and expensive process. Even if a product candidate is approved, the EMA may limit the
indications for which the drug may be marketed, require extensive warnings on the drug labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of
approval. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the
introduction of our product candidates in certain countries.
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Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for our product
candidates may be withdrawn. If we fail to comply with the applicable regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our product
candidates will be harmed and our business, financial condition, results of operations and prospects could be harmed.
If we commercialize our product candidates outside the United States, a variety of risks associated with
international operations could harm our business.
We intend to seek approval to market our product candidates outside the United States, and may do so for future product candidates. If we market
approved products outside the United States, we expect that we will be subject to additional risks in commercialization, including:
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different regulatory requirements for approval of therapies in foreign countries;
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing
business in another country;
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foreign reimbursement, pricing and insurance regimes;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons,
floods and fires.
We
have no prior experience in these areas. In addition, there are complex regulatory, tax, labor and other legal requirements imposed by many of the individual countries in which we may
operate, with which we will need to comply. Many biopharmaceutical companies have found the process of marketing their products in foreign countries to be challenging.
Product liability lawsuits against us could cause us to incur substantial liabilities and could limit
commercialization of any product candidate that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in clinical trials and may face an even
greater risk if we commercialize any product candidate that we may develop. If we cannot successfully defend ourselves against claims that any such product candidates caused injuries, we could incur
substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for any product candidate that we may develop;
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loss of revenue;
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substantial monetary awards to trial participants or patients;
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significant time and costs to defend the related litigation;
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withdrawal of clinical trial participants;
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increased insurance costs;
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the inability to commercialize any product candidate that we may develop; and
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injury to our reputation and significant negative media attention.
Any
such outcomes could negatively impact our business, financial condition, results of operations and prospects.
Our insurance policies may be inadequate and potentially expose us to unrecoverable risks.
Although we maintain product liability insurance coverage, such insurance may not be adequate to cover all liabilities that we may incur. We
anticipate that we will need to increase our insurance coverage each time we commence a clinical trial and if we successfully commercialize any product candidate. Insurance availability, coverage
terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify; however, we may fail to correctly anticipate or
quantify insurable risks, we may not be able to obtain appropriate insurance coverage and insurers may not respond as we intend to cover insurable events that may occur. We have observed rapidly
changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and
lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.
Risks Related to Regulatory Compliance
Our relationships with customers, physicians, and third-party payors are subject, directly or indirectly, to
federal and state healthcare fraud and abuse laws, false claims laws, health information privacy and security laws, and other healthcare laws and regulations. If we are unable to comply, or have not
fully complied, with such laws, we could face substantial penalties.
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and
prescription of any product candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and
third-party payors subject us to various federal and state fraud and abuse laws and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute, the federal civil and
criminal false claims laws and the law commonly referred to as the Physician Payments Sunshine Act and regulations. For additional information on the healthcare laws and regulations that we may be
subject to, see "BusinessGovernment Regulation and Product Approval."
Ensuring
that our business arrangements with third parties comply with applicable healthcare laws and regulations will likely be costly. It is possible that governmental authorities will
conclude that our business practices may not comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we
may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in government-funded healthcare programs, such as
Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these
laws, contractual damages, reputational harm and the curtailment or restructuring of our operations.
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If
the physicians or other providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from government-funded healthcare programs. Even if resolved in our favor, litigation or other legal proceedings relating to healthcare laws and
regulations may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of
the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on
the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, manufacturing, sales, marketing or
distribution activities. Uncertainties resulting from the initiation and continuation of litigation or other proceedings relating to applicable healthcare laws and regulations could have an adverse
effect on our ability to compete in the marketplace.
Coverage and adequate reimbursement may not be available for our product candidates, which could make it
difficult for us to sell profitably, if approved.
Market acceptance and sales of any product candidates that we commercialize, if approved, will depend in part on the extent to which
reimbursement for these drugs and related treatments will be available from third-party payors, including government health administration authorities, managed care organizations and other private
health insurers. Third-party payors decide which therapies they will pay for and establish reimbursement levels. While no uniform policy for coverage and reimbursement exists in the United States,
third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and
amount of reimbursement to be provided for any product candidates that we develop will be made on a payor-by-payor basis. Therefore, one payor's determination to provide coverage for a drug does not
assure that other payors will also provide coverage, and adequate reimbursement, for the drug. Additionally, a third-party payor's decision to provide coverage for a therapy does not imply that an
adequate reimbursement rate will be approved. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of
its formulary it will be placed. The position on a
payor's list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by
patients and physicians. Patients who are prescribed treatments for their conditions and providers prescribing such services generally rely on third-party payors to reimburse all or part of the
associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.
Third-party
payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that coverage and reimbursement will
be available for any drug that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Inadequate coverage and reimbursement may impact the demand for, or the
price of, any drug for which we obtain marketing approval. If coverage and adequate reimbursement are not available, or are available only at limited levels, we may not be able to successfully
commercialize any product candidates that we develop.
Healthcare legislative reform measures may have a negative impact on our business and results of operations.
In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and
proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities,
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and
affect our ability to profitably sell any product candidates for which we obtain marketing approval. In particular, there have been and continue to be a number of initiatives at the U.S. federal
and state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA,
changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based
on average sales prices for physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost
reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the MMA applies only to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the
MMA may result in a similar reduction in payments from private payors.
Further,
in March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the PPACA, was
passed, which substantially changed the way healthcare is financed by both governmental and private payors in the United States. Some of the provisions of the PPACA have yet to be fully implemented,
while certain provisions have been subject to judicial and Congressional challenges, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the PPACA. For
example, the Tax Act includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain
qualifying health coverage for all or part of a year, which is commonly referred to as the "individual mandate." Additionally, on January 22, 2018, President Trump signed a continuing
resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated fees, including the so-called "Cadillac" tax on certain high-cost employer-sponsored
insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act
of 2018, or the BBA, among other things, amended the PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the "donut hole." In July
2018, CMS published a final rule permitting further collections and payments to and from certain PPACA-qualified health plans and health insurance issuers under the PPACA adjustment program in
response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern
District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the PPACA, and therefore, because it was repealed as part of the Tax Act,
the remaining provisions of the PPACA are invalid as well. While the Texas District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect,
it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the PPACA will impact the PPACA. Congress may consider additional legislation to repeal or repeal and
replace other elements of the PPACA. We continue to evaluate the effect that the PPACA and its possible repeal and replacement have on our business.
Other
legislative changes have been proposed and adopted since the PPACA was enacted. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year
pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendments to the statute, including the BBA, which will remain in effect through 2027 unless
additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment
centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
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Additional
changes that may affect our business include the expansion of new programs such as Medicare payment for performance initiatives for physicians under the Medicare Access and
CHIP Reauthorization Act of 2015, which will be fully operational in 2019. At this time, it is unclear how the introduction of the Medicare quality payment program will impact overall physician
reimbursement.
Further,
in the United States there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several
Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under
government payor programs, and review the relationship between pricing and manufacturer patient programs. While some of the proposed measures will require authorization through additional legislation
to become effective, the U.S. Congress and the Trump administration have indicated that they will continue to seek new legislative and/or administrative measures to control drug costs. We expect that
additional U.S. federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that the U.S. federal government will pay for healthcare products and services,
which could result in reduced demand for our current or any future product candidates or additional pricing pressures. We cannot predict the likelihood, nature or extent of government regulation that
may arise from future legislation or administrative action in the United States or any other jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing
or new requirements or policies, or if we or such third parties are not able to maintain regulatory compliance, our current or any future product candidates we may develop may lose any regulatory
approval that may have been obtained and we may not achieve or sustain profitability.
Further,
on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right to Try Act, was signed into law. The
law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase 1 clinical trial and that are
undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA
expanded access program. There is no obligation for a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.
We
expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and in additional downward pressure on the price
that we receive for any approved drug, which could have an adverse effect on demand for our product candidates. Any reduction in reimbursement from Medicare or other government programs may result in
a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain
profitability or commercialize our products. For additional information on healthcare reform, see "BusinessGovernment Regulation and Product Approval."
Risks Related to Our Dependence on Third Parties
We intend to rely on third parties to produce clinical and commercial supplies of our product candidates.
We do not own or operate facilities for drug manufacturing, storage and distribution, or testing. We are dependent on third parties to
manufacture the clinical supplies of our current and any future product candidates. The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA
pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners
for compliance with the cGMP requirements, for manufacture of both active drug substance and finished drug product. If our contract manufacturers cannot successfully manufacture material that conforms
to our specifications and the strict regulatory
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requirements
of the FDA or others, we will not be able to secure and/or maintain regulatory approval for our product candidates. In addition, we have no control over the ability of our contract
manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the
manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to
develop, obtain regulatory approval for or market our product candidates, if approved. Any significant delay in the supply of a product candidate, or the raw material components thereof, for an
ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our
product candidates.
We
also intend to rely on third-party manufacturers to supply us with sufficient quantities of our product candidates to be used, if approved, for commercialization. We do not yet have a
commercial supply agreement for commercial quantities of drug substance or drug product. If we are not able to meet market demand for any approved product, it would negatively impact our ability to
generate revenue, harm our reputation, and could have an adverse effect on our business and financial condition.
Further,
our reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves,
including:
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inability to meet our product specifications and quality requirements consistently;
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delay or inability to procure or expand sufficient manufacturing capacity;
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issues related to scale-up of manufacturing;
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costs and validation of new equipment and facilities required for scale-up;
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our third-party manufacturers may not be able to execute our manufacturing procedures and other logistical support requirements appropriately;
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our third-party manufacturers may fail to comply with cGMP requirements and other inspections by the FDA or other comparable regulatory
authorities;
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our inability to negotiate manufacturing agreements with third parties under commercially reasonable terms, if at all;
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breach, termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;
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reliance on single sources for drug components;
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lack of qualified backup suppliers for those components that are currently purchased from a sole or single-source supplier;
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our third-party manufacturers may not devote sufficient resources to our product candidates;
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we may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in the
manufacturing process for our product candidates;
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operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including
the bankruptcy of the manufacturer or supplier; and
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carrier disruptions or increased costs that are beyond our control.
In
addition, if we enter into a strategic collaboration with a third-party for the commercialization of our current or any future product candidates, we will not be able to control the
amount of time or
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resources
that they devote to such efforts. If any strategic collaborator does not commit adequate resources to the marketing and distribution of our product candidates, it could limit our potential
revenues.
Any
of these events could lead to clinical trial delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize our current or any future product
candidates once approved. Some of these events could be the basis for FDA action, including injunction, request for recall, seizure, or total or partial suspension of production.
Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers
must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do, or interrupt our, business.
Our research and development activities and our third-party manufacturers' and suppliers' activities involve the generation, storage, use and
disposal of hazardous materials, including the components of our product candidates and other hazardous compounds and wastes. We and our manufacturers and suppliers are subject to environmental,
health and safety laws and regulations governing, among other matters, the use, manufacture, generation, storage, handling, transportation, discharge and disposal of these hazardous materials and
wastes and worker health and safety. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers' facilities pending their use and
disposal. We cannot eliminate the risk of contamination or injury, which could result in an interruption of our commercialization efforts, research and development efforts and business operations,
damages and significant cleanup costs and liabilities under applicable environmental, health and safety laws and regulations. We also cannot guarantee that the safety procedures utilized by our
third-party manufacturers for handling and disposing of these materials and wastes generally comply with the standards prescribed by these laws and regulations. We may be held liable for any resulting
damages costs or liabilities, which could exceed our resources, and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations.
Furthermore, environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be
certain of our future compliance. Failure to comply with these environmental, health and safety laws and regulations may result in substantial fines, penalties or other sanctions. We do not currently
carry hazardous waste insurance coverage.
We rely on third parties to conduct, supervise and monitor our preclinical studies and clinical trials, and
if those third parties perform in an unsatisfactory manner, it may harm our business.
We do not currently have the ability to independently conduct any clinical trials. We intend to rely on CROs and clinical trial sites to ensure
the proper and timely conduct of our preclinical studies and clinical trials, and we expect to have limited influence over their actual performance. We rely upon CROs to monitor and manage data for
our clinical programs, as well as the execution of future preclinical studies. We expect to control only certain aspects of our CROs' activities. Nevertheless, we will be responsible for ensuring that
each of our preclinical studies and clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve
us of our regulatory responsibilities.
We
and our CROs are required to comply with the good laboratory practices, or GLPs, and GCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory
authorities in the form of International Conference on Harmonization guidelines for any of our product candidates that are in preclinical and clinical development. The regulatory authorities enforce
GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. Although we rely on CROs to conduct GCP-compliant clinical trials, we remain responsible for
ensuring that each of our GLP preclinical studies and clinical trials is conducted in accordance with its investigational plan
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and
protocol and applicable laws and regulations. If we or our CROs fail to comply with GCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA or comparable
foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. Accordingly, if our CROs fail to comply with these regulations or fail
to recruit a sufficient number of subjects, we may be required to repeat clinical trials, which would delay the regulatory approval process.
Our
reliance on third parties to conduct clinical trials will result in less direct control over the management of data developed through clinical trials than would be the case if we
were relying entirely upon our own staff. Communicating with CROs and other third parties can be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Such
parties may:
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have staffing difficulties;
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fail to comply with contractual obligations;
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experience regulatory compliance issues; or
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undergo changes in priorities or become financially distressed.
These
factors may adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control.
If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or fail to comply with regulatory requirements, or if the quality or accuracy of the
clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for any other reasons, our clinical trials may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, any product candidate that we develop. As a result, our financial results and the commercial
prospects for any product candidate that we develop would be harmed, our costs could increase, and our ability to generate revenue could be delayed. While we will have agreements governing their
activities, our CROs will not be our employees, and we will not control whether or not they devote sufficient time and resources to our future clinical and preclinical programs. These CROs may also
have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials, or other drug development activities which could harm our business.
We face the risk of potential unauthorized disclosure or misappropriation of our intellectual property by CROs, which may reduce our trade secret protection and allow our potential competitors to
access and exploit our proprietary technology.
If
our relationship with any of these CROs terminates, we may not be able to enter into arrangements with alternative CROs or do so on commercially reasonable terms. Switching or adding
additional CROs involves substantial cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can
negatively impact our ability to meet our desired clinical development timelines. While we intend to carefully manage our relationships with our CROs, there can be no assurance that we will not
encounter challenges or delays in the future or that these delays or challenges will not have a negative impact on our business, financial condition and prospects.
In
addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such
services. Under certain
circumstances, we may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between us and a principal investigator has created a conflict of
interest or otherwise affected interpretation of the trial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical
trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our
product candidates.
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Risks Related to Our Intellectual Property
Licensing of intellectual property is of critical importance to our business and involves complex legal,
business and scientific issues. If we breach our license agreement with Columbia University or any of the other agreements under which we acquired, or will acquire, the intellectual property rights to
our product candidates, we could lose the ability to continue the development and commercialization of the related product.
The licensing of intellectual property is of critical importance to our business and to our current and future product candidates, and we expect
to enter into additional such agreements in the future. In particular, our current product candidates AT-001, AT-003 and AT-007 are dependent on our license agreement with The Trustees of Columbia
University in the City of New York, or Columbia University. Pursuant to the license agreement with Columbia University, or the 2016 Columbia Agreement, Columbia University granted us an exclusive
license under two important patent families, and a nonexclusive license to certain know-how, owned by Columbia University to develop, manufacture or commercialize certain compounds, including AT-001,
AT-003 and AT-007, for the diagnosis and treatment of human and animal diseases and conditions. The license grant is worldwide, with the exception of the patent family that covers AT-001 and AT-003.
The license grant for the patent family that covers AT-001 and AT-003 excludes patent rights in China, Taiwan, Hong Kong and Macao, which Columbia University has exclusively licensed to a third-party.
We cannot prevent Columbia University's third-party licensee from developing, manufacturing or commercializing certain compounds, including AT-001 and AT-003, but not including AT-007, in China,
Taiwan, Hong Kong and Macao, and we cannot develop, manufacture or commercialize AT-001 or AT-003 in these countries, which could have a negative effect on our business.
In
addition, we do not have the right to control the preparation, filing, prosecution and maintenance of patents and patent applications covering the technology that we license under the
Columbia Agreements (as defined below). Therefore, we cannot always be certain that these patents and patent applications will be prepared, filed, prosecuted and maintained in a manner consistent with
the best interests of our business. Although we have a right to have our comments considered in connection with the prosecution process, if Columbia University fails to prosecute and maintain such
patents, or loses rights to those patents or patent applications as a result of its control of the prosecution activities, the rights we have licensed may be reduced or eliminated, and our right to
develop and commercialize any of our product candidates that are the subject of such licensed rights could be adversely affected.
If
we fail to meet our obligations under the Columbia Agreements in any material respect, and fail to cure such breach in a timely fashion, then Columbia University may terminate the
Columbia Agreements. If the Columbia Agreements are terminated, and we lose our intellectual property rights under the Columbia Agreements, this may result in a complete termination of our product
development and any commercialization efforts for AT-001, AT-003 and AT-007. While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and
otherwise seek to preserve our rights under the Columbia Agreements, we may not be able to do so in a timely manner, at an acceptable cost or at all. For more information on the Columbia Agreements,
see the section titled "BusinessExclusive License Agreement with Columbia University."
Furthermore,
license agreements we enter into in the future may not provide exclusive rights to use intellectual property and technology in all relevant fields of use and in all
territories in which we may wish to develop or commercialize our technology and products. As a result, we may not be able to prevent competitors from developing and commercializing competitive
products in territories included in all of our licenses.
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If we are unable to obtain and maintain patent protection for our product candidates and technology, or if
the scope of the patent protection obtained is not sufficiently broad or robust, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability
to successfully commercialize our product candidates and technology may be adversely affected.
Our success depends, in large part, on our ability to obtain and maintain patent protection in the United States and other countries with
respect to our product candidates and our technology. We and our licensors have sought, and intend to seek, to protect our proprietary position by filing patent applications in the United States and
abroad related to our product candidates and our technology that are important to our business.
The
patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has, in recent years, been the subject
of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result
in patents being
issued which protect our technology or product candidates or which effectively prevent others from commercializing competitive technologies and product candidates. Since patent applications in the
United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our licensors were the first to
file a patent application relating to any particular aspect of a product candidate. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United
States can be initiated by such third-party, or by the U.S. Patent and Trademark Office, or USPTO, itself, to determine who was the first to invent any of the subject matter covered by the patent
claims of our applications.
The
patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent
applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain
patent protection.
We
or our licensors have not pursued or maintained, and may not pursue or maintain in the future, patent protection for our product candidates in every country or territory in which we
may sell our products, if approved. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
Consequently, we may not be able to prevent third parties from infringing our patents in all countries outside the United States, or from selling or importing products that infringe our patents in and
into the United States or other jurisdictions.
Moreover,
the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if the patent
applications we license or own do issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us
or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative products in a non-infringing
manner.
The
issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United
States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or
commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates. Given the amount of time required for the
development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our
intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
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Furthermore,
our owned and in-licensed patents may be subject to a reservation of rights by one or more third parties. For example, the research resulting in certain of our owned and
in-licensed patent rights and technology was funded in part by the U.S. government. As a result, the government may have certain rights, or march-in rights, to such patent rights and technology. When
new technologies are developed with government funding, the government generally obtains certain rights in any resulting patents, including a nonexclusive license authorizing the government to use the
invention for noncommercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise march-in rights to use or allow third parties to
use our licensed technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the government-funded
technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, our rights in such
inventions may be subject to certain requirements to manufacture products embodying such inventions in the United States. Any exercise by the government of such rights could harm our competitive
position, business, financial condition, results of operations and prospects.
Obtaining and maintaining our patent rights depends on compliance with various procedural, document
submission, fee payment and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other
similar provisions during the patent application process. In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and/or patent applications
will have to be paid to the USPTO and various government patent agencies outside the United States over the lifetime of our owned and licensed patents and/or applications and any patent rights we may
own or license in the future. We rely on our service providers or our licensors to pay these fees. The USPTO and various non-U.S. government patent agencies require compliance with several procedural,
documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and we are also dependent on our
licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property. Noncompliance events that could result in abandonment or lapse of a patent
or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, nonpayment of fees and failure to properly legalize and submit formal
documents. If we or our licensors fail to maintain the patents and patent applications covering our products or technologies, we may not be able to stop a competitor from marketing products that are
the same as or similar to our product candidates, which would have an adverse effect on our business. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in
accordance with the applicable rules. There are situations, however, in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete
loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market and this circumstance could harm our business.
In
addition, if we fail to apply for applicable patent term extensions or adjustments, we will have a more limited time during which we can enforce our granted patent rights. In
addition, if we are
responsible for patent prosecution and maintenance of patent rights in-licensed to us, any of the foregoing could expose us to liability to the applicable patent owner.
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Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate
amount of time.
Given the amount of time required for the development, testing and regulatory review of product candidates such as AT-001, AT-003 and AT-007,
patents protecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms in the United States and, if available, in
other countries where we have or will obtain patent rights. In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years
beyond the normal expiration of the patent; provided that the patent is not enforceable for more than 14 years from the date of drug approval,
which is limited to the approved indication (or any additional indications approved during the period of extension). Furthermore, only one patent per approved product can be extended and only those
claims covering the approved product, a method for using it or a method for manufacturing it may be extended. However, the applicable authorities, including the FDA and the USPTO in the United States,
and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant
more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical
data and launch their drug earlier than might otherwise be the case.
Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise
violating their intellectual property rights, the outcome of which would be uncertain and could have a negative impact on the success of our business.
Our commercial success depends, in part, upon our ability and the ability of others with whom we may collaborate to develop, manufacture, market
and sell our current and any future product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights and intellectual property
of third parties. The biotechnology and pharmaceutical industries are characterized by extensive and complex litigation regarding patents and other intellectual property rights. We may in the future
become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current and any future product candidates and technology,
including interference proceedings, post grant
review and inter partes review before the USPTO. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their
merit. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit,
a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, which could have a negative impact on our ability to commercialize our current and any
future product candidates. In order to successfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a presumption of validity. As this is a high burden and
requires us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any
such U.S. patent. Moreover, given the vast number of patents in our field of technology, we cannot be certain that we do not infringe existing patents or that we will not infringe patents that may be
granted in the future. Other companies and research institutions have filed, and may file in the future, patent applications related to AR inhibitors and their therapeutic use. Some of these patent
applications have already been allowed or issued, and others may issue in the future. While we may decide to initiate proceedings to challenge the validity of these or other patents in the future, we
may be unsuccessful, and courts or patent offices in the United States and abroad could uphold the validity of any such patent. Furthermore, because patent applications can take many years to issue
and may be confidential for 18 months or more after filing, and because pending patent claims can be revised before issuance, there may be applications now pending which may later result in
issued patents that may be infringed by the manufacture, use or sale
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of
our product candidates. Regardless of when filed, we may fail to identify relevant third-party patents or patent applications, or we may incorrectly conclude that a third-party patent is invalid or
not infringed by our product candidates or activities. If a patent holder believes that our product candidate infringes its patent, the patent holder may sue us even if we have received patent
protection for our technology. Moreover, we may face patent infringement claims from nonpracticing entities that have no relevant drug revenue and against whom our own patent portfolio may thus have
no deterrent effect. If a patent infringement suit were threatened or brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the drug or product
candidate that is the subject of the actual or threatened suit.
If
we are found to infringe a third-party's valid and enforceable intellectual property rights, we could be required to obtain a license from such third-party to continue developing,
manufacturing and marketing our product candidate(s) and technology. Under any such license, we would most likely be required to pay various types of fees, milestones, royalties or other amounts.
Moreover, we may not be able to obtain any required license on commercially reasonable terms or at all.
The
licensing or acquisition of third-party intellectual property rights is a competitive area, and more established companies may also pursue strategies to license or acquire
third-party intellectual property rights that we may consider attractive or necessary. These established companies may have a competitive advantage over us due to their size, capital resources and
greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be
unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our
investment or at all. If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to
abandon development of the relevant program or product candidate, which could have an adverse effect on our business, financial condition, results of operations and prospects. Furthermore, even if we
were able to obtain a license, it could be nonexclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and it could require us to make
substantial licensing and royalty payments. We could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology or product candidate. In
addition, we could be found liable for monetary damages, including treble damages and attorneys' fees, if we are found to have willfully infringed a patent or other intellectual property right. We may
be required to indemnify collaborators or contractors against such claims. A finding of infringement could prevent us from manufacturing and commercializing our current or any future product
candidates or force us to cease some or all of our business operations, which could harm our business. Even if we are successful in defending against such claims, litigation can be expensive and
time-consuming and would divert management's attention from our core business. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings,
motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have an adverse effect on the price of our common stock.
Claims
that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of
operations and prospects.
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We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or
disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Certain of our employees, consultants or advisors are currently, or were previously, employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how
of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any
such individual's current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose
valuable intellectual property rights or personnel.
Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
In
addition, we may in the future be subject to claims by our former employees or consultants asserting an ownership right in our patents or patent applications, as a result of the work
they performed on our behalf. Although it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements
assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own,
and we cannot be certain that our agreements with such parties will be upheld in the face of a potential challenge or that they will not be breached, for which we may not have an adequate remedy. The
assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that
they may bring against us, to determine the ownership of what we regard as our intellectual property.
We may be involved in lawsuits to protect or enforce our patents, the patents of our licensors or our other
intellectual property rights, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe, misappropriate or otherwise violate our patents, the patents of our licensors or our other intellectual property
rights. To counter infringement or unauthorized use, we may be required to file legal claims, which can be expensive and time-consuming and are likely to divert significant resources from our core
business, including distracting our technical and management personnel from their normal responsibilities. In addition, in an infringement proceeding, a court may decide that a patent of ours or our
licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse
result in any litigation or defense proceedings could put one or more of our owned or licensed patents at risk of being invalidated or interpreted narrowly and could put our owned or licensed patent
applications at risk of not issuing. The initiation of a claim against a third-party might also cause the third-party to bring counterclaims against us, such as claims asserting that our patent rights
are invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an
alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability assertion
could be an allegation that someone connected with prosecution of the patent withheld relevant material information from the USPTO, or made a materially misleading statement, during prosecution. Third
parties may also raise similar validity claims before the USPTO in post-grant proceedings such as ex parte reexaminations, inter partes review, post-grant review, or oppositions or similar proceedings
outside the United States, in parallel with litigation or even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot
be certain that there is or will be no invalidating prior art, of which we and the patent examiner
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were
unaware during prosecution. For the patents and patent applications that we have licensed, we may have limited or no right to participate in the defense of any licensed patents against challenge
by a third-party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of any future patent protection on our current or
future product candidates. Such a loss of patent protection could harm our business.
We
may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as
fully as in the United States. Our business could be harmed if in litigation the prevailing party does not offer us a license, or if the license offered as a result is not on commercially reasonable
terms. Any litigation or other proceedings to enforce our intellectual property rights may fail, and even if successful, may result in substantial costs and distract our management and other
employees.
Furthermore,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities
analysts or investors perceive these results to be negative, it could have an adverse effect on the price of our common stock.
We
may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation
or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Accordingly, despite our efforts, we may not be
able to prevent third parties from infringing upon or misappropriating or from successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation
of patent litigation or other proceedings could have an adverse effect on our ability to compete in the marketplace.
Changes in U.S. patent law or the patent law of other countries or jurisdictions could diminish the value of
patents in general, thereby impairing our ability to protect our current and any future product candidates.
Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs
surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United
States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March
2013, under the Leahy-Smith America Invents Act, or the
America Invents Act, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent
application will be entitled to the patent on an invention regardless of whether a third-party was the first to invent the claimed invention. The America Invents Act also includes a number of
significant changes that affect the way patent applications are prosecuted and also may affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent
prosecution and additional procedures to attack the validity of a patent by USPTO-administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings.
However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued
patents, all of which could have an adverse effect on our business, financial condition, results of operations, and prospects.
In
addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the
rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to
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obtain
patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the U.S. Congress, the federal courts, and
the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce patents that we own, have licensed or might
obtain in the future. Similarly, changes in patent law and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them or changes in how the relevant
governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or have licensed or that we may obtain in the future.
We may not be able to protect our intellectual property rights throughout the world, which could negatively
impact our business.
Filing, prosecuting and defending patents covering our current and any future product candidates in all countries throughout the world would be
prohibitively expensive. Competitors may use our technologies in jurisdictions where we or our licensors have not obtained patent protection to develop their own products and, further, may export
otherwise infringing products to territories where we may obtain patent protection but where patent enforcement is not as strong as that in the United States. These products may compete with our
products in jurisdictions where we do not have any issued or licensed patents, and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them
from so competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products,
which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings
to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could
put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not
prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and
proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many
countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of
patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of
our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition,
results of operations and prospects may be adversely affected.
Reliance on third parties requires us to share our trade secrets, which increases the possibility that a
competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Since we rely on third parties to help us discover, develop and manufacture our current and any future product candidates, or if we collaborate
with third parties for the development, manufacturing or commercialization of our current or any future product candidates, we must, at times, share trade secrets with them. We may also conduct joint
research and development programs that may require us to share trade secrets under the terms of our research and development partnerships or similar agreements. We seek to protect our proprietary
technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar
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agreements
with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the
third parties to use or disclose our confidential information, including our trade secrets. Despite the
contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our
competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our
know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure could have an adverse effect on our business and results of operations.
In
addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade
secrets. Despite our efforts to protect our trade secrets, we may not be able to prevent the unauthorized disclosure or use of our technical know-how or other trade secrets by the parties to these
agreements. Moreover, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our confidential information or proprietary technology and
processes. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the
collaborators, scientific advisors, employees, contractors and consultants who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate
remedies for any such breach or violation, and we could lose our trade secrets as a result. Moreover, if confidential information that is licensed or disclosed to us by our partners, collaborators, or
others is inadvertently disclosed or subject to a breach or violation, we may be exposed to liability to the owner of that confidential information. Enforcing a claim that a third-party illegally or
unlawfully obtained and is using our trade secrets, like patent litigation, is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position
would be harmed.
In addition to seeking patent and trademark protection for our product candidates, we also rely on trade secrets, including unpatented know-how,
technology and other proprietary information, to maintain our competitive position. We seek to protect our trade secrets, in part, by entering into nondisclosure and confidentiality agreements with
parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter
into confidentiality and invention or patent assignment agreements with our employees, advisors and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our
proprietary information, including our trade secrets. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to
protect our intellectual property will be effective. In addition, we may not be able to obtain adequate remedies for any such breaches. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling
to protect trade secrets.
Moreover,
our competitors may independently develop knowledge, methods and know-how equivalent to our trade secrets. Competitors could purchase our products and replicate some or all of
the
competitive advantages we derive from our development efforts for technologies on which we do not have patent protection. If any of our trade secrets were to be lawfully obtained or independently
developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were
to be disclosed to or independently developed by a competitor, our competitive position would be harmed.
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We also seek to preserve the integrity and confidentiality of our data and other confidential information by maintaining physical security of our premises and
physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and
detecting the disclosure or misappropriation of confidential information and enforcing a claim that a party illegally disclosed or misappropriated confidential information is difficult, expensive and
time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach. In addition, our confidential information may otherwise become known or be
independently discovered by competitors, in which case we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us.
Any trademarks we may obtain may be infringed or successfully challenged, resulting in harm to our business.
We expect to rely on trademarks as one means to distinguish any of our product candidates that are approved for marketing from the products of
our competitors. We have not yet
selected trademarks for our product candidates and have not yet begun the process of applying to register trademarks for our current or any future product candidates. Once we select trademarks and
apply to register them, our trademark applications may not be approved. Third parties may oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our
trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and
marketing new brands. Our competitors may infringe our trademarks, and we may not have adequate resources to enforce our trademarks.
In
addition, any proprietary name we propose to use with our current or any other product candidate in the United States must be approved by the FDA, regardless of whether we have
registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product
names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name
that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.
Intellectual property rights do not necessarily address all potential threats to our business.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations
and may not adequately protect our business. The following examples are illustrative:
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others may be able to make compounds or formulations that are similar to our product candidates but that are not covered by the claims of any
patents, should they issue, that we own or license;
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we or our licensors might not have been the first to make the inventions covered by the issued patents or pending patent applications that we
own or license;
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we or our licensors might not have been the first to file patent applications covering certain of our inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
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it is possible that our pending patent applications will not lead to issued patents;
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issued patents that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result
of legal challenges;
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our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from
patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to
develop competitive drugs for sale in our major commercial markets;
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we may not develop additional proprietary technologies that are patentable; and
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the patents of others may have an adverse effect on our business.
Risks Related to Our Business Operations, Employee Matters and Managing Growth
We are highly dependent on the services of our Chief Executive Officer and Chairman, Dr. Shoshana
Shendelman, and our Chief Medical Officer, Dr. Riccardo Perfetti, and if we are not able to retain these members of our management team or recruit and retain additional management, clinical and
scientific personnel, our business will be harmed.
We are highly dependent on our Chief Executive Officer and Chairman, Dr. Shoshana Shendelman, and our Chief Medical Officer,
Dr. Riccardo Perfetti. Each of them may currently terminate their employment with us at any time. The loss of the services of either of these persons could impede the achievement of our
research, development and commercialization objectives.
Recruiting
and retaining other senior executives, qualified scientific and clinical personnel and, if we progress the development of any of our product candidates, commercialization,
manufacturing and sales and marketing personnel, will be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our
research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may
be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain
regulatory approval of and commercialize our product candidates. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on
acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical
personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and
development and commercialization strategy. Our consultants and advisors may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we
are unable to continue to attract and retain high-quality personnel, our ability to pursue our growth strategy will be limited.
Our
future performance will also depend, in part, on our ability to successfully integrate newly hired executive officers into our management team and our ability to develop an effective
working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of management could result in
inefficiencies in the development and commercialization of our product candidates, harming future regulatory
approvals, sales of our product candidates and our results of operations. Additionally, we do not currently maintain "key person" life insurance on the lives of our executives or any of our employees.
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We expect to expand our organization, and we may experience difficulties in managing this growth, which could
disrupt our operations.
As of September 30, 2019, we had 10 full-time employees. As the clinical development of our product candidates progresses, we also expect
to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of research, drug development, regulatory affairs and, if any of our product
candidates receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial
systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a
company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may
lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or
suffer security breaches, which could result in a significant disruption of our product development programs and our ability to operate our business effectively, and adversely affect our business and
operating results.
Our internal computer systems, cloud-based computing services and those of our current and any future collaborators and other contractors or
consultants are vulnerable to damage or interruption from computer viruses, data corruption, cyber-based attacks, unauthorized access, natural disasters, terrorism, war and telecommunication and
electrical failures. While we have not experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it
could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other similar disruptions. For
example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce
the data. Furthermore, federal, state and international laws and regulations, such as the European Union's General Data Protection Regulation, or the GDPR, which took effect in May 2018, can expose us
to enforcement actions and investigations by regulatory authorities, and potentially
result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, our software systems include cloud-based applications that are hosted
by third-party service providers with security and information technology systems subject to similar risks. To the extent that any disruption or security breach were to result in a loss of, or damage
to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and
commercialization of our product candidates could be delayed.
Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other
improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners.
Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in other jurisdictions, provide accurate information to the FDA and other
regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities
to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct,
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kickbacks,
self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive
programs, and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory
authorities, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from
a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result
in significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in government-funded healthcare programs, such as Medicare and
Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws,
contractual damages, reputational harm and the curtailment or restructuring of our operations, any of which could have a negative impact on our business, financial condition, results of operations and
prospects.
Any future acquisitions or strategic collaborations may increase our capital requirements, dilute our
stockholders, cause us to incur debt or assume contingent liabilities and/or subject us to other risks.
From time to time, we may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary drugs,
intellectual property rights, technologies or businesses, as deemed appropriate to carry out our business plan. Any potential acquisition or strategic partnership may entail numerous risks,
including:
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increased operating expenses and cash requirements;
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the assumption of additional indebtedness or contingent or unknown liabilities;
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assimilation of operations, intellectual property and drugs of an acquired company, including difficulties associated with integrating new
personnel;
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the diversion of our management's attention from our existing drug programs and initiatives in pursuing such a strategic partnership, merger or
acquisition;
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retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;
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risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing drugs
or product candidates and regulatory approvals; and
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our inability to generate revenue from acquired technology and/or drugs sufficient to meet our objectives in undertaking the acquisition or
even to offset the associated acquisition and maintenance costs.
In
addition, if we engage in future acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses, and acquire
intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities, and this inability could impair our ability
to grow or obtain access to technology or drugs that may be important to the development of our business.
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Risks Related to This Offering and Ownership of Our Common Stock
The market price of our common stock may be volatile and fluctuate substantially, and you could lose all or
part of your investment.
The market price of our common stock is likely to be volatile. The stock market in general and the market for biopharmaceutical and
pharmaceutical companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may
not be able to sell your common stock at or above price paid for share. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this prospectus, the market price for our
common stock may be influenced by the following:
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the commencement, enrollment or results of our planned or future clinical trials of our product candidates or those of our competitors;
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the success of competitive drugs or therapies;
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regulatory or legal developments in the United States and other countries;
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the success of competitive products or technologies;
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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the recruitment or departure of key personnel;
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the level of expenses related to our product candidates or clinical development programs;
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the results of our efforts to discover, develop, acquire or in-license additional product candidates;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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our inability to obtain or delays in obtaining adequate drug supply for any approved drug or inability to do so at acceptable prices;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent
protection for our technologies;
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significant lawsuits, including patent or stockholder litigation;
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variations in our financial results or those of companies that are perceived to be similar to us;
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changes in the structure of healthcare payment systems, including coverage and adequate reimbursement for any approved drug;
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market conditions in the pharmaceutical and biotechnology sectors;
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general economic, political, and market conditions and overall fluctuations in the financial markets in the United States and abroad; and
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investors' general perception of us and our business.
These
and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which
may limit or prevent investors from selling their shares at or above the price paid for the shares and may otherwise negatively affect the liquidity of our common stock.
Some
companies that have experienced volatility in the trading price of their shares have been the subject of securities class action litigation. Any lawsuit to which we are a party,
with or without merit,
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may
result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our
reputation or adverse changes to our business practices. Defending against litigation is costly and time-consuming, and could divert our management's attention and our resources. Furthermore, during
the course of litigation, there could be negative public announcements of the results of hearings, motions or other interim proceedings or developments, which could have a negative effect on the
market price of our common stock.
Concentration of ownership of our common stock among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate decisions.
Based upon shares of our common stock outstanding as of September 30, 2019, our executive officers, directors and stockholders who own
more than 5% of our outstanding common stock will, in the aggregate, beneficially own shares representing approximately 32% of our outstanding common stock. If our executive officers, directors and
stockholders who owned more than 5% of our
outstanding common stock acted together, they may be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of any
merger, consolidation or sale of all or substantially all of our assets. The concentration of voting power and transfer restrictions could delay or prevent an acquisition of our company on terms that
other stockholders may desire or result in the management of our company in ways with which other stockholders disagree.
If research analysts do not publish research or reports, or publish unfavorable research or reports, about
us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or
our business. Equity research analysts may discontinue research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. We do not
have any control over the analysts or the content and opinions included in their reports. The price of our shares could decline if one or more equity research analysts downgrade our shares or issue
other unfavorable commentary or research about us. If one or more equity research analysts cease coverage of us or fail to publish reports on us regularly, demand for our shares could decrease, which
in turn could cause the trading price or trading volume of our common stock to decline.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future,
capital appreciation, if any, will be your sole source of gain.
You should not rely on an investment in our common stock to provide dividend income. We have never declared or paid cash dividends on our
capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may
preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Investors seeking cash dividends should
not purchase our common stock in this offering.
We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth
companies may make our common stock less attractive to investors.
We are an "emerging growth company," or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to
take advantage of some of the exemptions
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from
reporting requirements that are applicable to other public companies that are not EGCs, including:
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being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements,
with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure;
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not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory
audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements;
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reduced disclosure obligations regarding executive compensation; and
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not being required to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved.
We
cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a
result, there may be a less active trading market for our common stock and our share price may be more volatile. We currently take advantage of some or all of these reporting exemptions until we are
no longer an EGC. We will remain an EGC until the earlier of (i) December 31, 2024, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least
$1.07 billion, (iii) the last day of the first fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by
non-affiliates exceeds $700 million as of the prior June 30th, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior
three-year period.
In
addition, under Section 107(b) of the JOBS Act, EGCs can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We
have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised
accounting standards as other public companies that are not EGCs.
We will incur increased costs as a result of operating as a public company, and our management will be
required to devote substantial time to new compliance initiatives.
As a public company, and particularly after we are no longer an EGC, we will incur significant legal, accounting and other expenses that we did
not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and rules subsequently implemented by the SEC and The Nasdaq Stock Market LLC have
imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other
personnel will need to devote a substantial amount of time to comply with these requirements. 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 that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability
insurance.
Pursuant
to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by our management on our internal control over financial
reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an EGC, we will not be
required to include an attestation report on internal control over financial reporting issued by our independent registered public
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accounting
firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting,
which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and
document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and
implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public
accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an
adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which
may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that
stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing
to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of
our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors. Among other things, these provisions:
-
-
establish a classified board of directors such that not all members of the board are elected at one time;
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-
allow the authorized number of our directors to be changed only by resolution of our board of directors;
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-
limit the manner in which stockholders can remove directors from the board;
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-
establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of
directors;
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require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written
consent;
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-
limit who may call stockholder meetings;
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authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights
plan, or so-called "poison pill," that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of
directors; and
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-
require the approval of the holders of at least 662/3% of the votes that all our stockholders would be entitled to cast to amend
or repeal certain provisions of our charter or bylaws.
Moreover,
because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits a person who
owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions could discourage potential acquisition proposals and could delay or prevent a change
in
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control
transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions
may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with
us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, with respect to any state actions or proceedings under Delaware statutory
or common law, the Court of Chancery of the State of Delaware is the exclusive forum for:
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any derivative action or proceeding brought on our behalf;
-
-
any action asserting a breach of fiduciary duty;
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any action asserting a claim against us or any of our directors, officers, employees or agents arising under the DGCL, our amended and restated
certificate of incorporation or our amended and restated bylaws;
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any action or proceeding to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our
amended and restated bylaws; and
-
-
any action asserting a claim against us or any of our directors, officers, employees or agents that is governed by the internal-affairs
doctrine.
These
exclusive-forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other
employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find an exclusive-forum provision in our amended and restated certificate of
incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our business.
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BUSINESS
Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in
indications of high unmet medical need. We focus on molecules and pathways whose role in the disease process is well known based on prior research, but have previously failed to yield successful
products due to poor efficacy and tolerability. Our unique approach to drug development leverages recent technological advances to design improved drugs, employs early use of biomarkers to confirm
biological activity and focuses on abbreviated
regulatory pathways. Our first molecular target is aldose reductase, or AR, an enzyme that converts glucose to sorbitol under oxidative stress conditions, and is implicated in multiple diseases. Prior
attempts to inhibit this enzyme were hindered by nonselective, nonspecific inhibition, which resulted in limited efficacy and significant off-target safety effects. The detrimental consequences of
aberrant AR activation have been well established by decades of prior research. Our AR inhibitor, or ARI, program currently includes three small molecules, which are all designed to be potent and
selective ARIs, and are engineered to have unique tissue permeability profiles to target different disease states, including diabetic complications, heart disease and a rare pediatric metabolic
disease. Applying our strategy from our ARI program, we have also developed a program targeting selective inhibition of phosphatidylinositol 3-kinase, or PI3K, subunits that has resulted in an
early-stage oncology pipeline. The result of this unique multifaceted approach to drug development is a portfolio of highly specific and selective product candidates that we believe are significantly
de-risked and can move quickly through the development process.
Our
lead product candidate, AT-001, is a novel ARI with broad systemic exposure and peripheral nerve permeability that we are developing for the treatment of diabetic cardiomyopathy, or
DbCM, a fatal fibrosis of the heart. We are also developing AT-001 for diabetic peripheral neuropathy, or DPN, a debilitating neurodegenerative disease that significantly reduces quality of life and
for which there are currently no approved treatments in the United States. We recently completed a Phase 1/2 clinical trial studying AT-001 in approximately 120 patients with type 2
diabetes, in which no drug-related adverse effects or tolerability issues were observed. This trial also demonstrated target engagement and proof of biological activity, as measured by reduction in
sorbitol, a biomarker of AR activity and NTproBNP, a marker of cardiac stress. In September 2019 we initiated a pivotal Phase 2/3 study in DbCM patients at high risk of progression to overt
heart failure. The study also includes a DPN sub-study (in patients with both DbCM and DPN), which will inform our DPN development program.
Our
second product candidate, AT-007, is a central nervous system, or CNS, penetrant ARI that we are developing for the treatment of galactosemia, a devastating rare pediatric metabolic
disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. High levels of galactose circulating in the blood and
tissues of galactosemia patients enable AR to convert galactose to a toxic metabolite, galactitol, which results in long-term complications ranging from CNS dysfunction to cataracts. We have
demonstrated in an animal model of galactosemia that treatment with AT-007 reduces toxic galactitol levels and prevents disease complications. We believe that galactosemia may qualify for accelerated
approval, as well as for the rare pediatric disease priority review voucher, or RPD-PRV, program. Additionally, the U.S. Food and Drug Administration, or FDA, recently released draft guidance for
industry on drug development for low prevalence, slowly progressing rare metabolic diseases, for which we believe galactosemia qualifies. The guidance allows for a biomarker-based development program
if clinical efficacy and a link to a relevant biomarker can be demonstrated in an animal model of disease. We received Orphan Designation for AT-007 in Galactosemia in May 2019. In June 2019 we
initiated a pivotal Phase 1/2 clinical study in healthy volunteers and adults with Galactosemia examining safety, pharmacokinetics and biomarker effects of AT-007, In healthy volunteers, AT-007
was found to be well tolerated at all doses tested (5mg/kg to 20mg/kg) and pharmacokinetics were compatible with once daily oral dosing.
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We
are also developing AT-003, an ARI designed to cross through the back of the eye when dosed orally, and has demonstrated strong retinal penetrance, for the treatment of diabetic
retinopathy, or DR. DR is an ophthalmic disease that occurs in diabetic patients and for which treatments are currently limited to high-cost biologics requiring intravitreal administration. DR has
been linked to AR activity, including elevations in sorbitol and subsequent changes in retinal blood vessels, which distorts vision and leads to permanent blindness. We are currently in late stages of
preclinical development and intend to advance AT-003 into a Phase 1 clinical trial in 2020.
Our
management team and scientific advisory board are composed of accomplished scientists and clinicians with decades of experience developing drugs for a wide range of diseases. Our
view is that drug development does not always need to follow the standard approach, which often requires long and costly development programs before drugs become available to patients. By taking a
unique and focused approach to drug development, we believe we can significantly shorten development programs and bring lifesaving drugs to patients in urgent need. In May 2019, we completed our IPO
whereby we sold 4,000,000 shares of common stock at a public offering price of $10.00 per share, resulting in aggregate net proceeds of $34.6 million, after deducting underwriting discounts and
commissions and offering expenses.
Our Strategy
Our goal is to bring potentially transformative therapies to market across a range of fatal or debilitating diseases for which no treatments are
available. The critical components of our strategy include:
-
-
Leveraging our unique approach to develop our pipeline of novel
ARIs. We target molecules and pathways that have a proven role in disease, but have previously failed to yield successful products due to poor
efficacy and tolerability. Our unique approach to drug development utilizes recent technological advances to design improved drugs, employs early use of biomarkers to confirm biological activity and
focuses on abbreviated regulatory pathways. We develop product candidates with increased potency and selectivity by leveraging recent technological advances in high throughput crystallography and in
silico structural design. Our strategy is also informed by early use of biomarkers to confirm biological activity and target engagement. Early proof of biological activity through biomarkers in
clinical trials combined with data from prior clinical development programs on first generation drugs significantly de-risks clinical development in our target indications. AR is our first molecular
target that has been implicated in multiple diseases and for which sorbitol levels can be assessed as a biomarker of enzyme activity. Prior AR-targeting compounds produced nonselective inhibitors and
failed to demonstrate adequate safety and efficacy. We intend to apply our strategy to a wide range of validated targets across multiple disease indications, which we believe will result in additional
pipeline programs.
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-
Rapidly advancing the development of our ARI product candidates, AT-001, AT-007 and
AT-003. We advanced AT-001 into a pivotal clinical trial in Sept 2019 for the treatment of DbCM. We plan to collect data on motor nerve
conduction velocity, or MNCV, in this study in DbCM patients that also have DPN, which we expect will provide a basis for dose selection in Phase 3 clinical trials of DPN.
In
June 2019 we initiated a pivotal Phase 1/2 study for AT-007 in healthy volunteers and adult galactosemia patients. We expect this trial to provide critical data on safety,
tolerability and pharmacokinetics, or PK, and will target reduction in galactitol levels, a surrogate biomarker of AR activity in patients with galactosemia. The trial will form the basis of a future
trial in pediatric patients to determine appropriate dosing in the pediatric population. These data will form the basis of a New Drug Application, or NDA, for treatment of galactosemia.
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We
intend to complete an investigational new drug application, or an IND, enabling program for AT-003 alongside animal efficacy models in DR to support a Phase 1 clinical trial in
diabetic patients.
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Taking advantage of regulatory pathways designed for accelerated drug development in indications with high unmet need and seeking strategic
partnerships in other indications. We plan to leverage abbreviated development programs and biomarker-based approaches for rapid drug development and regulatory approval. For indications that require
standard development programs, we plan to seek strategic partnerships.
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Expanding our pipeline to products targeting other validated molecules and pathways outside of AR. We plan to further characterize our novel
PI3K inhibitors and select lead compounds for preclinical development. Utilizing our biomarker-based approach, we intend to target urgent hematological oncology indications and specific solid tumors.
We will continue leveraging our relationships with academic institutions and universities to acquire or license additional technologies that are consistent with our strategy of applying new
technologies to validated molecular pathways.
Our Pipeline
The following table shows the status of our current ARI and PI3K inhibitor programs:
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*
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Subcutaneous.
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**
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Peripheral
T-cell lymphoma, cutaneous T-cell lymphoma and T-cell acute lymphoblastic leukemia.
We
seek to protect our proprietary and intellectual property position for our product candidates, our core technology, and other know-how through U.S. and foreign patent protection. To
the extent that our platform is not patentable, we rely on trade secret protection and confidentiality agreements to protect our interests. For more information, see the section titled
"BusinessIntellectual Property."
Our Product Candidates
Our Aldose Reductase Program
AR is the first enzyme and rate-limiting step in the polyol pathway, an alternative glucose metabolism pathway. AR is a redox-regulated enzyme
that is activated by an altered redox state within
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the
cell, which occurs during hyperglycemia and ischemia. AR activation is associated with downstream consequences of hyperglycemia, such as diabetic complications, as well as consequences of ischemia
in the heart, such as acute myocardial infarction and chronic heart failure. As shown in the figure below, AR activity produces excess sorbitol, which causes osmotic dysregulation within cells and
tissues, such as nerve and retina, and is toxic to many cell types, including cardiomyocytes. Sorbitol is also further metabolized to fructose, which initiates a cascade of metabolic dysregulation and
inflammatory damage to cells, such as: reactive oxygen species, or ROS, generation; advanced glycation end products, or AGE; protein kinase C, or PKC, activation; and methylglyoxal overproduction.
Under non-oxidative, or healthy patient conditions, AR remains largely inactive and less than 3% of a healthy person's glucose
is processed by the polyol pathway. However, when the oxidative environment of the cell changes due to hyperglycemia or ischemia, AR is both activated and upregulated, and greater than 30% of the
patient's glucose is then shunted through the polyol pathway, resulting in significant downstream damage to cells and tissues. The detrimental consequences of AR activation have been well established
by decades of prior research. These include broad effects, such as mitochondrial dysfunction and cell death, as well as tissue-specific changes, such as neuronal degeneration in peripheral nerves,
collagen crosslinking and fibrosis in cardiac tissue, and damage to blood vessels in the lens of the eye.
AR Causes Damage to Tissues Under Conditions of Oxidative Stress
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*
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NF-kB
is a protein complex that controls transcription of DNA, cytokine production and cell survival.
Additionally,
as shown in the figure below, abnormal AR activity is associated with conversion of galactose to galactitol in patients with galactosemia. Galactitol, like sorbitol, does
not cross the cell membrane and causes damage to cells across a wide range of tissues, including neurons in the brain, retinal cells in the eye and peripheral nerve tissue.
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Galactitol Accumulation Results in Tissue Specific Damage
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*
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GALK,
or galactokinase, and GALT, or galactose-1-phosphate uridyl transferase, are enzymes that metabolize galactose.
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**
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Galactose-1-phosphate
is referred to as Gal-1P.
During
the 1980s and 1990s, AR was a significant target of drug development due to its established role in a wide range of debilitating indications. Although these programs failed to
produce effective drugs with a favorable risk/benefit profile, the prior ARI clinical development programs validated the role of AR in the pathogenesis of several diabetic complications and provided
useful information on optimal patient criteria and trial design.
By
applying new techniques in crystallography to better understand how the enzyme works, and applying in silico design and medicinal chemistry approaches, we have developed compounds
with logarithmically improved potency and increased selectivity. Our technology includes specific compounds that are in various stages of preclinical and clinical development, and is coupled with an
understanding of how the enzyme works and a knowledge base of structural approaches to drug the target while controlling drug characteristics, such as PK, solubility and tissue permeability.
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The
following table summarizes the current status of our AR program and compound differentiation:
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(1)
-
IC50
is the amount of a compound required to inhibit 50% of enzyme activity.
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(2)
-
LogD
is a log of partition of a chemical compound between the lipid and aqueous phases. LogD often predicts retinal permeability, with compounds with negative LogD
passing through the back of the eye.
AT-001 for the Treatment of Diabetic Cardiomyopathy
Our lead product candidate, AT-001, is a novel ARI with broad systemic exposure and peripheral nerve permeability that we are developing for the
treatment of DbCM, a fatal fibrosis of the heart, for which no treatments are available. We recently completed a Phase 1/2 clinical trial evaluating AT-001 in approximately 120 patients with
type 2 diabetes, in which no drug-related adverse effects or tolerability issues were observed. This trial also demonstrated target engagement and proof of biological activity, as measured by
reduction in sorbitol, a biomarker of AR activity and NTproBNP. In September 2019 we initiated a pivotal Phase 2/3 study in DbCM patients at high risk of progression to overt heart failure.
DbCM is a fatal fibrosis of the heart that occurs in both type 1 and type 2 diabetic patients, which leads to decreased
contractility and decreased heart function, eventually resulting in fulminant heart failure. DbCM is caused by metabolic derangements in cardiomyocytes that result in cell death and fibrosis. AR
activity has been shown to be a large contributor to these metabolic derangements, and the downstream effect of AR activation is responsible for the cardiomyocyte cell death and fibrosis. DbCM is
diagnosed by increased weight of the heart and decreased contractility, which are identified by echocardiographic screening, as well as by exclusion of other forms of heart disease. Epidemiological
studies have shown that approximately 17% to 24% of diabetic patients display DbCM in the absence of any other forms of heart disease. These patients do not have hypertension, atherosclerosis,
valvular
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heart
disease or ischemia, and the only cause of the cardiomyopathy is the underlying diabetes. Stages of DbCM range from asymptomatic, or stage 1, to acute heart failure, or stage 4.
Most patients are not diagnosed until stage 2, where heart function approaches 50% of normal and symptoms manifest as extreme shortness of breath during exercise, referred to as decreased
exercise tolerance. Exercise tolerance in these patients (as measured by maximum amount of oxygen a person can utilize during intense exercise known as peak VO2) is approximately 25% lower than
diabetic patients without DbCM, and decreases by an additional 30% as the patients progress to overt heart failure in later stages of diseases. Patients quickly progress at a steady state of decline
to stage 3, which includes marked cavity dilation and severe limitations in daily activities. The final stage of DbCM, stage 4, is represented by acute heart failure resulting in death.
The current standard of care is to target glucose control in these patients, as well as hemodynamic modulation of blood flow, through use of beta blockers and diuretics. Both approaches are largely
ineffective, and DbCM often results in death within five to ten years of diagnosis. Approximately 24% of DbCM patients progress to overt heart failure or death within 1.5 years of diagnosis,
and 37% within 5 years of diagnosis.
According to a retrospective epidemiological study, approximately 17% of patients suffering from diabetes develop DbCM. A more recent study
completed in France that utilized echocardiographic screening estimates the proportion of diabetic patients to develop DbCM at approximately 24%. The International Diabetes Foundation estimated that
there were approximately 451 million patients globally with diabetes in 2017, which is expected to increase to 693 million by 2045. This includes 58.0 million diabetes patients in
Europe in 2017, which is expected to increase to 67.0 million in 2045, and 46.0 million in North America, which is expected to increase to 62.0 million in 2045. Based on an
estimated prevalence of 17% of diabetic patients who develop DbCM, we estimate that currently there are approximately 77.0 million patients with DbCM globally, with approximately
8.0 million in North America and 10.0 million in Europe. Initially, our development program will target stage 2 and 3 patients, which we estimate constitute approximately 50% of
all DbCM patients. We believe these patients represent a symptomatic population that is more likely to be responsive to treatment. Stage 1 and 4 patients represent an additional market
opportunity, which we plan to explore in a post-approval setting.
AR activity has been implicated as a strong contributing factor to pathogenesis in DbCM. Pfizer Inc. was developing an ARI, Alond
(zopolrestat), for the treatment of DPN and DbCM in a Phase 2 clinical trial that demonstrated favorable outcomes on heart function in DbCM patients, but was discontinued due to an unfavorable
risk/benefit profile, with several patients experiencing liver toxicity and significant elevations in both aspartate aminotransferase and alanine aminotransferase, which are enzymes central to
identification of liver toxicity and damage. In this trial, patients with early-stage DbCM were identified by echocardiographic screening and were randomized to three treatment groups, which consisted
of placebo, 500 mg zopolrestat per day or 1,000 mg zopolrestat per day dosed for one year. Due to liver toxicity seen in another trial with zopolrestat, the 1,000 mg treatment arm was reduced to 500
mg, and the two doses were collapsed into one treatment arm. While patients on placebo displayed decreased heart function over the year of the trial as their disease progressed, patients on
zopolrestat displayed a stabilization of heart function and even improvement in heart function in some patients based on hemodynamic endpoints. As shown in the figure below, after one year of ARI
treatment, there were statistically significant increases in resting left ventricular ejection fraction, or LVEF (p<0.02), cardiac output (p<0.03), left ventricular, or
LV, stroke volume (p<0.004), and exercise LVEF (p<0.001). In placebo-treated subjects, there were statistically significant decreases in exercise LVEF, cardiac output and
stroke volume. Exercise LVEF increased with ARI treatment independent of blood pressure, insulin use or the presence of baseline abnormal heart rate
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variability.
There was no change in resting diastolic filling rates in either group. This trial demonstrated that abnormalities in systolic function in patients with DbCM can be stabilized and
partially reversed by ARI treatment. We believe this data validates the approach of using an ARI to improve outcomes for patients with DbCM and using our compounds, which demonstrate improved potency
and have been well tolerated, may lead to greater clinical utility.
Cardiac Function at 12 Months on Maximal Exercise
-
*
-
Data
are mean +/ standard deviation.
As
shown in the figure below, when compared to zopolrestat, AT-001 has significantly higher in vitro enzymatic inhibitory activity. IC50 and IC90, or the amount of a compound required to
inhibit 90% enzyme activity, are typically calculated by determining the level of enzymatic inhibition at ten-fold dilutions, moving to smaller concentrations of the inhibitory compound. At lower
concentrations of compound, AT-001 demonstrated logarithmically greater enzymatic inhibition versus zopolrestat. Similarly, the IC50 of AT-001 was determined to be 30pM, nearly 1,000 fold lower than
that of zopolrestat, which is 10nM. Zopolrestat demonstrated liver toxicity as a side effect in several clinical studies, which was believed to be due not to AR inhibition, but due to off-target
inhibition of a structurally related enzyme, Aldehyde Reductase, which is required for normal liver function. AT-001 demonstrates increased selectivity for Aldose Reductase, and does not inhibit
Aldehyde Reductase at any concentration tested. This increased selectivity led to lack of toxicity in cultured hepatocytes, or liver cells, whereas zopolrestat demonstrated significant toxicity in
hepatocytes as shown in the figures below. Thus, we believe that not only is AT-001 a more potent AR inhibitor than prior drugs, but we have overcome the safety and toxicity limitations from prior
compounds, which were due to lack of selectivity and off-target inhibition of Aldehyde Reductase.
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In vitro Aldose Reductase Activity AT-001 versus Zopolrestat
In Vitro Aldehyde Reductase Activity AT-001 vs. Zopolrestat
Aldehyde Reductase Inhibition
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Hepatotoxicity in Cultured Liver Cells AT-001 vs. Zopolrestat
|
|
|
ALT normalized to Cell Viability
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|
AST normalized to Cell Viability
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|
|
|
We have recently evaluated AT-001 in a placebo-controlled Phase 1/2 single ascending dose, or SAD, and multiple ascending dose, or MAD,
clinical trial in approximately 120 type 2 diabetes patients. The primary objectives of this trial were to explore the safety, tolerability and PK profile of AT-001. Because AR converts glucose
to sorbitol, and AR activity is elevated in diabetic patients, sorbitol normalization was also examined as a pharmacodynamic, or PD, biomarker of target engagement, which provided proof of biological
activity in patients.
The
Phase 1/2 clinical trial allowed use of concomitant treatments for glucose control, as well as other standard of care treatments for diabetes, such as statins and ACE
inhibitors. The FDA permitted us to directly evaluate diabetic patients due to positive data from the preclinical studies, as well as the urgency to develop drugs quickly due to high unmet need.
AT-001 was dosed as an active pharmaceutical ingredient, or API, powder in a rapid release capsule and the trial examined both once-daily and twice-daily, or BID, dosing regimens. We have completed
the initial safety, pharmacology and biomarker studies up to seven consecutive days of treatment. No drug-related adverse effects or tolerability issues were observed at any single or multiple doses
of AT-001. Treatment with AT-001 did not cause any abnormalities in vital signs or electrocardiogram, and did not cause an increase in glucose levels. Additionally, there were no observed adverse
interactions with any concomitant diabetes medications used by patients during the trial.
Our SAD trial was conducted on 40 type 2 diabetes patients, 10 patients per cohort, with 8 patients receiving AT-001 and 2
patients receiving placebo. The patients were dosed under fasted conditions and received breakfast two hours post dose. Hourly blood samples were taken for PK and sorbitol measurements over a 12-hour
period and again at 24 hours. Our initial dose of 5 mg/kg dosed orally was observed to have an effect on sorbitol levels in patients. Although we observed an effect on AR activity at the lowest
dose of 5 mg/kg, we continued to dose escalate up to 40 mg/kg. Unlike prior compounds that were often limited by tolerability and safety issues, our compound did not demonstrate safety or tolerability
limitations up to the maximum tested dose of 40 mg/kg. As shown in
the figure below, dose-response impact from 5 mg/kg to 40 mg/kg was observed on PK endpoints, providing adequate information for future dose selection.
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PK Timeframe for AT-001 Phase 1/2 SAD Cohorts
(each curve represents the mean of eight patients)
As
shown in the figures below, AT-001 demonstrated a linear PK profile, which we believe evidences a predictable dose response.
|
|
|
AT-001 Maximum Concentration (Cmax(1) mean)
|
|
AT-001 Area Under the Curve (AUC mean)
|
|
|
|
-
(1)
-
Cmax
is the highest concentration of a drug in the blood after a dose is given.
Because
AR converts glucose to sorbitol, and AR activity is elevated in diabetic patients, sorbitol normalization to healthy subject levels can be used as a PD biomarker of target
engagement and proof of biological activity. As shown in the figures below, which is representative of the AT-001-treated patients in the trial, as levels of AT-001 increase in the patients' blood,
sorbitol levels are significantly reduced.
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Representative PK Curves of AT-001 and Whole Blood Sorbitol Levels in Patients Treated with AT-001
As
shown in the figure below, which is representative of the placebo-treated patients in the trial, this effect was not observed in placebo patients, who demonstrated sorbitol increases
over the timeframe of drug-related sorbitol reduction, due to food effects on sorbitol. These patients were given breakfast two hours post dose.
Representative Curve of Whole Blood Sorbitol Levels in Placebo-Treated Patients
As
shown in the figure below, a dose response was observed when percent reduction in sorbitol levels was calculated at the Cmax of the drug, which is approximately two hours,
demonstrating higher reductions in sorbitol at higher doses of AT-001. Average sorbitol levels of healthy volunteers were observed to be approximately 470 ng/ml and approximately 750 ng/ml for
diabetic patients. The average
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net
difference in sorbitol levels between diabetic patients and healthy volunteers represents the approximate amount of sorbitol generated by abnormal AR activity, which is approximately 50% reduction
on average. Baseline sorbitol levels seen in healthy volunteers are believed to be primarily due to dietary intake of sorbitol, as well as baseline AR activity, which is approximately 3% glucose
metabolism through AR in healthy volunteers.
AT-001 Percent Reduction in Sorbitol, SAD Cohorts A1-A4
The
figure below depicts the average reduction in sorbitol from baseline to Cmax of two hours from each dose cohort, as captured by the figure above. Based on our trials, we believe the
complete inhibition of aberrant AR activity seen in diabetic patients corresponds to an approximately 50% reduction in elevated sorbitol levels to the healthy volunteer average of 470 ng/ml. This was
achieved in 25% of patients dosed at 10 mg/kg, 50% of patients dosed at 20 mg/kg and 75% of patients dosed at 40 mg/kg.
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AT-001 Mean Reduction in Sorbitol by Dose, SAD Cohorts A1-A4
Our MAD trial was conducted on 40 type 2 diabetes patients, 10 patients per cohort, with 8 patients receiving AT-001 and 2 patients
receiving placebo. The patients were dosed for seven consecutive days with 5 mg/kg, 20 mg/kg and 40 mg/kg once daily, or 20 mg/kg twice daily. Hourly blood samples were taken for PK and sorbitol
measurements over a 12-hour period and again at 24 hours on days one and seven.
As
shown in the figure below, PK profile of AT-001 was similar on days one and seven, suggesting there was no first pass clearance or other PK effects due to repeat dosing over this time
period.
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AT-001 Multiple Dose PK ProfileNo First Pass Clearance or Drug Accumulation at 5 mg/kg
As
shown in the figure below, effects on sorbitol from baseline to Cmax of two hours from each dose cohort were similar at day one and day seven, indicating that there is no correction
for AT-001 effects in diabetic patients over this time period.
Comparison of % Reduction in Sorbitol from Baseline to Cmax at Day 1 and Day 7 of Dosing
The
figure below shows the effect on sorbitol levels over a 12-hour period in patients treated with 5 mg/kg, 20 mg/kg and 40 mg/kg doses versus placebo. Treatment with AT-001 resulted in
dose-dependent AR inhibition as measured by sorbitol reduction over a 10- to 12-hour period.
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Effect of AT-001 on Sorbitol Levels Over 12 Hours
The diabetic patients enrolled in this trial had well-controlled blood glucose levels. However, these patients still experienced periods of
transient worsening of hyperglycemia, specifically following meals when there is excess glucose available. This transient post-prandial response leads to further activation of AR and is seen as an
increase in blood sorbitol levels following meals in placebo treated patients, as shown in the figure above and in prior figures. Patients receiving AT-001 not only demonstrated reduced sorbitol
levels, but were also protected from post-prandial AR activation.
We have completed an extension to our Phase 1/2 clinical trial to evaluate the safety, tolerability and PK of AT-001 over a 28-day treatment
period in approximately 30 type 2 diabetes patients with early-stage DbCM. The primary objectives were to explore the safety and tolerability of AT-001 over 28 days in patients with
early-stage DbCM, and to examine the PK profiles of a flat dose of 3,000 mg per patient administered via three different dosing formulations and posologies: (1) a once-daily extended release,
or ER, formulation in the form of four 750 mg tablets, (2) 1,500 mg BID rapid release capsule 12 hours apart and (3) 1,000 mg three times daily, or TID, 8 hours apart.
Additionally, many DbCM patients displayed elevated levels of a cardiac biomarker, NTproBNP, which can be examined alongside sorbitol normalization as a biomarker of AT-001 biological activity. There
were approximately 10 patients per cohort, with 8 patients receiving AT-001 and 2 patients receiving placebo.
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Even though the ER tablet did not release AT-001 from the polymer binding as expected, which resulted in low levels of exposure over a six-hour
period, it aided in determining the lowest efficacious dose, as this cohort did not demonstrate a significant clinical response on the cardiac
biomarker endpoints. The 1,500 mg BID and 1,000 mg TID capsule dosing regimens provided sustained levels of AT-001 in the bloodstream throughout the 24-hour period, but with different PK signatures.
The figure below shows the PK profile of AT-001 in 1,500 mg BID and 1,000 mg TID rapid release capsule and the once daily ER tablet.
PK Profile of AT-001 over 24 Hours
Additionally,
as shown in the figures below, BID dosing regimen provided a slightly higher Cmax at first dose administration, with levels dropping low, but still above zero, at
12 hours post-dose. The TID dosing regimen provided a lower Cmax at the first dose, but displayed an additive effect after second dose administration to achieve a Cmax at the second dose
similar to that seen with the BID dosing regimen. Significant levels of AT-001 were sustained at all time-points with the TID dosing regimen.
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AT-001 Cmax (mean)
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AT-001 AUC (mean)
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As expected, due to the low exposure achieved with the ER tablet, only moderate sorbitol reduction was seen with the ER tablet as compared to
the 1,500 mg BID and 1,000 mg TID rapid release capsule dosing regimens. However, both BID and TID capsule dosing regimens achieved the target range of sorbitol inhibition, normalizing sorbitol to
that of healthy volunteers in many patients, and demonstrating statistically significant results versus placebo-treated patients at both two hours post-dose (Cmax) and when AUC was evaluated over
12 hours as shown in the figures below.
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Sorbitol % Change at Cmax
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Sorbitol AUC 1-12h
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NTproBNP is a prohormone released by the heart in response to the stretching of the LV or changes in LV pressure. NTproBNP is well accepted as a
blood-based biomarker of cardiac stress and function, and is used in the clinical setting to diagnose overt heart failure and acute myocardial infarction. Patients with early stage DbCM typically
display lower levels of NTproBNP than patients with overt heart failure, but higher levels than non-DbCM diabetic patients or healthy volunteers. In diabetic patients, the level of NTproBNP prior to
overt heart failure has been correlated with worsening cardiac outcomes over time. We hypothesized that by lowering the metabolic stress and damage to the heart caused by AR, AT-001 may affect
NTproBNP levels in early stage DbCM patients. We demonstrated that treatment with AT-001 at 1,500 mg BID or 1,000 mg TID lowered mean NTproBNP levels across the cohort of treated patients over the
28-day treatment period versus placebo or the ER tablet. As shown in the figure below, both BID and TID treatment regimens displayed similar effects on NTproBNP, suggesting that the two different
treatment regimens are similar in their effectiveness.
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Change in NTproBNP 0-28 Days
Additionally,
when NTproBNP levels were examined on an individual patient basis to assess the percent of patients that demonstrated a clinically meaningful reduction in NTproBNP, defined
as a reduction of >25 pg/mL, the BID and TID dose cohorts produced a greater percent of clinical responders versus placebo or ER tablet patients, as shown in the figure below.
AT-001 was well tolerated over 28 days at all doses and regimens tested. No serious adverse events or drug-related adverse events were
reported over the 28-day treatment period, and no clinically significant abnormal lab values were noted.
In preclinical toxicology studies in dogs and rats, AT-001 was observed to be well tolerated up to 2,000 mg/kg per day, the maximum dose tested.
No dose-limiting adverse effects or tolerability issues were observed. Additionally, no drug-related adverse effects were observed in hERG studies, micronucleus assays, Ames testing or any other
preclinical safety and toxicology studies required for
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IND
approval. Additionally, in vitro metabolism studies suggested that AT-001 is not significantly metabolized in hepatocytes and it does not inhibit cytochromes.
In
preclinical efficacy studies in diabetic and non-diabetic rats and mice, AT-001 was cardioprotective, preventing damage caused by ischemia in the left anterior descending ligation
model of cardiac damage. As shown in the figures below, AT-001 in both pre-treatment and post-ischemia dosing models prevented cardiac damage, as measured by ischemic area, hemodynamic endpoints and
biomarkers of heart damage.
AT-001 is Cardioprotective in Diabetic Models
Until recently, development in cardiovascular disease indications often required large outcome-based trials that examined survival and
re-hospitalization as primary endpoints. These trials were extremely large, expensive and time-consuming, and were often confounded by comorbidities in the patient population. As a result, very few
cardiovascular programs resulted in approved drugs. There has been a recent effort from the Division of Cardiovascular and Renal Products at the FDA, as well as at the European Medicines Agency, or
EMA, to streamline drug development for cardiovascular disease to increase the probability of demonstrating a meaningful clinical effect in patients. Specifically in cardiomyopathies, where there is a
direct functional link between hemodynamic endpoints, heart contractility and quality of life, there is a unique opportunity to demonstrate benefit of therapy in a smaller number of patients and
shorter treatment period than was previously required. Recent clinical development programs in hereditary cardiomyopathies have pioneered smaller trials examining exercise tolerance and/or heart
functional class as a primary endpoint. Based on this precedent, we plan to take a similar approach to development of AT-001 for the treatment of DbCM.
Consistent
with these developments, at our pre-IND meeting, the FDA indicated that we would not be required to examine survival and re-hospitalization endpoints, and confirmed that
exercise tolerance would qualify as an appropriate primary endpoint in our DbCM trial. This was also recently publicly confirmed by the FDA in a whitepaper entitled "Draft Guidance for Industry:
Treatment for Heart Failure: Endpoints for Drug Development." Accordingly, we designed our pivotal Phase 2/3 clinical trial to target functional capacity, or exercise tolerance, as measured by Peak
VO2 on Cardiopulmonary Exercise Testing (CPET) in DbCM patients at high risk of progression to overt heart failure. The primary endpoint in the trial will be stabilization or decrease in slope of
decline on functional capactity, as measured by peak VO2, the rate of oxygen consumption measured during exercise. We are also evaluating heart function by echocardiogram-based hemodynamic endpoints,
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progression
to overt heart failure, and quality of life, as well biomarkers of heart inflammation and damage.. This trial will consist of 675 patients in three cohorts of approximately 225 patients
each, including a placebo group, a low dose AT-001 group (1,000mg twice daily) and a high dose AT-001 group (1,500mg twice daily). The trial treatment period for evaluation of the primary endpoint
will be 15 months, with additional endpoints evaluated at 27 months. We plan to initiate this pivotal Phase 2/3 trial in 2019.
AT-001 for the Treatment of Diabetic Peripheral Neuropathy
We also intend to develop AT-001 for DPN, a debilitating neurodegenerative disease that significantly reduces patients' quality of life, and for
which there are currently no FDA-approved treatments. We expect this indication will require a standard clinical development path, and as such we plan to pursue a strategic partnership in order to
expand into this indication. Since many patients with DbCM also have DPN, we plan to collect proof-of-concept data through our DbCM program to support our efforts in our DPN program. We have included
a DPN sub-study in our pivotal DbCM study.
DPN is diagnosed by a simple neurological assessment, usually the Toronto Neuropathy Scoring System, which is administered in the physician's
office and examines a patient's ability to feel various types of neurological stimuli on the hands and feet. AR activity has been shown to cause DPN. Epalrestat, an ARI, is approved in Japan, China
and India to prevent further neuronal degeneration in DPN patients. However, there are no disease modifying therapies approved in the United States and Europe, and only symptomatic medications, such
as Lyrica, are approved for pain associated with DPN. Although epalrestat was approved in Japan in 1992 based on very limited clinical data that would not have been sufficient for other markets, more
recent academic studies have demonstrated an effect on MNCV and symptomatic pain endpoints in a wide range of diabetic patients. For example, a multicenter, three-year Phase 3 clinical trial
conducted in Japan on epalrestat 150 mg versus placebo demonstrated that epalrestat prevented progression of DPN in diabetic patients versus placebo. Epalrestat prevented degeneration of nerve
function, as measured by MNCV, and prevented worsening of symptomatic pain. A statistically significant effect was demonstrated in all patients regardless of low or high levels of glucose attached to
their hemoglobin, as tested by a hemoglobin A1C (HbA1C) test.
Epalrestat,
which is now generic in Japan, reached peak sales of approximately $226 million in 2001. This is indicative of its widespread use in the Japanese diabetic population,
which was approximately five million patients at the time of launch despite significant tolerability issues associated with use and five times daily dosing due to a very short half-life. We do not
believe, however, that it is likely to be a candidate for further commercialization. Nevertheless, prior research on epalrestat evinces the role of AR in DPN and provides a clinical trial design to
demonstrate efficacy in this indication.
Approximately 50% of the global diabetic population, or 226 million diabetic patients, suffer from DPN, with 23.0 million patients
in North America and 29.0 million patients in Europe. Due to availability of generic epalrestat in China and India, we view the opportunity in these two markets to be limited as a result of
pricing pressures and differentiation requirements with regard to epalrestat. However, we believe a significant market opportunity for a more effective ARI with a favorable dosing regimen still exists
in Japan, a less price sensitive market where there is familiarity with the mechanism
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of
action in the disease and use of epalrestat is high. As such, although we are currently focused on the U.S. market, we may expand our efforts into Japan opportunistically.
In preclinical studies, AT-001 demonstrated improvements in neuronal degeneration in animal models of DPN and provided good exposure to
peripheral nerve tissue, as measured by MNCV in sciatic and tail nerves of diabetic rats. As shown in the figures below, in a type 1 diabetic rat model of peripheral neuropathy, AT-001
treatment prevented peripheral neuronal damage, as measured by MNCV after six weeks of treatment with zopolrestat 30 mg/kg, epalrestat 15 mg/kg, AT-001 0.3 mg/kg, 3 mg/kg or 30 mg/kg, or placebo. The
diabetic rats treated with placebo demonstrated a reduction in nerve function as measured by MNCV versus non-diabetic wild-type, or WT, rats, confirming that the six weeks of diabetes duration caused
neuronal dysfunction. A dose-dependent reduction in neuronal dysfunction was observed in rats treated with AT-001, and treatment at 30 mg/kg of AT-001 completely prevented neuronal degeneration, with
no statistical difference from non-diabetic WT rats. Effects of treatment with AT-001 demonstrated a similar effect versus zopolrestat or epalrestat at lower doses, and an increased effect at higher
doses.
Induced Diabetic Rat Models (Six-Week Treatment)
In
a type 2 diabetic rat model, AT-001 demonstrated improvements in neuronal degeneration versus epalrestat. Zucker diabetic fatty, or ZDF, rats were treated with epalrestat 30
mg/kg, AT-001 1 mg/kg, 3
mg/kg or 10 mg/kg, or placebo for 12 weeks, and effects on neurons were measured by MNCV. The diabetic rats treated with placebo demonstrated a reduction in nerve function as measured by MNCV
versus non-diabetic WT rats, confirming that the 12 weeks of diabetes duration caused neuronal dysfunction. Treatment with AT-001 showed a dose-dependent reduction in neuronal dysfunction, and
treatment at 10 mg/kg completely prevented neuronal degeneration, with no statistical difference from non-diabetic WT rats. Effects of treatment with AT-001 demonstrated a similar effect versus
epalrestat at a varying dose of 30 mg/kg of epalrestat versus 3 mg/kg of AT-001, and an increased effect at 1/3 the dose of 30 mg/kg of epalrestat versus 10 mg/kg of AT-001.
Since many DbCM patients often also suffer from DPN, we have incorporated DPN endpoints, such as MNCV, as a sub-study into our DbCM pivotal
program to provide additional proof-of-concept for AT-001 in DPN. We plan to seek a strategic partnership to develop AT-001 for treatment of DPN and advance the program into Phase 3 clinical
trial for this indication.
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AT-007 for the Treatment of Galactosemia
We are developing AT-007, our CNS penetrant ARI product candidate, for the treatment of galactosemia, a devastating rare pediatric metabolic
disease that affects how the body processes a simple sugar called galactose, and for which there is no known cure or approved treatment available. High levels of galactose circulating in the blood and
tissues of galactosemia patients enable AR to convert galactose to a toxic metabolite, galactitol, which results in long-term complications ranging from CNS dysfunction to cataracts. AT-007 was
specifically designed to be a CNS penetrant to
address AR activity in the brain and potentially prevent CNS consequences of the disease. We believe galactosemia qualifies for accelerated approval under recently released draft FDA guidance for low
prevalence, slowly progressing rare metabolic diseases. The guidance allows for a biomarker-based development program if clinical efficacy and a link to a relevant biomarker can be demonstrated in an
animal model of disease. We have demonstrated that treatment with AT-007 in an animal model of galactosemia reduces toxic galactitol levels and prevents disease complications. Additionally, we believe
that pediatric galactosemia may qualify for the RPD-PRV program. In June 2019 we initiated a pivotal Phase 1/2 clinical study in healthy volunteers and adults with galactosemia examining safety,
pharmacokinetics and biomarker effects of AT-007.
Galactosemia is caused by severe deficiency in the GALK or GALT enzymes that metabolize galactose. Galactose is a sugar produced endogenously by
the body, and is also a metabolite of lactose. Galactosemia is often fatal in infants within the first weeks of life if they are exposed to dietary lactose in the form of breast milk or dairy-based
formula. As such, there is mandatory newborn screening for galactosemia in the United States and many countries in Europe. While prompt identification of infants with galactosemia and immediate
implementation of a lactose-restricted diet prevents many fatalities, long-term consequences of disease persist due to endogenous generation of galactose within the body. We are specifically
developing AT-007 for patients with severe enzyme deficiencies in GALK, which is referred to as type 2 galactosemia, and GALT, which is referred to as classic galactosemia. In these patients,
despite dietary restriction, galactosemia manifests as a combination of CNS and systemic toxicities in tissues, including cognitive dysfunction and intellectual deficiencies, speech and motor
pathologies, pre-senile cataracts and tremor, as well as ovarian insufficiency in females.
Unlike
severe forms of galactosemia, "clinical variant galactosemia" and "Duarte galactosemia" refer to partial reductions in various galactose metabolism enzymes; however, there does
not appear to be any clinical consequence, as remaining activity is sufficient to metabolize galactose within the body. Patients with clinical variant and Duarte galactosemia do not require any
intervention, in comparison to patients with severe GALK or GALT enzyme deficiencies.
There
are no treatments available for galactosemia, despite movement towards enzyme replacement therapy and gene editing and delivery technologies for many other rare diseases. This is
because the major tissue-specific effects of galactosemia are seen in neurons in the brain, and delivery of recombinant enzymes, as well as gene delivery and editing, are difficult to accomplish
across the blood-brain barrier and into neuronal cells, and current technologies have not yet been able to achieve therapeutic CNS delivery. Due to endogenous production of galactose within the body,
infants with galactosemia develop significant complications even with immediate implementation of, and strict adherence to, a dairy-free diet. CNS complications include cognitive impairment, low IQ,
speech and motor deficiencies, and infant or pediatric seizures. In addition, nearly all females develop ovarian insufficiency. Further to the damage that occurs in childhood, many adults also develop
persistent
cataracts, tremor and seizures, due to ongoing tissue deposition of galactitol in the eyes and peripheral nerves.
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AR Activity Causes Toxic Accumulation of Galactitol in Galactosemia
As
shown in the figure below, we believe that blocking AR activity shifts galactose metabolism to an alternative enzyme called galactose dehydrogenase, which allows galactose to be
metabolized to galactonate, a benign substance that is removed in the urine.
The global incidence of galactosemia is estimated to be 1 in 50,000 to 1 in 90,000, depending on ethnicity. However, we believe that the U.S.
galactosemia population is approximately 2,800 patients,
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based
on newborn screening data identifying 2,500 infants through 2014, and the estimated birth rate of 80 patients per year. Prior studies estimated that the U.S. galactosemia population was higher
based on the incidence rates, because they did not take into account that, prior to newborn screening, most infants with galactosemia died within a few weeks of birth. As a result, the disease
prevalence is significantly lower, and the live population with galactosemia is largely age 40 and younger.
A rat model of classic galactosemia, or GALT null, was recently developed at Emory University, and was shown to display similar levels of
galactose and metabolites in blood and tissues to that of galactosemia patients. These rats develop many of the long-term complications associated with galactosemia in humans, including bilateral
cataracts, as well as CNS deficiencies in
motor coordination, cognition and learning, as quantified by rotarod and water maze testing. Characteristics of this model, including cataracts and high levels of galactose, galactitol and Gal-1P in
blood and tissues such as liver and brain, are shown in the figure below.
Animal Model of GALT Deficiency
As
shown in the figures below, treatment with AT-007 in neonatal GALT null rats from day 1 to day 10 significantly reduced galactitol levels in target tissues, including blood, brain and
liver, without increasing galactose or Gal-1P levels, and prevented complications associated with galactitol accumulation in tissues, including cataract formation and CNS dysfunction. The effects of
AT-007 were dose dependent and corresponded with galactitol reduction. Rats treated with AT-007 also displayed
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reduced
galactonate levels, supporting our hypothesis that ARIs increase metabolism of galactose by galactonate dehydrogenase.
AT-007 Treatment Significantly Reduced Galactitol Levels in Liver, Brain and Plasma
Similar
reductions in galactitol were observed at day 22 and at five months. Additionally, AT-007 prevented cataract formation in newborn rats at day 10, day 22 (as shown in the figure
below) and at five months.
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AT-007 Treatment Prevented Cataract Formation in Newborn Rats
As
shown in the figures below, greater doses of AT-007 reduced galactitol levels and the severity of cataracts.
AT-007 Cataract Dose Response
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AT-007 Galactitol Reduction Dose Response
As
shown in the figure below, AT-007 reduced galactonate levels, which we believe supports our hypothesis that AR inhibition activates galactonate dehydrogenase.
AT-007 Reduced Galactonate Levels at Day 22
WT
and GALT null rats were treated daily with AT-007 for five months, beginning on the day after birth, and were tested for cognitive outcomes via rotarod and water maze testing.
Generally, rotarod tests both learning and motor coordination, while water maze tests intelligence and cognitive ability.
As
shown in the figure below, while galactosemic rats show deficits in learning and motor coordination versus WT rats, treatment with AT-007 was able to prevent these deficiencies and
normalize cognitive and motor function as measured by both rotarod and water maze testing.
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AT-007 Treatment Prevented CNS Deficits in GALT Null Rats (Rotarod Test and Water Maze)
We are currently evaluating AT-007 in a pivotal Phase 1/2 clinical trial in healthy volunteers and adults with galactosemia. Although
much of the CNS damage seen in adults may be permanent and irreversible, prevention of further damage to tissues that occurs throughout adult life, such as cataract formation and tremor, may provide
significant quality of life benefits to galactosemic adults. In pediatric studies we will seek to prevent any tissue damage from occurring, including neuronal damage in the brain that results in
cognitive, intellectual, speech and motor deficits in infants and children.
The
Phase 1 clinical trial is split into two partsPhase 1 in healthy volunteers and Phase 2 in adults with galactosemia. The Phase 1 portion in
healthy volunteers is designed as a SAD and MAD clinical trial in 24 to 32 healthy volunteers, 6 to 8 patients per cohort, with 2 patients receiving placebo. The Phase 1 evaluated safety,
tolerability and PK of AT-007 at doses 5mg/kg to 20mg/kg per day via once daily dosing. The MAD portion of the trial studied seven days of consecutive treatment at 5-20mg/kg per day. The
Phase 2 portion in adults with galactosemia is designed an adaptive trial in 12 to 18 patients, up to 6 patients per cohort. The Phase 2 portion is currently ongoing and is evaluating
safety, tolerability and PK in adult patients with galactosemia. Patients will receive either AT-007 or placebo, receiving a single dose four days prior to receiving 27 days of consecutive
dosing. Biomarker levels of galactose and galactose metabolites, including galactitol, will also be measured in these patients to determine target engagement and proof of biological activity. The FDA
has permitted us to use the same adult galactosemia patients for single and multiple dose exposure, due to the low prevalence of this condition and availability of patients for a clinical trial. If
favorable effects are demonstrated, an open label extension study examining safety and tolerability over longer dosing periods will be initiated in conjunction with availability of animal safety data.
The
FDA recently released draft guidance for industry on development of drugs for low prevalence (< 5,000 U.S. patients), slowly progressing rare diseases. Based on
feedback from the FDA at our pre-IND meeting, we believe that galactosemia may qualify as such a disease, permitting an accelerated approval under the new guidance based upon examining surrogate
metabolite biomarkers, such as galactitol, rather than clinical endpoints. We will seek to conduct a Phase 1 clinical trial in adults with galactosemia, where safety, tolerability and PK can be
explored in conjunction with effects on galactitol levels in various tissues. Pending the successful outcome of the adult trial, we then intend to conduct an additional clinical trial in a pediatric
population to determine appropriate dosing to achieve similar exposures to those seen in the adult biomarker study. Based on discussions with the FDA, we plan to transition from adults directly into
children ages two to six, followed by infants ages
one month to two years. Due to the early role of endogenous galactose production and resulting galactitol levels on
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neuronal
damage, there is an urgency to treat prior to damage occurring. We plan to move as quickly as possible in clinical development from adults to infants and young children. We believe that a
pediatric indication in galactosemia may qualify for the RPD-PRV program.
AT-003 for the Treatment of Diabetic Retinopathy
We are developing AT-003, an ARI designed to cross through the back of the eye when dosed orally, which has demonstrated strong retinal
penetrance, for the treatment of DR. DR is an ophthalmic disease that occurs in diabetic patients, and for which treatments are currently limited to intravitreal administration. DR has been linked to
AR activity, including elevations in sorbitol and subsequent changes in retinal blood vessels, which distorts vision and leads to permanent blindness. We are currently in late stages of preclinical
development and intend to advance AT-003 into a Phase 1 clinical trial for the treatment of DR in 2020.
DR is diagnosed by routine dilated eye exam by an ophthalmologist. Annual or biennial ophthalmic exams to screen for DR are a recommended
standard of care for diabetic patients under current treatment guidelines. Vascular endothelial growth factor, or VEGF, inhibitors, Lucentis (ranibizumab) and Eylea (aflibercept), are approved to
treat severe or late-stage DR, but are limited by
high cost, the need for intravitreal injection into the eye and the lack of therapeutic benefit in many patients. A need exists for safe, effective and tolerable treatments for DR early in the disease
process that provide a benefit to a wide range of patients. AR is an attractive target for DR drug development since AR activity is upstream of VEGF activity in DR pathogenesis. AR has been shown to
cause DR by inducing hyperosmolarity in retinal cells due to elevated sorbitol, as well as through fructose-mediated detrimental downstream effects, such as AGE generation and PKC activation. AR
knock-out rats are protected from DR development, and several prior ARIs demonstrated efficacy on DR endpoints in clinical trials, but were not approved due to dose-limiting safety concerns.
A recent retrospective epidemiological analysis of diabetic patients globally confirmed that DR affects approximately 35% of diabetics, and is a
leading cause of blindness worldwide. Based on the 2017 diabetes numbers, the global market for DR is approximately 158 million patients, with anticipated increase to 243 million by
2045. The current market is approximately 16.0 million in North America and 20.0 million in Europe.
AT-003 displayed significant retinal penetration when dosed orally in diabetic rats. AT-003 was observed to be well tolerated over a seven-day
dosing period in all doses tested, up to 1,000 mg/kg daily, with no adverse effects observed. Efficacy of AT-003 is currently being explored in two animal models of DRan ischemic injury
model (acute damage) and chronic diabetic treatment model.
Similar to AT-001, we plan to explore the safety, tolerability, PK profile and biomarker effects of AT-003 in a Phase 1a/1b clinical
trial in diabetic patients. Assuming positive data in this trial, we plan to initiate a pivotal Phase 2/3 clinical trial of AT-003 in patients with DR to prevent disease progression versus
placebo, as measured by subjective metrics, including fluoroscein angiography and optical coherence tomography, which are scans used in the examination and management of retinal diseases.
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Our Early-Stage PI3K Program
PI3 kinkases are a family of membrane-based enzymes containing a catalytic subunit that exists in four different isoforms: alpha, beta, delta
and gamma. PI3K triggers a signaling cascade that regulates cell proliferation and survival, and is constitutively activated in many tumor cell lines. Prior PI3K inhibitors were nonselective for
subunit inhibition, and were plagued by tolerability and safety issues, such as hepatic toxicity, severe diarrhea and colitis, hyperglycemia and hypertension, which are believed to be due to
inhibition of the alpha and beta subunits. Selective inhibition of certain PI3K subunits may be advantageous in targeting tumor cells and maximizing response, while avoiding dose-limiting side effects
and tolerability issues. Using similar strategies to our ARI program, we have developed highly selective PI3K inhibitors that target the delta subunit, as well as dual delta/gamma selectivity.
AT-104 for the Treatment of Orphan Hematological Oncology
We expect to initially target orphan hematological oncology indications, including peripheral T-cell lymphoma, cutaneous T-cell lymphoma and
T-cell acute lymphoblastic leukemia. We plan to initiate our clinical program in these indications in 2021. We are additionally developing selective alpha/gamma inhibitors to target solid tumors that
constitutively express PI3K alpha.
Exclusive License Agreement with Columbia University
On October 26, 2016, we entered into a license agreement with Columbia University (the "2016 Columbia Agreement"). Pursuant to the 2016
Columbia Agreement, Columbia University granted us a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in
each case to develop, manufacture, and
commercialize ARI products, including AT-001, AT-003 and AT-007. The license grant is worldwide with the exception of a single patent family covering AT-001 and AT-003 for which the license grant
excludes China, Taiwan, Hong Kong and Macao. Under the 2016 Columbia Agreement, we are obligated to use commercially reasonable efforts to research, discover, develop and market licensed products for
commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined time periods. Columbia University retains the
right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology; provided that such
research is not funded by a commercial entity or for-profit entity or results in rights granted to a commercial or for-profit entity. As the technology licensed to us under the 2016 Columbia Agreement
was developed as a result of a U.S. government grant, the licenses granted to us under the agreement are subject to the terms of such grant, and to standard rights of the U.S. government under the
Bayh-Dole Act, including the grant to the government of a non-exclusive, worldwide, freedom to operate license under any patents, and the requirement, absent a waiver, to manufacture products
substantially in the United States.
As
consideration for entering into the 2016 Columbia Agreement, we made a nominal upfront payment to Columbia University and, following the occurrence of certain trigger events, issued
to Columbia University shares equal to 5% of our outstanding common stock on a fully diluted basis at the time of issuance. We will be required to make further payments to Columbia University of up to
an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of
aggregate annual net sales, in each case in connection with products covered by the 2016 Columbia Agreement. We will also be required to pay tiered royalties to Columbia University in the low- to
mid-single digit percentages on our, our affiliates' and our sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, we are required to make specified
annual minimum royalty payments to Columbia University in the mid six figures beginning on the 10th anniversary of the effective date of the agreement. As of the date of this prospectus, we
have not granted any sublicenses under the 2016 Columbia Agreement. However, if we sublicense the rights granted under the 2016 Columbia
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Agreement
to one or more third parties, we will be required to pay to Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and
20%, depending on the stage of development at the time such revenue is received from such third parties.
Columbia
University is responsible for the prosecution and maintenance of the licensed patents, in consultation with us, and subject to a requirement to give due consideration to our
comments, at our expense. We have the first right, but not the obligation, to control the enforcement of licensed patents exclusively licensed to us against third parties. We are required to indemnify
Columbia University for any third-party claims that arise from or relate to the 2016 Columbia Agreement.
The
2016 Columbia Agreement will terminate upon the expiration of all our royalty payment obligations in all countries. We may terminate the 2016 Columbia Agreement for convenience upon
90 days' written notice to Columbia University. At its election, Columbia University may terminate the 2016 Columbia Agreement, or convert the licenses granted to us into non-exclusive,
non-sublicensable licenses, in the case of (a) our uncured material breach upon 30 days' written notice (which shall be extended to 90 days if we are diligently attempting to cure
such material breach), (b) our failure to achieve the specified development and funding milestone events, or (c) our insolvency.
In
March 2019, and in connection with the 2016 Columbia Agreement, the Company entered into a research services agreement (the "2019 Columbia Research Agreement" and collectively with
the 2016 Columbia Agreement and 2019 Columbia Agreement, the "Columbia Agreements") with Columbia University with the purpose of analyzing structural and functional changes in brain tissue in an
animal model of galactosemia, and the effects of certain compounds whose intellectual property rights were licensed to the Company as part of the 2016 Columbia Agreement on any such structural and
functional changes. The 2019 Columbia Research Agreement has a term of 12 months from its effective date; provided that the Company can terminate
the 2019 Columbia Research Agreement without cause with at least 30 days' prior written notice. The services covered by the 2019 Columbia Research Agreement will be performed by Columbia
University in two parts consisting of six months. The decision to proceed with Part 2 of the 2019 Columbia Research Agreement shall be made solely by the Company and will be contingent on the
success of the research performed in Part 1. In consideration for the services performed by Columbia University in Part 1, the Company will be required to pay $0.1 million to
Columbia University for staffing, supplies and indirect costs. If the Company decides to continue the research defined in Part 2, the Company will be required to pay an additional
$0.2 million to Columbia University.
Sales and Marketing
Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We intend to build a
commercial infrastructure to support sales of our product candidates in the United States. We expect to manage sales, marketing and distribution through internal resources and third-party
relationships. While we may commit significant financial and management resources to commercial activities, we will also consider collaborating with one or more pharmaceutical companies to enhance our
commercial capabilities. Outside the United States, we plan to seek pharmaceutical partners for sales and marketing activities.
Manufacturing
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We depend on third-party contract
manufacturing organizations, or CMOs, for
all of our requirements of raw materials, drug substance and drug product for our preclinical research and our clinical trials for AT-001, AT-007 and AT-003. We have not entered into long-term
agreements with our current CMOs. We intend to continue to rely on CMOs for later-stage development and commercialization of our current products, as well as the development and commercialization of
any other product candidates that we may identify. Although we rely on CMOs, we have personnel and third-party consultants with extensive manufacturing experience to oversee the relationships with our
contract manufacturers.
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We believe the synthesis of the drug substance for AT-001 and AT-007 are reliable and reproducible from readily available starting materials, and the synthetic
routes are amenable to large-scale production and do not require unusual equipment or handling in the manufacturing process. We have obtained adequate supplies of the drug substance for AT-001 and
AT-007 to satisfy our immediate clinical and preclinical demands.
Drug
product formulation development for AT-001 is in progress. We have contracted with a third-party manufacturer capable of both formulation development and drug product manufacturing
through commercialization. We may identify a second drug product manufacturer in the future to add additional capacity and redundancy to our supply chain. In our completed Phase 1 SAD/MAD
clinical trial of AT-001, we developed and utilized a rapid release capsule formulation filled with API powder. AT-007 is dosed as a powder in a capsule for adult treatment, and we will develop a dose
suspension formulation for future pediatric treatment.
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary
products. While we believe that our technology, the expertise of our executive and scientific team, research, clinical capabilities, development experience and scientific knowledge provide us with
competitive advantages, we face potential competition from many different sources, including pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and
private research institutions. Product candidates that we successfully develop and commercialize may compete with existing therapies and new therapies that may become available in the future.
Our
competitors may have significantly greater financial resources, established presence in the market, expertise in research and development, manufacturing, preclinical and clinical
testing, obtaining regulatory approvals and reimbursement and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific, sales,
marketing and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our
programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
There
are currently no therapies approved to treat DbCM. Entresto, a drug developed by Novartis International AG, or Novartis, is approved for acute heart failure, which can be caused by
many conditions, including DbCM. However, we are aware that Novartis may be pursuing a label expansion for earlier treatment of generalized heart failure, which may overlap with our target disease
stages in DbCM. Additionally, sponsors of sodium-glucose cotransporter-2, or SGLT2, inhibitors are pursuing broad cardiovascular labels in type 2 diabetes patients, which may include a subset
of DbCM patients as part of the larger diabetic population at risk for heart failure. We are also aware of planned Phase 2 clinical trials on glucagon-like peptide-1, or GLP-1, agonists in
DbCM, as well as anti-fibrotic therapies in Phase 1 clinical development. Many of these programs are sponsored by large pharmaceutical companies with a strong presence in cardiology and
metabolic disease. Additionally, stem-cell targeted initiatives are in various stages of preclinical and early clinical development to stimulate regeneration of cardiac tissue to counter fibrosis in
DbCM. There have been prior studies demonstrating effectiveness in DbCM of off-label use of sildenafil, although we do not believe this represents a commercially viable competitive threat.
There
are no disease modifying therapies approved to treat DPN outside of Japan, India and China. In these limited markets, epalrestat, another ARI, is approved to prevent worsening of
DPN, and despite challenges in compliance due to frequent dosing three to five times daily, the drugs are generic and offer a low cost alternative. A more effective therapy with improved tolerability
and dosing
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may
offer an advantage. A re-formulation of proprietary crystalline epalrestat, BNV-222, is in development for DPN in Russia in a 12-month Phase 2/3 clinical trial, which completed enrollment in 2016,
but has not yet reported any results.
There
are currently no therapies approved to treat galactosemia. Due to the importance of GALK and GALT enzymes within neurons in the CNS, we believe that enzyme replacement therapy is
not an effective approach in this indication. Additionally, numerous mutations across ethnicities are responsible for loss of function in GALK or GALT, which presents significant challenges to
potential gene editing approaches.
There
are several therapies approved to treat severe or late-stage forms of DR, or proliferative DR, such as diabetic macular edema and proliferative DR, including anti-VEGF therapies,
Lucentis and Eylea, which represents approximately 20% of the larger DR population. There are currently no therapies approved to treat non-proliferative DR, an earlier stage of the disease upstream of
vessel or capillary proliferation. However, there are significant additional clinical development efforts for other mechanistic interventions in early-stage or for non-proliferative DR.
The
following table summarizes the current competitive landscape for our initial target indications:
|
|
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|
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Disease
|
|
Product Type
|
|
Stage of Development
|
DbCM
|
|
Entresto (sacubitril/valsartan)
|
|
Approved for late stages of generalized cardiac heart failure; may pursue earlier stages of heart failure that may overlap with
DbCM
|
|
|
SGLT2 inhibitors
|
|
Approved for glucose control with additional label claiming cardiovascular benefit in diabetics; may achieve specific label in DbCM in
future studies
|
|
|
GLP-1 agonists
|
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Approved; additional studies examining direct CV benefit in DbCM anticipated
|
|
|
Anti-fibrotic therapies
|
|
Preclinical to Phase 1; may prevent collagen cross-linking and B-catenin remodeling
|
DPN
|
|
Epalrestat (ARI);
|
|
Approved as a generic in Japan, China and India
|
|
|
BNV-22 epalrestat reformulation
|
|
Attempt to reformulate as a novel product in Russia in Phase 2/3 trial (no information available since 2016)
|
Galactosemia
|
|
|
|
None identified
|
DR
|
|
Anti-VEGFs (Lucentis; Eylea)
|
|
Approved for proliferative forms of DRonly 20% of DR population
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|
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Other mechanisms
|
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Phase 2a development for non-proliferative DR
|
Intellectual Property
Our intellectual property is critical to our business and we strive to protect it, including by obtaining and maintaining patent protection in
the United States and internationally for our product candidates, new therapeutic approaches and potential indications, and other inventions that are important to our business. Our policy is to seek
to protect our proprietary and intellectual property position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements
that are important for the development and implementation of our business. We also rely on the skills, knowledge and experience of our scientific and technical personnel, as well as that of our
advisors, consultants and other contractors. To help protect our proprietary know-how that is not patentable, we rely on confidentiality agreements to protect our interests. We require our employees,
consultants and advisors to enter into confidentiality agreements
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prohibiting
the disclosure of confidential information and requiring disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
Our
patent portfolio includes patents and patent applications that are exclusively licensed from Columbia University and patent applications that are owned by us. Our patent portfolio
includes patents and patent applications that cover our product candidates AT-001, AT-003, AT-007 and AT-104, and the use of these candidates for therapeutic purposes. Our proprietary technology has
been developed primarily through relationships with academic research centers and contract research organizations.
For
our product candidates, we will, in general, initially pursue patent protection covering compositions of matter and methods of use. Throughout the development of our product
candidates, we seek to identify additional means of obtaining patent protection that would potentially enhance commercial success, including through additional methods of use, process of making,
formulation and dosing regimen-related claims.
In
total, our patent portfolio, including patents licensed from Columbia University, comprises seven different patent families, filed in various jurisdictions worldwide, including
families directed to composition of matter for AR inhibitors, and a family directed to methods of treating galactosemia and complications associated with galactosemia using AR inhibitors. Our patent
portfolio includes issued
patents in the United States, Europe, Japan, Australia and Canada. Our patent portfolio is outlined below:
Composition of Matter Patents
AT-001 and AT-003. As of April 1, 2019, we have exclusively licensed from Columbia University a patent family that includes 3
issued patents
in the United States, 25 issued patents in Europe, Japan, Canada and Australia, 2 pending applications in the United States, and a pending application in Europe that claim the composition of matter of
and certain methods of use with respect to AT-001 and AT-003. The 20-year term of the patents in this family runs through July 2031, absent any available patent term adjustments or extensions.
AT-007. We have exclusively licensed a patent family from Columbia University that includes an issued composition of matter patent in
the United
States and a pending European patent application that claim the composition of matter of and certain methods of use with respect to AT-007. In addition, we have also filed applications in Japan,
China, Canada, Australia, Russia, Brazil, India, Israel, Mexico, New Zealand, Singapore and South Africa. The 20-year term of patents in this family runs through June 2037, absent any available patent
term adjustments or extensions.
AT-104. We have exclusively licensed an early-stage patent family from Columbia University that currently includes one pending
international patent
application filed under the Patent Cooperation Treaty, or PCT, that claims the composition of matter of and certain methods of use with respect to AT-104. We intend to file national phase applications
based on this PCT application before applicable deadlines. The 20-year term of any patents in this family that may issue will run through July 2038, absent any available patent term adjustments or
extensions.
Methods for Treating Galactosemia
We own a pending PCT patent application that claims methods for treating galactosemia and preventing complications associated with galactosemia
using AT-007 and other inhibitors of AR. We plan to file national stage applications in the United States, Europe and other jurisdictions before the deadlines to file such applications. No patents
have issued to date, but we expect that the 20-year term of patents that do issue in this family will run through July 2038, absent any available patent term adjustments or extensions.
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We
expect to file future patent applications on innovations that are developed in the course of advancing our pipeline through preclinical and clinical development.
Patent Term and Term Extensions
Individual patents have terms for varying periods depending on the date of filing of the patent application or the date of patent issuance and
the legal term of patents in the countries in which they are obtained. Generally, utility patents issued for applications filed in the United States are granted a term of 20 years from the
earliest effective filing date of a non-provisional patent application. In addition, in certain instances, the term of a U.S. patent can be extended to recapture a portion of the United States Patent
and Trademark Office, or the USPTO, delay in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the
restoration period cannot be longer than five years and the restoration period cannot extend the patent term beyond 14 years from FDA approval. In addition, only one patent applicable to an
approved drug is eligible for the extension, and only those claims covering the approved drug, a method for using it, or a method of manufacturing may be extended. The duration of foreign patents
varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. All taxes, annuities or maintenance fees for a patent, as
required by the USPTO and various foreign jurisdictions, must be timely paid in order for the patent to remain in force during this period of time.
The
actual protection afforded by a patent may vary on a product by product basis, from country to country, and can depend upon many factors, including the type of patent, the scope of
its coverage, the availability of regulatory-related extensions and the availability of legal remedies in a particular country and the validity and enforceability of the patent.
Our
patents and patent applications may be subject to procedural or legal challenges by others. We may be unable to obtain, maintain and protect the intellectual property rights
necessary to conduct our business, and we may be subject to claims that we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For more
information, see the section titled "Risk FactorsRisks Related to Our Intellectual Property."
Trademarks and Know-How
In connection with the ongoing development and advancement of our products and services in the United States and various international
jurisdictions, we seek to create protection for our marks and enhance their value by pursuing trademarks and service marks where available and when appropriate. In addition to patent and trademark
protection, we rely upon know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, by using
confidentiality agreements with our commercial partners, collaborators, employees and consultants, and invention assignment agreements with our employees and consultants. These agreements are designed
to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed by our employees and through relationships with
third parties. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by
competitors. To the extent that our contractors, commercial partners, collaborators, employees, and consultants use intellectual property owned by others in their work for us, disputes may arise as to
the rights in related or resulting know-how and inventions. For more information, see the section titled "Risk FactorsRisks Related to Our Intellectual Property."
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Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local levels, and in other countries, extensively regulate, among other
things, the research, development, testing, manufacture, pricing, quality control, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of
pharmaceutical products, such as those we are developing. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with
applicable statutes and regulations, require the expenditure of substantial time and financial resources.
United States Government Regulation
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The
process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and
financial resources. Failure to comply with the applicable United States requirements at any time during the drug development process, approval process or after approval, may subject an applicant to
delays and a variety of administrative or judicial sanctions, such as the FDA's refusal to approve a pending New Drug Application, or NDA, withdrawal of an approval, imposition of a clinical hold,
issuance of warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,
restitution, disgorgement or civil or criminal penalties.
The
process required by the FDA before a drug may be marketed in the United States generally involves:
-
-
completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA's good laboratory practice, or
GLP, regulations;
-
-
submission to the FDA of an IND, which must become effective before human clinical trials may begin;
-
-
approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated;
-
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performance of adequate and well-controlled clinical trials, in accordance with good clinical practice, or GCP, requirements to establish the
safety and efficacy of the proposed drug for each indication;
-
-
submission to the FDA of an NDA;
-
-
satisfactory completion of an FDA advisory committee review, if applicable;
-
-
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance
with cGMP requirements, and to assure that the facilities, methods and controls are adequate to preserve the drug's identity, strength, quality and purity;
-
-
satisfactory completion of an FDA inspection of selected clinical sites to assure compliance with GCPs and the integrity of the clinical data;
-
-
payment of user fees; and
-
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FDA review and approval of the NDA.
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Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential
safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, among
other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA,
unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold or a partial clinical hold.
In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA
allowing clinical trials to commence.
Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in
accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are
conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and
approve the plan for any clinical trial before it commences at that institution, and the IRB must continue to oversee the clinical trial while it is being conducted and reapprove the study at least
annually. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their ClinicalTrials.gov
website.
Human
clinical trials are typically conducted in three sequential phases, which may overlap or be combined. In Phase 1, the drug is initially introduced into healthy human
subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an initial indication of
its effectiveness. In Phase 2, the drug typically is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy
of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. In Phase 3, the drug is administered to an expanded patient population, generally at
geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the safety and efficacy of the product for approval, to establish
the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.
Progress
reports detailing the results of the clinical trials must be submitted, at least annually, to the FDA, and more frequently if serious adverse events occur. Phase 1,
Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical
trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. In addition, IND safety reports must be submitted to the FDA for
any of the following: serious and unexpected suspected adverse reactions, findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product,
and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Similarly, an IRB can suspend or terminate approval
of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB's requirements, or if the drug has been associated with unexpected serious harm to
patients.
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Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed
information relating to the product's chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product
for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently
in effect, the FDA has a goal of ten months from the date of "filing" of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes 12 months
from the date the NDA is submitted to the FDA because the FDA has approximately two months to make a "filing" decision. The FDA may further
extend the review process for three additional months to consider new information provided by the applicant to address any outstanding deficiency identified by the FDA following the original
submission.
In
addition, under the Pediatric Research Equity Act, certain NDAs or supplements to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the
claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its
own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from
the pediatric data requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.
The
FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh its risks. The REMS plan could include
medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such as restricted distribution methods, patient registries or other risk minimization tools.
The
FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete
to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The
resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an
NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the
product's continued safety, quality and purity.
The
FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts,
that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee,
but it considers such recommendations carefully when making decisions.
Before
approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. These pre-approval inspections may cover all facilities associated
with an NDA submission, including component manufacturing, finished product manufacturing and control testing laboratories. The FDA will not approve an application unless it determines that the
manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before
approving an NDA, the FDA will typically inspect one or more clinical trial sites to assure compliance with GCP requirements.
The
testing and approval process for an NDA requires substantial time, effort and financial resources, and takes several years to complete. Data obtained from preclinical and clinical
testing are
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not
always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval of an NDA on a timely basis, or at all.
After
evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical
trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in
order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA's satisfaction, the FDA
will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even
if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product
labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug's safety after approval, require testing and surveillance programs to
monitor the product after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the
potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval,
some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and
approval.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is a disease
or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000, there is no reasonable expectation that sales of the drug in the United States will
be sufficient to offset the costs of developing and making the drug available in the United States. Orphan drug designation must be
requested before submitting an NDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
If
the FDA approves a sponsor's marketing application for a designated orphan drug for use in the rare disease or condition for which it was designated, the sponsor is eligible for a
seven-year period of marketing exclusivity, during which the FDA may not approve another sponsor's marketing application for a drug with the same active moiety and intended for the same use or
indication as the approved orphan drug, except in limited circumstances, such as if a subsequent sponsor demonstrates its product is clinically superior. During a sponsor's orphan drug exclusivity
period, competitors, however, may receive approval for drugs with different active moieties for the same indication as the approved orphan drug, or for drugs with the same active moiety as the
approved orphan drug, but for different indications. Orphan drug exclusivity could block the approval of one of our products for seven years if a competitor obtains approval for a drug with the same
active moiety intended for the same indication before we do, unless we are able to demonstrate that grounds for withdrawal of the orphan drug exclusivity exist, such as that our product is clinically
superior. Further, if a designated orphan drug receives marketing approval for an indication broader than the rare disease or condition for which it received orphan drug designation, it may not be
entitled to exclusivity.
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The FDA has various programs, including fast track designation, priority review, accelerated approval and breakthrough therapy designation,
which are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and
demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
To
be eligible for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life-threatening disease or
condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or
provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors. The FDA may review sections of the NDA for a fast track product on a rolling basis before
the complete application is submitted. The FDA may do so if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines
that the schedule is
acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.
The
FDA may give a priority review designation to drugs that are designed to treat serious conditions, and if approved, would provide a significant improvement in treatment, or provide a
treatment where no adequate therapy exists. A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA
guidelines. Under the current PDUFA agreement, these six and ten-month review periods are measured from the "filing" date rather than the receipt date for NDAs for new molecular entities, which
typically adds approximately two months to the timeline for review and decision from the date of submission. Most products that are eligible for fast track designation are also likely to be considered
appropriate to receive a priority review.
Rare
pediatric disease, or RPD, designation by the FDA enables priority review voucher, or PRV, eligibility upon U.S. market approval of a designated drug for rare pediatric diseases.
The RPD-PRV program is intended to encourage development of therapies to prevent and treat rare pediatric diseases. The voucher, which is awarded upon NDA or Biologics License Application, or BLA,
approval to the sponsor of a designated RPD can be sold or transferred to another entity and used by the holder to receive priority review for a future NDA or BLA submission, which reduces the FDA
review time of such future submission from ten to six months.
In
addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing
treatments may be eligible for accelerated approval. To qualify, the FDA must determine that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical
benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other
clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require a
sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and
the drug may be subject to accelerated withdrawal procedures.
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Breakthrough therapy designation is for a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and
review of an application for approval of a breakthrough therapy.
Even
if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period
for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates as appropriate.
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among
other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After
approval, most changes to the approved product, such as adding new indications, manufacturing changes or other labeling claims, are subject to further testing requirements and prior FDA review and
approval. There also are continuing annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as application fees for supplemental
applications with clinical data.
Even
if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product
labeling, including a boxed warning, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug's safety after approval, require testing and
surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms under a REMS, which can
materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance
programs.
In
addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state
agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and
often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements
upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality
control to maintain cGMP compliance.
The
FDA may also subject a drug to official lot release, which requires manufacturers to submit several items to the FDA with respect to each lot of a drug before it is released to
distribution. These items include samples of each lot, a summary of the manufacturing history of the lot and the results of any tests performed on the lot.
Once
an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches
the market.
Later
discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with
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regulatory
requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or
imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
-
-
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
-
-
fines, warning letters or holds on post-approval clinical trials;
-
-
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals;
-
-
product seizure or detention, or refusal to permit the import or export of products; or
-
-
injunctions or the imposition of civil or criminal penalties.
The
FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in
accordance with the provisions of the approved label, although physicians, in the practice of medicine, may prescribe approved drugs for unapproved indications. The FDA and other agencies actively
enforce the laws and regulations prohibiting their promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal and
administrative liability.
In
addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug
samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription
pharmaceutical product samples and impose requirements to ensure accountability in distribution.
Federal and State Fraud and Abuse, Data Privacy and Security, and Transparency Laws and Regulations
In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws and regulations restrict business
practices in the biopharmaceutical industry. These laws may impact, among other things, our current and future business operations, including our clinical research activities, and proposed sales,
marketing and education programs and constrain the business or financial arrangements and relationships with healthcare providers and other parties through which we market, sell and distribute our
products for which we obtain marketing approval. These laws include anti-kickback and false claims laws and regulations, data privacy and security, and transparency laws and regulations, including,
without limitation, those laws described below.
The
federal Anti-Kickback Statute prohibits any person or entity from, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in
return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare
programs. The term "remuneration" has been broadly interpreted to include anything of value. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common
activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or
recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of
an arrangement
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involving
remuneration is to induce referrals of federal healthcare covered business, the statute has been violated.
A
person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act or
the civil monetary penalties laws.
Federal
civil and criminal false claims laws and civil monetary penalties laws, including the federal civil False Claims Act, which can be enforced by individuals through civil
whistleblower and qui tam actions, prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, a false claim for payment to the federal government or
knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes "any request or demand" for money
or property presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies' marketing of
products for unapproved, and thus non-reimbursable, uses.
The
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among other things, knowingly and willfully
executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have similar fraud and abuse statutes
or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
In
addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health
Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementing regulations, impose specified requirements on certain types of individuals and entities
relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA's security standards directly applicable to "business
associates," defined as independent contractors or agents of covered entities, which include certain healthcare providers, healthcare clearinghouses and health plans, that create, receive, maintain or
transmit individually identifiable health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be
imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to
enforce HIPAA and seek attorney's
fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which are not pre-empted
by HIPAA, differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
The
federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or
the Children's Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers
of value made to physicians and teaching hospitals, and applicable manufacturers and applicable group
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purchasing
organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members.
We
may also be subject to state laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance
guidance promulgated by the federal government, state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare
providers or marketing expenditures, and state and local laws that require the registration of pharmaceutical sales representatives.
Because
of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities could be
subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that
apply to us, we may be subject to significant criminal, civil and administrative penalties including damages, fines, individual imprisonment, additional reporting requirements and oversight if we
become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future
earnings, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations, any of which could adversely affect our ability to
operate our business and our results of operations. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include,
for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, implementation of corporate compliance programs, reporting of payments or transfers of
value to healthcare professionals, and additional data privacy and security requirements.
The future commercial success of our product candidates, if approved, will depend in part on the extent to which third-party payors, such as
governmental payor programs at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payors, provide coverage of and establish adequate
reimbursement levels for our product candidates. Third-party payors generally decide which products they will pay for and establish reimbursement levels for those products. In particular, in the
United States, no uniform policy for coverage and reimbursement exists. Private health insurers and other third-party payors often provide coverage and reimbursement for products based on the level at
which the government, through the Medicare program, provides coverage and reimbursement for such products, but also on their own methods and approval process apart from Medicare determinations.
Therefore, coverage and reimbursement can differ significantly from payor to payor.
In
the United States, the European Union, or EU, and other potentially significant markets for our product candidates, government authorities and third-party payors are increasingly
attempting to limit or regulate the price of products, particularly for new and innovative products, which often has resulted in average selling prices lower than they would otherwise be. Further, the
increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the EU will put additional pressure on product pricing, reimbursement
and usage. These pressures can arise from rules and practices of managed care groups, judicial decisions and laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical
coverage and reimbursement policies and pricing in general.
Third-party
payors are increasingly imposing additional requirements and restrictions on coverage and limiting reimbursement levels for products. For example, federal and state
governments reimburse products at varying rates generally below average wholesale price. These restrictions and limitations
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influence
the purchase of products. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a
particular indication. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of products, in addition to their safety and efficacy. We
may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our product candidates, in addition to the costs required to obtain the
FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor's decision to provide coverage for a product does not imply that an adequate reimbursement
rate will be approved. Adequate third-party payor reimbursement may not be available to enable us to
realize an appropriate return on our investment in product development. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement
for our product candidates, if approved, or exclusion of our product candidates from coverage and reimbursement. The cost containment measures that third-party payors and providers are instituting and
any healthcare reform could significantly reduce our revenues from the sale of any approved product candidates.
The United States and some foreign jurisdictions are considering enacting or have enacted a number of additional legislative and regulatory
proposals to change the healthcare system in ways that could affect our ability to sell our product candidates profitably, if approved. Among policy makers and payors in the United States and
elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States,
the pharmaceutical industry has been a particular focus of these efforts, which include major legislative initiatives to reduce the cost of care through changes in the healthcare system, including
limits on the pricing, coverage, and reimbursement of pharmaceutical and biopharmaceutical products, especially under government-funded healthcare programs, and increased governmental control of drug
pricing.
There
have been several U.S. government initiatives over the past few years to fund and incentivize certain comparative effectiveness research, including creation of the Patient-Centered
Outcomes Research Institute under the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the PPACA. It is also
possible that comparative effectiveness research demonstrating benefits in a competitor's product could adversely affect the sales of our product candidates.
The
PPACA became law in March 2010 and substantially changed the way healthcare is financed by third-party payors, and significantly impacts the U.S. pharmaceutical industry. Among other
measures that may have an impact on our business, the PPACA establishes an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic
agents; a new Medicare Part D coverage gap discount program; and a new formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program. Additionally, the PPACA
extends manufacturers' Medicaid rebate liability, expands eligibility criteria for Medicaid programs, and expands entities eligible for discounts under the Public Health Service Act. At this time, we
are unsure of the full impact that the PPACA will have on our business.
Since
its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA, as well as recent efforts by the Trump administration to repeal or replace
certain aspects of the PPACA, and we expect such challenges and amendments to continue. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the
implementation of
certain PPACA provisions or otherwise circumvent requirements for health insurance mandated by the PPACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all
or part of the PPACA. While Congress has not passed comprehensive repeal legislation, two bills
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affecting
the implementation of certain taxes under the PPACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or Tax Act, includes a provision that repealed, effective January 1,
2019, the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as
the "individual mandate." On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain PPACA-mandated
fees, including the so-called "Cadillac" tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the
medical device excise tax on nonexempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things, amended the PPACA, effective January 1, 2019, to increase from 50% to
70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as
the "donut hole." In July 2018, CMS published a final rule permitting further collections and payments to and from certain PPACA qualified health plans and health insurance issuers under the PPACA
adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. In December 2018, a U.S. District Court Judge in the
Northern District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the PPACA, and therefore, because it was repealed as part of the
Tax Act, the remaining provisions of the PPACA are invalid as well. While the Texas District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no
immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the PPACA will impact the PPACA.
In
addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, the President signed into law the Budget Control Act of 2011, as
amended, which, among other things, included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which began in 2013 and, following passage of subsequent legislation,
including the BBA, will continue through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was enacted which, among other things, reduced
Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further,
there has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices. Specifically, there have been several recent U.S.
Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and
manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, the Trump administration's budget proposal for fiscal year 2019 contains
further drug price
control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D plans to negotiate the price of
certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the
Trump administration released a "Blueprint" to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the
negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. The
U.S. Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measures and is implementing others under its existing authority. For
example, in September 2018, CMS announced that it will allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS
proposed a new rule that would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid,
to include in the advertisement the
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Wholesale
Acquisition Cost, or list price, of that drug or biological product. Although a number of these and other proposed measures will require authorization through additional legislation to
become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level,
legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints,
discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine which drugs and suppliers will be included in their healthcare
programs. These measures could reduce future demand for our products or put pressure on our pricing.
Additionally,
in May 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right to Try Act, was signed into law. The law,
among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing
investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded
access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.
Foreign Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other
countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our product candidates. For example, in the
EU, we must obtain authorization of a clinical trial application, or CTA, in each member state in which we intend to conduct a clinical trial. Whether or not we obtain FDA approval for a drug, we
would need to obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the drug in those countries. The
approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might
differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory
approval in one country may negatively impact the regulatory process in others.
Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently a party to
any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results or
financial condition.
Facilities
We lease the space for our principal executive offices in New York, New York, on a three-month basis. We believe that our facilities are
adequate to meet our current needs.
Employees
As of April 1, 2019, we had 10 full-time employees, seven of whom were primarily engaged in research and development activities. A total
of five employees have an M.D. or Ph.D. degree. None of our employees is represented by a labor union and we consider our employee relations to be good.
117
Table of Contents
Index to Financial Statements
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Applied Therapeutics, Inc.
We
have audited the accompanying balance sheets of Applied Therapeutics, Inc. (the Company) as of December 31, 2017 and 2018, the related statements of operations,
convertible preferred stock and
stockholders' deficit, and cash flows for each of the two years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2018, and the results of its operations and its cash flows for each of the two years in
the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has recurring losses from operations, will require additional capital to fund operations, and has stated that substantial doubt exists about the
Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness
of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
Ernst & Young LLP
We
have served as the Company's auditor since 2017.
New
York, New York
March 8, 2019, except for Note 12, as to which the date is April 29, 2019
F-2
Table of Contents
Applied Therapeutics, Inc.
Balance Sheets
(in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
|
|
Pro Forma
December 31,
2018
|
|
|
|
2017
|
|
2018
|
|
|
|
|
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,277
|
|
$
|
18,748
|
|
$
|
18,748
|
|
Prepaid expenses and other current assets
|
|
|
9
|
|
|
1,498
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,286
|
|
|
20,246
|
|
|
20,246
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
3,286
|
|
$
|
20,246
|
|
$
|
20,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
713
|
|
$
|
3,015
|
|
$
|
3,015
|
|
Accrued expenses and other current liabilities
|
|
|
280
|
|
|
1,413
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
993
|
|
|
4,428
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
993
|
|
|
4,428
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.0001 par value, 3,535,910 shares authorized at December 31, 2017 and 3,093,898 shares authorized at
December 31, 2018; 3,093,898 shares issued and outstanding at December 31, 2017 and 2018; liquidation preference of $7,000 at December 31, 2017 and 2018; 0 shares issued and outstanding, pro forma as of December 31, 2018
(unaudited)
|
|
|
6,254
|
|
|
6,254
|
|
|
|
|
Series B convertible preferred stock, $0.0001 par value; 0 and 7,790,052 shares authorized as of December 31, 2017 and 2018, respectively; 0 and
4,001,848 shares issued and outstanding as of December 31, 2017 and 2018, respectively; liquidation preference of $0 and $29,964 at December 31, 2017 and 2018, respectively; 0 shares issued and outstanding, pro forma as of December 31,
2018 (unaudited)
|
|
|
|
|
|
29,156
|
|
|
|
|
STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value, 11,049,720 and 20,441,982 shares authorized at December 31, 2017 and 2018, respectively; 5,458,450 and 5,513,531
shares issued and outstanding at December 31, 2017 and 2018, respectively; 12,609,277 shares issued and outstanding, pro forma as of December 31, 2018 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
775
|
|
|
1,665
|
|
|
37,075
|
|
Accumulated deficit
|
|
|
(4,736
|
)
|
|
(21,257
|
)
|
|
(21,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' (deficit) equity
|
|
|
(3,961
|
)
|
|
(19,592
|
)
|
|
15,818
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
$
|
3,286
|
|
$
|
20,246
|
|
$
|
20,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
F-3
Table of Contents
Applied Therapeutics, Inc.
Statements of Operations
(in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
2018
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
3,703
|
|
$
|
11,471
|
|
General and administrative
|
|
|
582
|
|
|
2,047
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,285
|
|
|
13,518
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(4,285
|
)
|
|
(13,518
|
)
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET:
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
3
|
|
|
(1,642
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
(221
|
)
|
Other expense
|
|
|
|
|
|
(1,140
|
)
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
3
|
|
|
(3,003
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,282
|
)
|
$
|
(16,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholdersbasic and diluted
|
|
$
|
(0.79
|
)
|
$
|
(3.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstandingbasic and diluted
|
|
|
5,406,513
|
|
|
5,483,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share attributable to common shareholdersbasic and diluted (unaudited)
|
|
|
|
|
$
|
(1.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average common stock outstandingbasic and diluted (unaudited)
|
|
|
|
|
|
9,163,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
F-4
Table of Contents
Applied Therapeutics, Inc.
Statement of Convertible Preferred Stock and Stockholders' (Deficit) Equity
(in thousands, except share and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
Preferred Stock
|
|
Series B
Convertible
Preferred Stock
|
|
|
|
Common Stock
Par value
$0.0001
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
January 1, 2017
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
4,972,373
|
|
$
|
|
|
$
|
41
|
|
$
|
(454
|
)
|
|
(413
|
)
|
Issuance of common stock in exchange for license
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,077
|
|
|
|
|
|
486
|
|
|
|
|
|
486
|
|
Issuance of Series A convertible preferred stock for cash, net of issuance costs of $746
|
|
|
3,093,898
|
|
|
6,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with the issuance of Series A convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
216
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
32
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,282
|
)
|
|
(4,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
3,093,898
|
|
$
|
6,254
|
|
|
|
|
|
|
|
|
|
|
5,458,450
|
|
$
|
|
|
$
|
775
|
|
$
|
(4,736
|
)
|
$
|
(3,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B convertible preferred stock for cash, net of issuance costs of $812
|
|
|
|
|
|
|
|
|
2,904,127
|
|
|
20,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B convertible preferred stock on extinguishment of convertible promissory notes
|
|
|
|
|
|
|
|
|
1,097,721
|
|
|
8,219
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
101
|
|
Issuance of common stock warrants in connection with the issuance of convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
|
|
242
|
|
Issuance of common stock warrants in connection with the issuance of Series B convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
228
|
|
Exercise of options for common stock issued under Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,081
|
|
|
|
|
|
47
|
|
|
|
|
|
47
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
272
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,521
|
)
|
|
(16,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2018
|
|
|
3,093,898
|
|
$
|
6,254
|
|
|
4,001,848
|
|
$
|
29,156
|
|
|
|
|
5,513,531
|
|
$
|
|
|
$
|
1,665
|
|
$
|
(21,257
|
)
|
$
|
(19,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
F-5
Table of Contents
Applied Therapeutics, Inc.
Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,282
|
)
|
$
|
(16,521
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
32
|
|
|
272
|
|
Issuance of common stock in exchange for license
|
|
|
486
|
|
|
|
|
Non-cash interest expense
|
|
|
|
|
|
1,642
|
|
Change in fair value of derivative liability
|
|
|
|
|
|
972
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
168
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
221
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(9
|
)
|
|
(1,179
|
)
|
Accounts payable
|
|
|
499
|
|
|
2,302
|
|
Accrued expenses and other current liabilities
|
|
|
79
|
|
|
941
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,195
|
)
|
|
(11,182
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from issuance of Series A convertible preferred stock, net of cash issuance costs of $530
|
|
|
6,470
|
|
|
|
|
Proceeds from issuance of Series B convertible preferred stock, net of cash issuance costs of $584
|
|
|
|
|
|
21,165
|
|
Proceeds from issuance of convertible promissory notes, net of cash issuance costs of $440
|
|
|
|
|
|
5,560
|
|
Payment of deferred offering costs
|
|
|
|
|
|
(119
|
)
|
Exercise of stock options for common stock under Equity Incentive Plan
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,470
|
|
|
26,653
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS:
|
|
|
3,275
|
|
|
15,471
|
|
Cash and cash equivalents at beginning of year
|
|
|
2
|
|
|
3,277
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,277
|
|
$
|
18,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
|
|
|
|
|
|
|
|
Issuance of warrants in connection with Series A convertible preferred stock
|
|
$
|
216
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with convertible promissory notes
|
|
$
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with Series B convertible preferred stock
|
|
$
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B convertible preferred stock upon extinguishment of convertible promissory notes
|
|
$
|
|
|
$
|
8,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability in connection with issuance of convertible promissory notes
|
|
$
|
|
|
$
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of convertible promissory notes
|
|
$
|
|
|
$
|
4,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of derivative liability in connection with extinguishment of convertible promissory notes
|
|
$
|
|
|
$
|
2,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred offering costs in accrued expenses
|
|
$
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Financial Statements are an integral part of these statements.
F-6
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Business
Applied Therapeutics, Inc. (the "Company") is a clinical-stage biopharmaceutical company developing a pipeline of novel product
candidates against validated molecular targets in indications of high unmet medical need. In particular, the Company is currently targeting treatments for cardiovascular disease, galactosemia and
diabetic complications.
The
Company was incorporated in Delaware on January 20, 2016 and is headquartered in New York, New York.
Going Concern
The Company has evaluated whether there are conditions and events considered in the aggregate that raise substantial doubt about the Company's
ability to continue as a going concern.
Through
December 31, 2018, the Company has primarily funded its operations with proceeds from the sale of convertible preferred stock (see Note 6). The Company has incurred
recurring losses from operations since its inception, including net losses of $4.3 million and $16.5 million for the years ended December 31, 2017 and December 31, 2018,
respectively, and has used cash in operations of $3.2 million and $11.2 million for the years ended December 31, 2017 and December 31, 2018, respectively. In addition, as
of December 31, 2018, the Company had an accumulated deficit of $21.3 million. The Company expects its operating losses and negative cash flows to continue into the foreseeable future as
it continues to develop, manufacture, and commercialize its product candidates.
The
Company is seeking to complete an initial public offering ("IPO") of its common stock. In the event the Company does not complete an IPO, and even after the completion of an IPO, the
Company expects to seek additional funding through private or public equity financings, debt financings, collaborations, or other strategic transactions. The Company may not be able to obtain funding
on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders.
If
the Company is unable to obtain funding, the Company will be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or
commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, there is no
assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
Based
on the operating losses incurred since inception, the expectation of continuing operating losses for the foreseeable future, and the need to raise additional capital to finance its
operations, the Company has concluded that there is substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
F-7
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical
studies and clinical trials, the need to obtain marketing approval for any product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its
product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and reliance on
third-party manufacturers.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Pro Forma Information
The accompanying unaudited pro forma balance sheet as of December 31, 2018 has been prepared to give effect, upon the closing of a
qualified IPO, to the conversion of all outstanding convertible preferred stock into 7,095,746 shares of common stock.
The
accompanying unaudited pro forma basic and diluted net loss per share attributable to common stockholders in the statements of operations for the year ended December 31, 2018
have been prepared
to give effect, upon the closing of a qualified IPO, to the conversion of all outstanding shares of convertible preferred stock into shares of common stock as of December 31, 2018.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in the statement of convertible preferred stock and
stockholders' (deficit) equity as a reduction of proceeds generated as a result of the offering.
Should
a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the statement of operations. The Company
recorded deferred offering costs of $0.3 million as of December 31, 2018 in prepaid expenses and other current assets.
Fair Value Measurements
Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried
at fair value are to be classified and disclosed in one of the following three levels
F-8
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of
the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1Quoted
prices in active markets for identical assets or liabilities.
Level 2Observable
inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in
markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3Unobservable
inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities,
including pricing models, discounted cash flow methodologies and similar techniques.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments, with an original maturity of three months or less, to be cash equivalents. The
Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts and does not believe it is
exposed to any significant credit risk on cash and cash equivalents.
Common Stock Valuation
The Company utilizes significant estimates and assumptions in determining the fair value of its common stock. The Company has utilized various
valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company
Equity Securities Issued as Compensation (the "Practice Aid"), to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions
that require the Company's judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, the prices at which the Company sold
shares of preferred stock, the superior rights and preferences of securities senior to the Company's common stock at the time of, and the likelihood of, achieving a liquidity event, such as an IPO or
sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.
Convertible Preferred Stock
The Company records shares of its convertible preferred stock at their respective fair values on the dates of issuance less issuance costs. The
Company classifies shares of its convertible preferred stock outside of stockholders' deficit when the redemption of such units or shares is outside the Company's control. The Company does not adjust
the carrying values of the convertible preferred units or convertible preferred stock to the liquidation preferences of such units or shares until such time as a deemed liquidation event is probable
of occurring.
Research and Development
The Company expenses all costs incurred in performing research and development activities. Research and development expenses include salaries
and other related costs, materials and supplies,
F-9
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
preclinical
expenses, manufacturing expenses, contract services and other outside expenses. As part of the process of preparing the financial statements, the Company is required to estimate their
accrued research and development expenses. The Company makes estimates of the accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at that
time. In addition, there may be instances in which payments made to the Company's vendors will exceed the level of services provided and result in a prepayment of the expense in which case such
amounts are reflected as prepaid expenses and other current assets. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be
expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company adjusts the accrual or the amount of prepaid expenses
accordingly. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other
current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
General and Administrative
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in
the Company's executive and finance functions. General and administrative expenses also include professional fees for legal, accounting, auditing, tax and consulting services; travel expenses; and
facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs.
Stock-Based Compensation
The Company accounts for its stock-based compensation as expense in the statements of operations based on the awards' grant date fair values.
The Company accounts for forfeitures as they occur by reversing any expense recognized for unvested awards.
The
Company estimates the fair value of options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires inputs based on certain subjective
assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected
dividends. Due to the lack of a public market for the Company's common stock and a lack of company-specific historical and implied volatility data, the Company has based its estimate of expected
volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term
assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product
development and life science industry focus. The Company uses the simplified method as allowed by the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107,
Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the
expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as
the Company has never paid dividends and has no current plans to pay any dividends on its common stock.
F-10
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period.
Income Taxes
The Company uses the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at currently enacted tax rates. These
temporary differences primarily relate to net operating loss carryforwards available to offset future taxable income. Valuation allowances are established, if necessary, to reduce a deferred tax asset
to the amount that will more likely than not be realized.
The
Company recognizes tax liabilities from an uncertain tax position only if it is more likely than not that the tax position will not be sustained upon examination by the taxing
authorities, based on the technical merits of the tax position. There are no uncertain tax positions that have been recognized in the accompanying financial statements. The Company is required to file
tax returns in the U.S. federal jurisdiction and in the state of New York. The Company's policy is to recognize interest and penalties related to uncertain tax benefits, if any, as part of income tax
expense. No such interest and penalties have been accrued as of December 31, 2017 and 2018.
Net Loss per Share and Unaudited Pro Forma Net Loss per Share
Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted-average common stock outstanding.
Diluted net loss per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities, including outstanding warrants and the effect of shares issuable
under the Company's stock-based compensation plan, if such effect is dilutive.
Unaudited
pro forma net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding after giving effect to the
conversion of all outstanding convertible preferred stock into shares of common stock as if such conversion had occurred at January 1, 2018, or the date of original issuance, if later.
Segment Information
Operating segments are defined as components of an enterprise for which separate discrete information is available for evaluation by the chief
operating decision-maker in deciding how to allocate resources and assess performance. The Company and the Company's chief operating decision-maker, the Company's chief executive officer, views the
Company's operations and manages its business as a single operating segment, which is the business of discovering and developing its product candidates.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606) ("ASU No. 2014-09"), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification
("ASC") (ASC Topic 606, Revenue from Contracts with Customers), the current guidance found in ASC Topic 605, and various other revenue
accounting standards for specialized transactions and industries. ASU
F-11
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
No. 2014-09
outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of Effective Date ("ASU No. 2015-14"), which defers the effective date of ASU
No. 2014-09 by one year. Early adoption is permitted for annual periods beginning after December 15, 2016. To date, the Company has not had any arrangements that are within the scope of
ASU No. 2014-09, or its predecessor, ASC Topic 605. The Company adopted these pronouncements on January 1, 2017, which did not have any impact on the Company's financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"),
which simplifies share-based payment accounting through a variety of amendments. The Company elected to early adopt this guidance effective January 1, 2016, and has
elected to account for forfeitures as incurred and therefore no forfeiture estimate is utilized in the year ended December 31, 2017. Adoption of ASU No. 2016-09 did not have a material
impact on the Company's financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, CompensationStock Compensation (Topic 718): Scope of Modification
Accounting ("ASU No. 2017-09"), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new
guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or
conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted
ASU No. 2017-09 as of January 1, 2018, which did not have a material impact on the Company's financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, CompensationStock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting ("ASU No. 2018-07"). These amendments expand the scope of Topic 718, CompensationStock
Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the
accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, EquityEquity-Based
Payments to Non-Employees. This standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years, with early adoption permitted as long as ASU No. 2014-09 has been adopted by the Company. The Company adopted ASU No. 2018-07 as of January 1, 2017, which did not
have a material impact on the Company's financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which
requires lessees to recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 also requires improved disclosures to help users of financial statements better
understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods
within that reporting period. Early adoption is permitted. The
F-12
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Company
is currently evaluating the impact the adoption of ASU 2016-02 will have on its financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair
Value Measurement. which, eliminates, modifies, and adds disclosure requirements on fair value measurements. The standard is effective for annual periods beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its
financial statements.
2. LICENSE AGREEMENT
Columbia University
In October 2016, the Company entered into a license agreement (the "Columbia Agreement") with The Trustees of Columbia University in the City of
New York ("Columbia University"). Pursuant to the Columbia Agreement, Columbia University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain
patents, and non-exclusive with respect to certain know-how, in each case to develop, manufacture and commercialize aldose reductase inhibitor products, including AT-001, AT-003 and AT-007. The
license grant is worldwide with the exception of a single patent family covering AT-001 and AT-003 for which the license grant excludes
China, Taiwan, Hong Kong and Macao. Under the Columbia Agreement, the Company is obligated to use commercially reasonable efforts to research, discover, develop and market licensed products for
commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined time periods. Columbia University retains the
right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology, provided that such research is not funded by a commercial entity or
for-profit entity or results in rights granted to a commercial or for-profit entity.
As
consideration for entering into the Columbia Agreement, the Company made a nominal upfront payment to Columbia University and, following the occurrence of certain trigger events,
issued to Columbia University shares equal to 5% of its outstanding common stock on a fully diluted basis at the time of issue. The common stock had a fair value of $0.5 million, which was
recognized as research and development expense for the year ended December 31, 2017. The Company will be required to make further payments to Columbia University of up to an aggregate of
$1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual
net sales, in each case in connection with products covered by the Columbia Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit
percentages on the Company's, its affiliates' and its sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified
annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed products, in the mid six figures beginning on the 10th anniversary of the effective
date of the Columbia Agreement. The Company has not granted any sublicenses under the Columbia Agreement. However, if the Company sublicenses the rights granted under the Columbia Agreement to one or
more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from
F-13
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
2. LICENSE AGREEMENT (Continued)
such
third parties, at percentages between 10% and 20%, depending on the stage of development at the time such revenue is received from such third parties.
The
Columbia Agreement will terminate upon the expiration of all the Company's royalty payment obligations in all countries. The Company may terminate the Columbia Agreement for
convenience upon 90 days' written notice to Columbia University. At its election, Columbia University may terminate the Columbia Agreement, or convert the licenses granted to the Company into
non-exclusive, non-sublicensable licenses, in the case of (a) the Company's uncured material breach upon 30 days' written notice (which shall be extended to 90 days if the Company
is diligently attempting to cure such material breach), (b) the Company's failure to achieve the specified development and funding milestone events, or (c) the Company's insolvency.
The
Company recorded research and development expense related to the Columbia Agreement of $0.6 million and $0.5 million for the years ended December 31, 2017 and
2018, respectively, and $1.4 million from the execution of the Columbia Agreement through December 31, 2018.
Columbia
University is a related party as they have been issued shares of the Company's common stock. As of December 31, 2017, the Company had $0.2 million due to Columbia
University included in accrued expenses and $0.1 million included in accounts payable. As of December 31, 2018, the Company had $0.1 million due to Columbia University included in
accrued expenses and $0.1 million included in accounts payable.
3. FAIR VALUE MEASUREMENTS
During the year ended December 31, 2018, the Company had level 3 financial liabilities that were measured at fair value on a recurring basis that were no longer outstanding
as of December 31, 2018. There were no transfers between fair value hierarchy levels during the year ended December 31, 2018. There were no financial assets and liabilities measured at
fair value on a recurring basis as of December 31, 2017.
Derivative Liability
The Company's convertible promissory notes issued on February 5, 2018 (the "2018 Notes") (see Note 4), contained certain features
which met the criteria to be bifurcated and accounted for separately from the 2018 Notes (the "Derivative Liability"). The Derivative Liability was recorded at fair value of $1.9 million upon
the issuance of the 2018 Notes and was subsequently remeasured at fair value at each reporting period and immediately before extinguishment. Changes in
the fair value of the Derivative Liability were recognized as a component of other income (expense), net in the statement of operations.
The
Derivative Liability was initially valued and remeasured using a "with-and-without" method. The "with-and-without" methodology involves valuing the whole instrument on an as-is basis
and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded
derivative is the fair value of the derivative, recorded as the Derivative Liability. The Derivative Liability is settled when the underlying debt instrument is settled either through conversion or
extinguishment into equity at a variable price, which is a redemption feature, or held to maturity. In November 2018, the Derivative Liability was settled in connection with the extinguishment of the
2018 Notes.
F-14
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
Warrant Liability
In connection with the issuance of the 2018 Notes, the Company had a contingent obligation to issue common stock warrants ("2018 Notes
Warrants") upon the conversion of the 2018 Notes into Series B convertible preferred stock ("Series B Preferred Stock") (see Note 6 and Note 7). As the obligation to issue
the 2018 Notes Warrants was not initially for a fixed number of warrants, it was recorded as a liability (the "Warrant Liability") at fair value of $0.1 million upon the issuance of the 2018
Notes and was subsequently remeasured at fair value each reporting period and immediately before the 2018 Notes were extinguished. Changes in the fair value of the Warrant Liability were recognized in
other income (expense), net in the statement of operations. In November 2018, in connection with the conversion of the 2018 Notes into Series B Preferred Stock, the 2018 Notes Warrants were
issued and reclassified to equity.
The
2018 Notes Warrants were initially valued and remeasured using a Black-Scholes option pricing model with the range of assumptions as follows:
|
|
|
Contractual term (in years)
|
|
10.0
|
Volatility
|
|
74.48% - 76.56%
|
Risk-free interest rate
|
|
2.85% - 3.20%
|
Dividend yield
|
|
0.00%
|
The
following table provides a roll forward of the aggregate fair values of the Company's Derivative Liability and Warrant Liability, for which fair value is determined using
Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
Warrant
Liability
|
|
Balance as of January 1, 2018
|
|
$
|
|
|
$
|
|
|
Initial fair value of Derivative Liability
|
|
|
1,896
|
|
|
|
|
Initial fair value of Warrant Liability
|
|
|
|
|
|
74
|
|
Change in fair value
|
|
|
972
|
|
|
168
|
|
Extinguishment of Derivative Liability in connection with extinguishment of 2018 Notes
|
|
|
(2,868
|
)
|
|
|
|
Reclassification of Warrant Liability into 2018 Notes Warrants
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
inputs utilized by management to value the Derivative Liability and 2018 Notes Warrants are highly subjective. The assumptions used in calculating the fair value of the Derivative
Liability and 2018 Notes Warrants represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change
and the Company uses different assumptions, the fair value of the Derivative Liability and 2018 Notes Warrants may be materially different in the future.
4. CONVERTIBLE PROMISSORY NOTES
On February 5, 2018, the Company issued the 2018 Notes in the aggregate principal amount of $6.0 million. The 2018 Notes bore interest at a rate of 15.0% per annum, were
unsecured and were due
F-15
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
4. CONVERTIBLE PROMISSORY NOTES (Continued)
and
payable, including accrued interest, on August 8, 2019. In the event of a qualified sale of preferred stock to one or more investors resulting in gross proceeds to the Company of at least
$8.0 million, all principal and accrued and unpaid interest under the 2018 Notes was automatically convertible into a number of shares of the Company's preferred stock issued in such a
financing equal to the outstanding principal and accrued but unpaid interest under the 2018 Notes, divided by an amount equal to 80% of the lowest price per share of the preferred stock sold in the
financing. In the event of a corporate transaction or change of control event, the 2018 Notes contained a put option whereby the Company was required to pay to the holders of 2018 Notes an amount
equal to (i) the principal amount then outstanding under the 2018 Notes plus any accrued but unpaid interest, plus (ii) an amount equal to 30% of the outstanding principal amount.
The
terms of the 2018 Notes provided that (i) all outstanding principal and interest was due and payable in cash upon an event of acceleration, as defined in the 2018 Notes
agreement; (ii) amounts outstanding under the 2018 Notes were not prepayable without the written consent of the holders of more than 50% of the outstanding principal of the 2018 Notes, and in
addition to the balance the Company will prepay, the Company will also pay the noteholders an amount equal to 15% of the principal amount of the 2018 Notes that the Company is prepaying; and
(iii) with respect to subordination, the Company has no outstanding indebtedness for borrowed money or any other liabilities, other than accounts payable arrangements with vendors entered into
in the ordinary course of business and consistent with usual trade terms and will not issue or incur additional indebtedness for borrowed money while the 2018 Notes remain outstanding. There were no
financial or negative covenants associated with the 2018 Notes.
The
Derivative Liability represents the conversion feature in the event of a qualified financing and the put option, which each met the definition of an embedded derivative and were
required to be combined and accounted for as a separate unit of accounting. The Company recorded the issuance-date fair value of the Derivative Liability of $1.9 million as a debt discount and
Derivative Liability in the Company's balance sheet.
In
connection with the 2018 Notes, the Company paid legal costs and bank fees of $0.4 million and was obligated to issue the 2018 Notes Warrants (see Note 3 and
Note 7) with an initial fair value of $0.1 million, which were capitalized and recorded as a debt discount. The debt discount, which included legal costs, bank fees, the Derivative
Liability and 2018 Notes Warrants, was amortized using the effective interest method over the term of the loan. The Company recognized interest expense of $1.6 million, including amortization
of the debt discount of $0.9 million, during the year ended December 31, 2018 in connection with the 2018 Notes.
In
November 2018, in connection with the Company's issuance and sale of Series B Preferred Stock, all of the outstanding principal and accrued interest under the 2018 Notes,
totaling $6.6 million, was automatically converted into 1,097,721 shares of Series B Preferred Stock at a price equal to 80% of the $7.49 per share price paid by investors in the
Series B Preferred Stock financing.
The
Company accounted for the conversion of the 2018 Notes as a debt extinguishment and recognized a loss on extinguishment of debt of $0.2 million within other income (expense),
net in the Company's statement of operations and $0.1 million within additional paid-in-capital related to the amount of unpaid and accrued interest as of the extinguishment date that was not
converted into Series B Preferred Stock. The loss on extinguishment was calculated as the difference between (i) the fair value of the 1,097,721 shares of Series B convertible
preferred stock issued to settle the 2018 Notes
F-16
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
4. CONVERTIBLE PROMISSORY NOTES (Continued)
of
$8.2 million and (ii) the carrying value of the 2018 Notes, net of the unamortized debt discount, of $5.1 million plus the then-current fair value of the Derivative Liability
associated with the 2018 Notes at the time of the extinguishment of $2.9 million.
5. STOCK-BASED COMPENSATION
In 2016, the Company adopted, and its stockholders approved, the 2016 Equity Incentive Plan, as amended (the "2016 Plan"), which provides for the granting of options at the discretion of
the board of directors or any subcommittee of the Board to its employees, officers and independent contractors. Under the terms of the 2016 Plan, options may not be granted at an exercise price less
than fair market value of the Company's common stock on the date of the grant. As of December 31, 2017 and 2018, there were 1,345,469 shares and 2,966,241 shares, respectively, reserved by the
Company to grant under the 2016 Plan and an aggregate of 1,083,041 shares and 1,708,179 shares, respectively remained
available for future grants. Stock options awarded under the 2016 Plan expire 10 years after the grant and typically vest over three years.
Total
stock-based compensation expense recorded for employees, directors and non-employees during the years ended December 31, 2017 and 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2018
|
|
Research and development
|
|
$
|
|
|
$
|
140
|
|
General and administrative
|
|
|
32
|
|
|
132
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
32
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average fair value of options granted during the year ended December 31, 2017 and 2018 was $0.66 per share and $1.54 per share, respectively. As of
December 31, 2017 and 2018, the total unrecognized stock-based compensation balance for unvested options was $0.1 million and $1.3 million, respectively, which is expected to be
recognized over 2.1 years as of each date. The total fair value of options vested during the year ended December 31, 2017 and 2018 was less than $1,000 and approximately $40,000,
respectively.
The
following table summarizes the information about options outstanding at December 31, 2018 (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
262,427
|
|
$
|
0.90
|
|
|
9.09
|
|
$
|
27
|
|
Options granted
|
|
|
995,633
|
|
$
|
1.44
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(55,081
|
)
|
$
|
0.84
|
|
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,202,979
|
|
$
|
1.35
|
|
|
9.14
|
|
$
|
4,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
73,692
|
|
$
|
0.88
|
|
|
8.01
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2018
|
|
|
1,129,287
|
|
$
|
1.38
|
|
|
9.22
|
|
$
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
5. STOCK-BASED COMPENSATION (Continued)
Valuation Assumptions
The fair value of each option award granted is estimated on the date of the grant using the Black-Scholes option valuation model based on the
weighted average assumptions noted in the table below for those options granted in the years ended December 31, 2017 and 2018.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2018
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
5.9
|
|
Volatility
|
|
|
75.06%
|
|
|
71.78%
|
|
Risk-free interest rate
|
|
|
2.09%
|
|
|
2.71%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
0.00%
|
|
6. STOCKHOLDERS' EQUITY
As of December 31, 2018, the authorized capital stock of the Company consists of 20,441,982 shares of common stock, par value $0.0001 per share, and 10,883,950 shares of
convertible preferred stock, par value $0.0001 per share, of which 3,093,898 are designated as Series A convertible preferred stock ("Series A Preferred Stock") and 7,790,052 are
designated as Series B Preferred Stock (collectively, with the Series A Preferred Stock, the "Preferred Stock"). As of December 31, 2017, the Company had 5,458,450 shares of
common stock issued and outstanding and 3,093,898 shares of Series A Preferred Stock issued and outstanding. As of December 31, 2018, the Company had 5,513,531 shares of common
stock issued and outstanding, 3,093,898 shares of Series A Preferred Stock issued and outstanding and 4,001,848 shares of Series B Preferred Stock issued and outstanding.
Common Stock
In February 2017, the Company issued 486,077 shares of common stock, with a fair value of $0.5 million, as consideration pursuant to a
license agreement with Columbia University (see Note 2).
The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of the stockholders. There is no
cumulative voting.
Preferred Stock
In January 2017, the Company issued 3,093,898 shares of Series A Preferred Stock at $2.26 per share for gross proceeds of
$7.0 million. Issuance costs were $0.7 million, which included the issuance of warrants to purchase common stock (see Note 7).
Between
November and December 2018, the Company issued an aggregate of 2,904,127 shares of its Series B Preferred Stock at $7.49 per share for gross proceeds of
$21.7 million. Issuance costs were $0.8 million, which included the obligation to issue warrants to purchase common stock (see Note 7). In addition, all of the outstanding
principal and accrued interest under the 2018 Notes were automatically converted into an aggregate of 1,097,721 shares of its Series B Preferred Stock.
F-18
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
As of December 31, 2017 and 2018, Preferred Stock consisted of the following (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
Preferred
Stock
Authorized
|
|
Preferred
Stock Issued
and
Outstanding
|
|
Carrying
Value
|
|
Liquidation
Value
|
|
Common Stock
Issuable Upon
Conversion
|
|
Series A Preferred Stock
|
|
|
3,535,910
|
|
|
3,093,898
|
|
$
|
6,254
|
|
$
|
7,000
|
|
|
3,093,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,535,910
|
|
|
3,093,898
|
|
$
|
6,254
|
|
$
|
7,000
|
|
|
3,093,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Preferred
Stock
Authorized
|
|
Preferred
Stock
Issued and
Outstanding
|
|
Carrying
Value
|
|
Liquidation
Value
|
|
Common stock
Issuable Upon
Conversion
|
|
Series A Preferred Stock
|
|
|
3,093,898
|
|
|
3,093,898
|
|
$
|
6,254
|
|
$
|
7,000
|
|
|
3,093,898
|
|
Series B Preferred Stock
|
|
|
7,790,052
|
|
|
4,001,848
|
|
|
29,156
|
|
|
29,964
|
|
|
4,001,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,883,950
|
|
|
7,095,746
|
|
$
|
35,410
|
|
$
|
36,964
|
|
|
7,095,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a summary of the rights and privileges of the common and preferred stockholders as of December 31, 2018:
The holders of Preferred Stock have the right to one vote for each share of common stock into which such Preferred Stock could be converted and
will vote together with the holders of common stock as a single class.
Dividends are payable to holders of Preferred Stock prior to payment of any dividend to holders of common stock. Dividends are payable when and
if declared out of funds legally available and such dividends are not cumulative. In the event the board of directors of the Company declares a dividend payable on the common stock, the holders of the
Preferred Stock would be entitled to receive the amount of dividends per share of Preferred Stock that would be payable on the number of whole shares of the common stock into which each share of such
Preferred Stock held by each holder could be converted into.
In the event of any liquidation, dissolution or winding up of the Company, or a Deemed Liquidation Event (as defined below), the holders of
shares of Preferred Stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of
common stock by reason of their ownership thereof, in an amount per share equal to the greater of (i) the original issue price ($2.26 per share for Series A Preferred Stock and
$7.49 per share for Series B Preferred Stock) plus any dividends
declared but unpaid thereon or (ii) such amount per share as would have been payable had each series of Preferred
F-19
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
Stock
been converted into common stock immediately prior to a liquidation, dissolution or winding up of the Company or Deemed Liquidation Event. If upon any such liquidation, dissolution or winding up
of the Company or Deemed Liquidation Event, the proceeds shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled, the holders of shares of
Preferred Stock shall share ratably in any distribution of the proceeds in proportion to the respective amounts which would otherwise be payable in respect of the shares of Preferred Stock held by
them upon such distribution if all amounts payable with respect to such shares were paid in full. After the payment of all preferential amounts to be paid to the holders of shares of Preferred Stock,
the remaining proceeds shall be distributed among the holders of shares of common stock pro rata based on the number of shares held by each such holder.
A
Deemed Liquidation Event is defined as: (i) a merger where the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares
of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company
outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or
consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned
subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (ii) the sale, lease, transfer,
exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company
and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its
subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the
Company.
At any time when any shares of Preferred Stock remain outstanding, the Company shall not take any of the following actions without the vote or
written consent of the holders of a majority of the then outstanding shares of Preferred Stock separately as a class: (i) liquidate, dissolve or wind-up the business and affairs of the Company,
effect any merger, consolidation or any
other Deemed Liquidation Event, or consent to any of the foregoing, in each case other than in the event that such event would provide the holders of the Preferred Stock a return per each share of
Preferred Stock, including all distributions and dividends paid to such holders prior to such event by the Company, if any, of at least two (2) times the Series B Original Issue Price in
the twenty-four (24) months following the Series B Original Issue Date (November 5, 2018) or three (3) times the Series B Original Issue Price thereafter;
(ii) amend, alter, or repeal any provision of the Certificate of Incorporation or the Company's bylaws in a manner that adversely affects the powers, preferences or rights of the Preferred
Stock; (iii) create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock unless the same ranks junior to the Preferred
Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption, or increase the authorized number of
shares of Preferred Stock; (iv) purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or
F-20
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
6. STOCKHOLDERS' EQUITY (Continued)
declare
any dividend or make any distribution on, any shares of capital stock of the Company other than (a) redemptions of or dividends or distributions on the Preferred Stock as expressly
authorized herein, (b) dividends or other distributions payable on the common stock solely in the form of additional shares of common stock and (c) repurchases of stock from former
employees, officers, directors, consultants or other persons who performed services for the Company or any subsidiary in connection with the cessation of such employment or service at the lower of the
original purchase price or the then-current fair market value thereof; (v) create, or authorize the creation of, or issue, or authorize the issuance of any debt security, or permit any
subsidiary to take any such action with respect to any debt security, if the aggregate indebtedness of the Company and its subsidiaries for borrowed money following such action would exceed
$2.0 million other than equipment leases or bank lines of credit; (vi) create, or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more
other subsidiaries) by the Company, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Company, or permit any direct or indirect subsidiary to
sell, lease, transfer, exclusively license or otherwise dispose (in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary; or
(vi) increase or decrease the authorized number of directors of the Company.
Each share of Preferred Stock is convertible, at the option of the holder thereof, at any time and from time to time after issuance, and without
the payment of additional consideration into such number of fully paid and nonassessable shares of common stock as is determined by dividing the original issue price ($2.26 per share for
Series A Preferred Stock and $7.49 per share for Series B Preferred Stock) by the series conversion price ($2.26 per share for Series A Preferred Stock and $7.49
per share for Series B Preferred Stock) in effect at the time of conversion. As of December 31, 2018, the Preferred Stock is convertible in to common stock on a one-for-one basis.
All outstanding shares of Preferred Stock shall automatically be converted into shares of common stock, at the then effective conversion rate,
upon either (a) the closing of the sale of shares of common stock to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, resulting in at least $30.0 million of proceeds, net of the underwriting discount and commissions, to the Company, or (b) the date and time, or the
occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Preferred Stock.
The Preferred Stock is redeemable upon the occurrence of a Deemed Liquidation Event, which is not solely in control of the Company. Therefore,
the Preferred Stock has been classified as temporary equity.
F-21
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
7. WARRANTS
Warrants Issued with Series A Preferred Stock
On January 26, 2017, in connection with the sale and issuance of the Series A Preferred Stock, the Company issued
equity-classified warrants to purchase 309,389 shares of common stock (the "2017 Warrants"), valued at $0.2 million, and included in the issuance costs of the Series A Preferred Stock
(see Note 4). The warrants vested immediately and have an exercise price of $2.49 per share and expire on March 13, 2027.
The
fair value of warrants issued is estimated using the Black-Scholes option pricing model with the following assumptions for the 2017 Warrants.
|
|
|
|
|
Contractual term (in years)
|
|
|
10.0
|
|
Volatility
|
|
|
76.95
|
%
|
Risk-free interest rate
|
|
|
2.62
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Warrants Issued with the 2018 Notes
On January 18, 2018, the Company entered into a placement agent agreement through which it became obligated to issue common stock
warrants in connection with the issuance of the 2018 Notes. The obligation to issue the 2018 Notes Warrants was recorded as a liability at its fair value (see Note 3), which was initially
$0.1 million, and was included in the issuance costs of the 2018 Notes (see Note 4). On November 5, 2018, in connection with the extinguishment of the 2018 Notes into shares of
Series B Preferred Stock, the Company issued the 2018 Notes Warrants, which were equity-classified warrants upon issuance, to purchase 76,847 shares of common stock, valued at
$0.3 million. The 2018 Notes Warrants vested immediately upon issuance and have an exercise price of $6.59 per share and expire on November 4, 2028.
Warrants Issued with Series B Preferred Stock
In November and December 2018, in connection with the sale and issuance of the Series B Preferred Stock, the Company was obligated to
issue equity-classified warrants to purchase 72,261 shares of common stock (collectively the "2018 Warrants"), valued in the aggregate at $0.2 million, which was included in the issuance costs
for the Series B Preferred Stock (see Note 6). The warrants vest immediately upon issuance, have an exercise price of $8.24 per share and expire 10 years from the date of
issuance.
The
fair value of the 2018 Warrants is estimated using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
Contractual term (in years)
|
|
|
10.0
|
|
Volatility
|
|
|
74.48
|
%
|
Risk-free interest rate
|
|
|
3.20
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
The
inputs utilized by management to value the warrants are highly subjective. The assumptions used in calculating the fair value of the warrants represent the Company's best estimates,
but these estimates involve inherent uncertainties and the application of management judgment. As a result, if
F-22
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
7. WARRANTS (Continued)
factors
change and the Company uses different assumptions, the fair value of the warrants may be materially different in the future.
8. INCOME TAXES
The Company's current tax provision for the years ended December 31, 2017 and 2018 is $0 and $0, respectively. The Company's deferred tax provision for the years ended
December 31, 2017 and 2018 is $0.
Deferred
income tax assets and liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
335
|
|
$
|
|
|
Stock-based compensation
|
|
|
11
|
|
|
98
|
|
Capitalized startup costs
|
|
|
38
|
|
|
35
|
|
Net operating losses
|
|
|
1,200
|
|
|
6,176
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,584
|
|
|
6,309
|
|
Less: valuation allowance
|
|
|
(1,584
|
)
|
|
(6,309
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets result primarily from unutilized net operating losses, capitalized startup costs and timing differences as a result of the Company reporting its income tax returns.
As of December 31, 2018, the Company had approximately $3.6 million of federal and state net operating losses ("NOLs") carried forward expiring through 2037. Additionally, the Company
generated approximately $14.2 million of NOLs in 2018 which, for federal income tax purposes, do not expire but are limited to offsetting up to 80% of future taxable income.
The
NOL carry forwards are subject to review and possible adjustment by the U.S. and state tax authorities. NOL carry forwards may become subject to an annual limitation in the event of
certain cumulative changes in the ownership interest of significant shareholders, as defined under Sections 382 Internal Revenue Code. This could limit the amount of NOLs that the Company can utilize
annually to offset future taxable income or tax liabilities. As of December 31, 2018, the Company has not performed such an analysis. Subsequent ownership changes and proposed future changes to
tax rules in respect of the utilization of losses carried forward may further affect the limitation in future years.
In
assessing the realizability of the Company's deferred tax assets, management considers whether or not it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company's assessment is based on the weight of available evidence,
including cumulative losses since inception and expected future losses and, as such, the Company does not believe it is more likely than not that the deferred tax assets will be realized. Accordingly,
a full valuation allowance has been established and no deferred tax assets and related tax benefit have been recognized in the accompanying financial statements. At December 31, 2017 and 2018,
the Company recorded valuation allowances of $1.6 million and $6.3 million, respectively, representing an increase in the valuation
F-23
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
8. INCOME TAXES (Continued)
allowance
of $4.7 million in 2018 due to the uncertainty regarding the realization of such deferred tax assets, to offset the benefits of net operating losses generated during those years.
The
U.S. federal statutory corporate tax rate reconciles to the Company's effective tax rate for the years ended December 31, 2017 and 2018:
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
2018
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
21.0
|
%
|
State and local taxes net of federal tax benefit
|
|
|
11.3
|
|
|
13.5
|
|
Tax rate change
|
|
|
(13.8
|
)
|
|
0.3
|
|
Change in valuation allowance
|
|
|
(32.2
|
)
|
|
(28.5
|
)
|
Permanently disallowed interest expense
|
|
|
|
|
|
(6.3
|
)
|
Other
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
December 22, 2017, the United States enacted the Tax Cuts and Jobs Act ("Tax Act"), which made significant changes to the U.S. federal income tax law. The Tax Act affected 2018
and forward, including but not limited to a reduction in the federal corporate rate from 35.0% to 21.0%, elimination of the corporate alternative minimum tax, a new limitation on the deductibility of
certain executive compensation, limitations on NOLs generated after December 31, 2017 and various other items. These changes did not have a material impact on the Company's financial statements
due to the accumulated NOLs in the United States.
9. BENEFIT PLANS
The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code in 2018. This plan covers substantially all employees who meet
minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Matching contributions to the plan may be made at the discretion of the
Company's board of directors. The Company made approximately $11,000 in matching contributions to the plan during the year ended December 31, 2018.
10. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the
period.
Diluted
net loss per common share is computed by giving the effect of all potential shares of common stock, including stock options, preferred shares, warrants and instruments
convertible into common stock, to the extent dilutive. Basic and diluted net loss per common share was the same for the years ended December 2017 and 2018, as the inclusion of all potential common
shares outstanding would have been anti-dilutive.
F-24
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
10. NET LOSS PER COMMON SHARE (Continued)
The
following table sets forth the computation of basic and diluted net loss per common share (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,282
|
)
|
$
|
(16,521
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average common stock outstanding
|
|
|
5,406,513
|
|
|
5,483,149
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.79
|
)
|
$
|
(3.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's potential dilutive securities, which include Preferred Stock, stock options and warrants, have been excluded from the computation of diluted net loss per share as the
effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common
stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at December 31, 2017 and 2018, from the computation of diluted net
loss per share attributable to common stockholders because including them would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2018
|
|
Preferred Stock
|
|
|
3,093,898
|
|
|
7,095,746
|
|
Options to purchase common stock
|
|
|
262,427
|
|
|
1,202,979
|
|
Warrants to purchase common stock
|
|
|
309,389
|
|
|
458,497
|
|
Unaudited Pro Forma Net Loss Per Share
The unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2018 has
been prepared to give effect to adjustments arising upon the completion of a qualified IPO. The unaudited pro forma basic and diluted weighted-average common shares outstanding used in the calculation
of unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2018 has been prepared to give effect, upon a qualified IPO, to
the conversion of all outstanding shares of Preferred Stock into common stock as if the proposed IPO had occurred on the later of January 1, 2018 or the issuance date of the preferred stock.
F-25
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
10. NET LOSS PER COMMON SHARE (Continued)
Unaudited
pro forma basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
Year Ended December 31,
2018
|
|
|
|
(unaudited)
|
|
Numerator:
|
|
|
|
|
Net loss attributable to common stockholdersbasic and diluted
|
|
$
|
(16,521
|
)
|
|
|
|
|
|
Pro forma net loss attributable to common stockholdersbasic and diluted
|
|
$
|
(16,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted-average common stock outstandingbasic and diluted
|
|
|
5,483,149
|
|
Pro forma adjustment to reflect conversion of convertible preferred stock to common stock upon the completion of the proposed initial public
offering
|
|
|
3,679,938
|
|
|
|
|
|
|
Pro forma weighted-average common stock outstandingbasic and diluted
|
|
|
9,163,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share attributable to common stockholdersbasic and diluted
|
|
$
|
(1.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. RELATED PARTIES
In December 2018, the Company entered into an agreement (the "LaunchLabs Agreement") with ARE-LaunchLabs NYC LLC ("Alexandria LaunchLabs"), a subsidiary of Alexandria Real Estate
Equities, Inc. for use of specified premises within the Alexandria LaunchLabs space. A member of the Company's board of directors is the founder and executive chairman of Alexandria Real Estate
Equities, Inc. During the year ended December 31, 2018, the Company made payments to Alexandria LaunchLabs of approximately $13,000 under the LaunchLabs Agreement, which was recognized
in research and development expenses. As of December 31, 2018, there were no amounts due to Alexandria LaunchLabs under the LaunchLabs Agreement.
12. SUBSEQUENT EVENTS
Issuance of Series B Preferred Stock
In February 2019, the Company issued an aggregate of 442,925 shares of its Series B Preferred Stock to investors and certain members of
its board of directors at a price per share of $7.49 for proceeds of $3.1 million, net of issuance costs of $0.2 million. The rights and privileges of the Series B Preferred Stock
are the same as the rights and privileges of the Series B Preferred Stock issued in earlier closings. In connection with the Series B Preferred Stock issuance, the Company is obligated
to issue warrants to purchase shares of common stock to the placement agent.
F-26
Table of Contents
Applied Therapeutics, Inc.
Notes to the Financial Statements (Continued)
12. SUBSEQUENT EVENTS (Continued)
Columbia University
In January 2019, the Company entered into a license agreement with Columbia University ("2019 Columbia Agreement"). Pursuant to the 2019
Columbia Agreement, Columbia University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain
know-how, in each case to develop, manufacture and commercialize PI3K inhibitor products. As consideration, the Company made a nominal upfront payment to Columbia University. The Company will be
required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of
$1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2019 Columbia Agreement. The Company will also be
required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company's, its affiliates' and its sublicensees' net sales of licensed products, subject to
specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed
products, in the mid six figures beginning on the 10th anniversary of the effective date of the 2019 Columbia Agreement. If the Company sublicenses the rights granted under the 2019 Columbia
Agreement to one or more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from such sublicensees, at percentages ranging from 10% to
50%, depending on the passage of time or the stage of development of the applicable product at the time such revenue is received from such sublicenses.
In April 2019, the board of directors and the stockholders of the Company approved a 55.2486-for-1 forward stock split of the Company's
outstanding common stock and Preferred Stock, which was effected on April 26, 2019. Stockholders entitled to fractional shares as a result of the forward stock split will receive a cash payment
in lieu of receiving fractional shares. The Company's historical share and per share information has been retroactively adjusted to give effect to this forward stock split. Shares of common stock
underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were proportionately decreased
in accordance with the terms of the agreements governing such securities.
On April 22, 2019, the Board of Directors approved a modification to the vesting conditions of certain outstanding stock option grants to
certain employees and directors. The Company is evaluating the impact this modification will have to its 2019 financial statements.
F-27
Unaudited Condensed Financial Statements
Applied Therapeutics, Inc.
Condensed Balance Sheets
(in thousands, except share and per share
data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2019
|
|
As of
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,065
|
|
$
|
18,748
|
|
Prepaid expenses and other current assets
|
|
|
4,080
|
|
|
1,498
|
|
Investments
|
|
|
19,889
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
37,034
|
|
|
20,246
|
|
Other assets
|
|
|
230
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
37,264
|
|
$
|
20,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,688
|
|
|
3,015
|
|
Accrued expenses and other current liabilities
|
|
|
4,829
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,517
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,517
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.0001 par value; 0 shares and 3,093,898 shares authorized at September 30, 2019 and December 31,
2018, respectively; 0 shares and 3,093,898 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; liquidation preference of $0 and $7,000 at September 30, 2019 and December 31, 2018,
respectively
|
|
|
|
|
|
6,254
|
|
Series B convertible preferred stock, $0.0001 par value; 0 shares and 7,790,052 shares authorized as of September 30, 2019 and December 31,
2018, respectively; 0 shares and 4,001,848 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively; liquidation preference of $0 and $29,964 as of September 30, 2019 and December 31, 2018,
respectively
|
|
|
|
|
|
29,156
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value; 100,000,000 and 20,441,982 shares authorized as of September 30, 2019 and December 31, 2018, respectively;
17,134,190 shares and 5,513,531 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
|
|
|
1
|
|
|
|
|
Additional paid-in capital
|
|
|
79,872
|
|
|
1,665
|
|
Accumulated other comprehensive loss
|
|
|
11
|
|
|
|
|
Accumulated deficit
|
|
|
(49,137
|
)
|
|
(21,257
|
)
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
30,747
|
|
|
(19,592
|
)
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
37,264
|
|
$
|
20,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Condensed Financial Statements are an integral part of these statements.
F-28
Applied Therapeutics, Inc.
Condensed Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
7,453
|
|
$
|
2,726
|
|
$
|
18,582
|
|
$
|
6,111
|
|
General and administrative
|
|
|
3,294
|
|
|
598
|
|
|
9,331
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,747
|
|
|
3,324
|
|
|
27,913
|
|
|
7,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(10,747
|
)
|
|
(3,324
|
)
|
|
(27,913
|
)
|
|
(7,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
34
|
|
|
(584
|
)
|
|
33
|
|
|
(1,400
|
)
|
Other expense
|
|
|
|
|
|
(373
|
)
|
|
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
34
|
|
|
(957
|
)
|
|
33
|
|
|
(2,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,713
|
)
|
$
|
(4,281
|
)
|
$
|
(27,880
|
)
|
$
|
(9,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholdersbasic and diluted
|
|
$
|
(10,713
|
)
|
$
|
(4,281
|
)
|
$
|
(27,880
|
)
|
$
|
(9,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholdersbasic and diluted
|
|
$
|
(0.63
|
)
|
$
|
(0.78
|
)
|
$
|
(1.98
|
)
|
$
|
(1.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common stock outstandingbasic and diluted
|
|
|
17,095,870
|
|
|
5,497,871
|
|
|
14,085,579
|
|
|
5,473,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Condensed Financial Statements are an integral part of these statements.
F-29
Applied Therapeutics Inc.
Condensed Statement of Comprehensive Income
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net Loss
|
|
$
|
(10,713
|
)
|
$
|
(4,281
|
)
|
$
|
(27,880
|
)
|
$
|
(9,802
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities
|
|
|
11
|
|
|
|
|
|
11
|
|
|
|
|
Income tax related to unrealized gain or loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
11
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax
|
|
$
|
(10,702
|
)
|
$
|
(4,281
|
)
|
$
|
(27,869
|
)
|
$
|
(9,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Condensed Financial Statements are an integral part of these statements.
F-30
Applied Therapeutics, Inc.
Condensed Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity
(in thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
Preferred Stock
|
|
Series B
Convertible
Preferred Stock
|
|
|
|
Common Stock
$0.0001
Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
BALANCE, December 31, 2017
|
|
|
3,093,898
|
|
$
|
6,254
|
|
|
|
|
$
|
|
|
|
|
|
5,458,450
|
|
$
|
|
|
$
|
775
|
|
$
|
(4,736
|
)
|
$
|
|
|
$
|
(3,961
|
)
|
Issuance of common stock in exchange for license
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,335
|
)
|
|
|
|
|
(2,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2018
|
|
|
3,093,898
|
|
|
6,254
|
|
|
|
|
|
|
|
|
|
|
5,458,450
|
|
|
|
|
|
801
|
|
|
(7,071
|
)
|
|
|
|
|
(6,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for common stock issued under Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,171
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
9
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
76
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,185
|
)
|
|
|
|
|
(3,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2018
|
|
|
3,093,898
|
|
|
6,254
|
|
|
|
|
|
|
|
|
|
|
5,467,621
|
|
|
|
|
|
886
|
|
|
(10,256
|
)
|
|
|
|
|
(9,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for common stock issued under Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,739
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
28
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
78
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,281
|
)
|
|
|
|
|
(4,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2018
|
|
|
3,093,898
|
|
$
|
6,254
|
|
|
|
|
$
|
|
|
|
|
|
5,504,360
|
|
$
|
|
|
$
|
992
|
|
$
|
(14,537
|
)
|
$
|
|
|
$
|
(13,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Condensed Financial Statements are an integral part of these statements.
F-31
Applied Therapeutics, Inc.
Condensed Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity (Continued)
(in thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
Preferred Stock
|
|
Series B
Convertible
Preferred Stock
|
|
|
|
Common Stock
$0.0001
Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
BALANCE, December 31, 2018
|
|
|
3,093,898
|
|
$
|
6,254
|
|
|
4,001,848
|
|
$
|
29,156
|
|
|
|
|
5,513,531
|
|
$
|
|
|
$
|
1,665
|
|
$
|
(21,257
|
)
|
$
|
|
|
$
|
(19,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B convertible preferred stock for cash, net of issuance costs of $266
|
|
|
|
|
|
|
|
|
442,925
|
|
|
3,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with the issuance of Series B convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
80
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
325
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,730
|
)
|
|
|
|
|
(8,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2019
|
|
|
3,093,898
|
|
|
6,254
|
|
|
4,444,773
|
|
|
32,207
|
|
|
|
|
5,513,531
|
|
|
|
|
|
2,070
|
|
|
(29,987
|
)
|
|
|
|
|
(27,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series A convertible preferred stock into common stock upon closing of initial public offering
|
|
|
(3,093,898
|
)
|
|
(6,254
|
)
|
|
|
|
|
|
|
|
|
|
3,093,898
|
|
|
|
|
|
6,254
|
|
|
|
|
|
|
|
|
6,254
|
|
Conversion of Series B convertible preferred stock into common stock upon closing of initial public offering
|
|
|
|
|
|
|
|
|
(4,444,773
|
)
|
|
(32,207
|
)
|
|
|
|
4,444,773
|
|
|
|
|
|
32,207
|
|
|
|
|
|
|
|
|
32,207
|
|
Issuance of common stock upon initial public offering, net of issuance costs of $5,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
|
1
|
|
|
34,617
|
|
|
|
|
|
|
|
|
34,618
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,279
|
|
|
|
|
|
|
|
|
3,279
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,437
|
)
|
|
|
|
|
(8,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,052,202
|
|
|
1
|
|
|
78,427
|
|
|
(38,424
|
)
|
|
|
|
|
40,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for common stock issued under Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,988
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
226
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,219
|
|
|
|
|
|
|
|
|
1,219
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,713
|
)
|
|
|
|
|
(10,713
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2019
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
17,134,190
|
|
$
|
1
|
|
$
|
79,872
|
|
$
|
(49,137
|
)
|
$
|
11
|
|
$
|
30,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Notes to Condensed Financial Statements are an integral part of these statements.
F-32
Applied Therapeutics, Inc.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,880
|
)
|
$
|
(9,802
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
4,823
|
|
|
180
|
|
Non-cash interest expense
|
|
|
|
|
|
1,399
|
|
Payment of security deposit for long-term lease
|
|
|
(230
|
)
|
|
|
|
Change in fair value of derivative liability
|
|
|
|
|
|
809
|
|
Change in fair value of warrant liability
|
|
|
|
|
|
64
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(2,702
|
)
|
|
(1,097
|
)
|
Accounts payable
|
|
|
(1,327
|
)
|
|
1,833
|
|
Accrued expenses and other current liabilities
|
|
|
3,416
|
|
|
1,301
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(23,900
|
)
|
|
(5,313
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase of available-for-sale securities
|
|
|
(19,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from issuance of Series B convertible preferred stock, net of cash issuance costs of $186
|
|
|
3,131
|
|
|
|
|
Proceeds from issuance of convertible promissory notes, net of cash issuance costs of $440
|
|
|
|
|
|
5,560
|
|
Payment of offering costs
|
|
|
(2,463
|
)
|
|
|
|
Proceeds from the initial public offering, net of underwriter commissions
|
|
|
37,200
|
|
|
|
|
Exercise of stock options for common stock under Equity Incentive Plan
|
|
|
227
|
|
|
37
|
|
Net cash provided by financing activities
|
|
|
38,095
|
|
|
5,597
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(5,683
|
)
|
|
284
|
|
Cash and cash equivalents at beginning of period
|
|
|
18,748
|
|
|
3,277
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
13,065
|
|
$
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Issuance of warrants in connection with convertible promissory notes
|
|
$
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with Series B convertible preferred stock
|
|
$
|
80
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability in connection with issuance of convertible promissory notes
|
|
$
|
|
|
$
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred Stock to Equity Following IPO
|
|
$
|
38,461
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Notes to Condensed Financial Statements are an integral part of these statements.
F-33
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Business
Applied Therapeutics, Inc. (the "Company") is a clinical-stage biopharmaceutical company developing a pipeline of novel product
candidates against validated molecular targets in indications of high unmet medical need. In particular, the Company is currently targeting treatments for cardiovascular disease, galactosemia and
diabetic complications. The Company was incorporated in Delaware on January 20, 2016 and is headquartered in New York, New York.
On
May 16, 2019, the Company completed an initial public offering ("IPO") in which the Company issued and sold 4,000,000 shares of its common stock at a public offering price of
$10.00 per share, for aggregate gross proceeds of $40.0 million. The Company received net of proceeds $34.6 million, after deducting underwriting discounts and commissions and offering
costs. Prior to the completion of the IPO, the Company primarily funded its operations with proceeds from the sale of convertible preferred stock (see Note 8).
In
connection with the IPO, the Company effected a 55.2486-for-1 stock split of its issued and outstanding shares of common stock and convertible preferred stock. The stock split became
effective on April 26, 2019. Stockholders entitled to fractional shares as a result of the forward stock split received cash payment in lieu of receiving fractional shares. All share and per
share amounts for all periods presented in the accompanying condensed financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this stock split. Shares of
common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were
proportionately decreased in accordance with the terms of the agreements governing such securities.
Upon
the closing of the IPO on May 16, 2019, all of the then-outstanding shares of convertible preferred stock automatically converted into 7,538,671 shares of common stock on a
one-for-one basis. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.
The
accompanying unaudited condensed financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 have been prepared by
the Company in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto
for the year ended December 31, 2018 included in the Company's final prospectus that forms a part of the Company's Registration Statement on Form S-1 (Reg. No. 333-230838),
filed with the SEC pursuant to Rule 424(b)(4) on May 14, 2019 (the "Prospectus").
The
unaudited condensed financial statements have been prepared on the same basis as the audited financial statements. In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments which are necessary for a fair presentation of the Company's financial position as of September 30, 2019, results of operations for the three and
nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. Such adjustments are of a normal and recurring nature. The results of
operations for
F-34
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the
three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.
Liquidity
The Company has incurred, and expects to continue to incur, significant operating losses and negative cash flows for at least the next several
years as it continues to develop its drug candidates. To date, the Company has not generated any revenue, and it does not expect to generate revenue unless and until it successfully completes
development and obtains regulatory approval for one of its product candidates.
Management
believes that the Company's existing cash, together with the net proceeds from the IPO, will allow the Company to continue its operations for at least 12 months from
the issuance date of these financial statements. If the Company is unable to obtain additional funding, the Company will be forced to delay, reduce or eliminate some or all of its research and
development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although
management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations,
if at all.
Risks and Uncertainties
The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure of
preclinical studies and clinical trials, the need to obtain marketing approval for any product candidate that it may identify and develop, the need to successfully commercialize and gain market
acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations
and reliance on third-party manufacturers.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Significant Accounting Policies
The significant accounting policies and estimates used in preparation of the condensed financial statements are described in the Company's
audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company's
Prospectus. Except as detailed below, there have been no material changes to the Company's significant accounting policies during the nine months ended September 30, 2019.
F-35
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company accounts for its stock-based compensation as expense in the condensed statements of operations based on the awards' grant date fair
values. The Company accounts for forfeitures as they occur by reversing any expense recognized for unvested awards.
The
Company estimates the fair value of options granted using the Black-Scholes option pricing model with the exception of stock options that include service, performance and market
conditions, which are valued using the Monte-Carlo simulation model. The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected
stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. The Company has historically been a private
company and lacks company-specific historical and implied volatility information. Therefore, the Company estimates its expected stock volatility based on the historical volatility of a publicly traded
set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The historical volatility is
calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies
with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the simplified method as allowed by the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of
the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. A Monte-Carlo simulation
is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes from these trial runs based
on the specific vesting conditions.
The
fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period, with the exception of the fair value of
stock-based payments for awards that include service, performance and market conditions, which is recognized as expense over the derived service period determined using the Monte-Carlo simulation.
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in the statement of stockholders' (deficit) equity as
a reduction of proceeds generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating
expenses in the statement of operations.
Upon
closing the IPO in May 2019, $2.6 million in deferred offering costs were reclassified from prepaid and other current assets and recorded against the IPO proceeds reducing
additional paid-in capital. As of September 30, 2019, the Company did not have any deferred offering costs recorded in prepaid and other current assets.
F-36
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We have investments in marketable debt securities. We determine the appropriate classification of our investments at the date of purchase and
reevaluate the classifications at the balance sheet date. Marketable debt securities with maturities of 12 months or less are classified as short-term. Marketable debt securities with
maturities greater than 12 months are classified as long-term. The Company's marketable securities are accounted for as available for sale ("AFS"). AFS securities are reported at fair value.
Unrealized gains and losses, after applicable income taxes, are reported in accumulated other comprehensive income/(loss).
We
conduct an other-than-temporary impairment ("OTTI") analysis on a quarterly basis or more often if a potential loss-triggering event occurs. We consider factors such as the duration,
severity and the reason for the decline in value, the potential recovery period and whether we intend to sell. For AFS securities, we also consider whether (i) it is more likely than not that
we will be required to sell the debt securities before recovery of their amortized cost basis and (ii) the amortized cost basis cannot be recovered as a result of credit losses.
Recently Adopted Accounting Pronouncements
The new accounting pronouncements recently adopted by the Company are described in the Company's audited financial statements as of and for the
year ended December 31, 2018, and the notes thereto, which are included in the Company's Prospectus as filed with the SEC on May 14, 2019. Except as described below, there have been no
new accounting pronouncements adopted by the Company during the nine months ended September 30, 2019.
In
February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic
842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases on their balance sheet date ("ASU
No. 2016-02"). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018. In July 2018, an amendment was made that allows companies the option of using the
effective date of the new standard as the initial application date (at the beginning of the period in which the new standard is adopted, rather than at the beginning of the earliest comparative
period). This update includes a short-term lease exception for leases with a term of 12 months or less, in which a lessee can make an accounting policy election not to recognize the associated
lease assets and lease liabilities on its balance sheet. Additionally, in March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification
Improvements ("ASU No. 2019-01"). ASU No. 2019-01 clarifies the transition guidance related to interim disclosures provided in the year of adoption. Lessees will
continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance.
For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease did not significantly change from previous U.S. GAAP. The modified retrospective
method includes several optional practical expedients that entities may elect to apply, as well as transition guidance specific to nonstandard leasing transactions. The Company adopted Topic 842 on
January 1, 2019 using a cumulative-effect adjustment on the effective date of the standard, for which comparative periods are presented in accordance with the previous guidance under ASC 840.
In
adopting Topic 842, the Company elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not
require the
F-37
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reassessment
of the following: i) whether existing or expired arrangements are or contain a lease; ii) the lease classification of existing or expired leases; and iii) whether
previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company made an accounting
policy election not to recognize assets or related lease liabilities with a lease term of twelve months or less in its condensed balance sheet.
The
adoption of this standard did not have an impact on the Company's condensed balance sheet as all of the Company's leases are for terms that are less than 12 months.
Additionally, the adoption of this standard did not have a material impact on the Company's condensed statements of operations or condensed statement of cash flows. On August 6, 2019 the
Company entered into a lease for approximately 6,579 square feet of new office space in New York City (the "Lease"). The Lease will commence upon delivery of the premise after certain improvements are
made, which is anticipated to be on or about November 1, 2019 (the "Commencement Date"), for a five-year period. Under the Lease, the Company will pay monthly rent of approximately $38,000 for
the first year following the Commencement Date, and such rent will increase by a nominal percentage every year following the first anniversary of the Commencement Date. The Company will also pay a
real estate tax escalation, as additional rent, over a base year. Total lease obligation over the term of the lease will be approximately $2.4 million.
Recently Issued Accounting Pronouncements
The FASB issued authoritative guidance that amends guidance on reporting credit losses for assets, including available-for-sale marketable
securities and any other financial assets not excluded from the scope that have the contractual right to receive cash. For available-for-sale marketable securities, credit losses should be measured in
a manner similar to current generally accepted accounting standards; however, ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, will require that credit losses be presented as an allowance rather than as a write-down. We are currently in the process of evaluating the
impact of this guidance on our condensed financial statements.
2. LICENSE AGREEMENT
Columbia University
In October 2016, the Company entered into a license agreement (the "2016 Columbia Agreement") with the Trustees of Columbia University
("Columbia University") to obtain an exclusive royalty-bearing sublicensable license in respect to certain patents. As part of the consideration for entering into the 2016 Columbia Agreement, the
Company issued to Columbia University shares equal to 5% of its outstanding common stock on a fully diluted basis at the time of issue. The common stock had a fair value of $0.5 million at the
time of issuance. The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory
milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2016 Columbia
Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company's, its affiliates' and its sublicensees' net
sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University,
F-38
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
2. LICENSE AGREEMENT (Continued)
which
is contingent upon the approval of the licensed products, in the mid-six figures beginning on the 10th anniversary of the effective date of the 2016 Columbia Agreement. The Company has
not granted any sublicenses under the 2016 Columbia Agreement. However, if the Company sublicenses the rights granted under the 2016 Columbia Agreement to one or more third parties, it will be
required to pay
Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and 20%, depending on the stage of development at the time such revenue is
received from such third parties.
In
January 2019, the Company entered into a second license agreement with Columbia University (the "2019 Columbia Agreement"). Pursuant to the 2019 Columbia Agreement, Columbia
University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in each case to develop,
manufacture and commercialize PI3k inhibitor products. The license grant is worldwide. Under the 2019 Columbia Agreement, the Company is obligated to use commercially reasonable efforts to research,
discover, develop and market licensed products for commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined
time periods. Columbia University retains the right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology; provided that such research
is not funded by a commercial entity or for-profit entity or results in rights granted to a commercial or for-profit entity. As consideration for entering into the 2019 Columbia Agreement, the Company
made a nominal upfront payment to Columbia University. The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of
specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with
products covered by the 2019 Columbia Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company's, its
affiliates' and its sublicensees' net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to
Columbia University, which is contingent upon the approval of the licensed products, in the mid-six figures beginning on the tenth anniversary of the effective date of the 2019 Columbia Agreement.
The
Company has not granted any sublicenses under the 2019 Columbia Agreement. However, if the Company sublicenses the rights granted under the 2019 Columbia Agreement to one or more
third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and 50%, depending on the stage of
development at the time such revenue is received from such third parties. The 2019 Columbia Agreement will terminate upon the expiration of all the Company's royalty payment obligations in all
countries. The Company may terminate the 2019 Columbia Agreement for convenience upon 90 days' written notice to Columbia University. At its election, Columbia University may terminate the 2019
Columbia Agreement, or convert the licenses granted to the Company into non-exclusive, non-sublicensable licenses, in the case of (a) the Company's uncured material breach upon 30 days'
written notice (which shall be extended to 90 days if the Company is diligently attempting to cure such material breach), (b) the Company's failure to achieve the specified development
and funding milestone events, or (c) the Company's insolvency.
In
March 2019, and in connection with the 2016 Columbia Agreement, the Company entered into a research services agreement (the "2019 Columbia Research Agreement" and collectively with
the
F-39
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
2. LICENSE AGREEMENT (Continued)
2016
Columbia Agreement and 2019 Columbia Agreement, the "Columbia Agreements") with Columbia University with the purpose of analyzing structural and functional changes in brain tissue in an animal
model of galactosemia, and the effects of certain compounds whose intellectual property rights were licensed to the Company as part of the 2016 Columbia Agreement on any such structural and functional
changes. The 2019 Columbia Research Agreement has a term of 12 months from its effective date; provided that the Company can terminate the 2019 Columbia Research Agreement without cause with at
least 30 days' prior written notice. The services covered by the 2019 Columbia Research Agreement will be performed by Columbia University in two parts consisting of six months. The decision to
proceed with Part 2 of the 2019 Columbia Research Agreement shall be made solely by the Company and will be contingent on the success of the research performed in Part 1. In
consideration for the services performed by Columbia University in Part 1, the Company will be required to pay $0.1 million to Columbia University for staffing, supplies and indirect
costs. If the Company decides to continue the research defined in Part 2, the Company will be required to pay an additional $0.2 million to Columbia University.
During
the three and nine months ended September 30, 2019, the Company recorded $17,000 and $42,000, respectively, in research and development expense and $28,000 and
$0.3 million, respectively, in general and administrative expense related to the Columbia Agreements. During the three and nine months ended September 30, 2018, the Company recorded
$0.1 million and $0.2 million, respectively, in research and development expense and $43,000 and $98,000, respectively, in general and administrative expense related to the Columbia
Agreements. In aggregate, the Company has incurred $1.7 million in expense from the execution of the Columbia Agreements through September 30, 2019.
As
of September 30, 2019, the Company had $0.1 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable. As of
December 31, 2018, the Company had $0.1 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable.
3. FAIR VALUE MEASUREMENTS
The following table summarizes, as of September 30, 2019, the Company's financial assets and liabilities that are measured at fair value on a recurring basis, according to the
fair value hierarchy described in the significant accounting policies described in the Company's audited financial statements as of and for the year ended December 31, 2018, and the notes
thereto, which are included in the
F-40
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
Company's
Prospectus. As of December 31, 2018, the Company did not have financial assets or liabilities that are measured at fair value on a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
|
$
|
12,933
|
|
$
|
|
|
$
|
|
|
$
|
12,933
|
|
Money market funds
|
|
|
133
|
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
13,065
|
|
$
|
|
|
$
|
|
|
$
|
13,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and corporate bonds
|
|
|
|
|
|
7,522
|
|
|
|
|
|
7,522
|
|
U.S. government agency debt securities
|
|
|
|
|
|
12,367
|
|
|
|
|
|
12,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
|
|
$
|
19,889
|
|
$
|
|
|
$
|
19,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets measured at fair value on a recurring basis
|
|
$
|
13,065
|
|
$
|
19,889
|
|
$
|
|
|
$
|
32,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in commercial paper, corporate bonds, and U.S. government agency debt securities have been classified as Level 2 as they are valued using quoted prices in less active
markets or other directly or indirectly observable inputs. Fair values of corporate bonds and U.S. government agency debt securities were derived from a consensus or weighted average price based on
input of market prices from multiple sources at each reporting period. With regard to commercial paper, all of the securities had high credit ratings and one year or less to maturity; therefore, fair
value was derived from
accretion of purchase price to face value over the term of maturity or quoted market prices for similar instruments if available. During the three and nine months ended September 30, 2019,
there were no transfers of financial assets between Level 1 and Level 2.
During
the three and nine months ended September 30, 2018, the Company had Level 1 financial assets (cash) and Level 3 financial liabilities that were measured at
fair value on a recurring basis. The Company's convertible promissory notes issued on February 5, 2018 (the "2018 Notes") (see Note 4), contained certain features which met the criteria
to be bifurcated and accounted for separately from the 2018 Notes (the "Derivative Liability"). Also in connection with the issuance of the 2018 Notes, the Company had a contingent obligation to issue
common stock warrants ("2018 Notes Warrants") upon the conversion of the 2018 Notes into Series B convertible preferred stock ("Series B Preferred Stock") (the "Warrant Liability"). The
Derivative Liability and the Warrant Liability were initially recorded at fair value of $1.9 million and $0.1 million, respectively, and were subsequently remeasured at fair value at
each reporting period. In November 2018, the Derivative Liability was settled in connection with the extinguishment of the 2018 Notes (see Note 4).
F-41
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
3. FAIR VALUE MEASUREMENTS (Continued)
The
following table provides a roll forward of the aggregate fair values of the Derivative Liability and Warrant Liability as of September 30, 2018, for which fair value is
determined using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Derivative
Liability
|
|
Warrant
Liability
|
|
Balance as of January 1, 2018
|
|
$
|
|
|
$
|
|
|
Initial fair value of Derivative Liability
|
|
|
1,896
|
|
|
|
|
Initial fair value of Warrant Liability
|
|
|
|
|
|
74
|
|
Change in fair value
|
|
|
180
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
|
$
|
2,076
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
294
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
2,370
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
335
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2018
|
|
$
|
2,704
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in the fair value of the Derivative Liability and Warrant Liability were recognized in other income (expense), net in the condensed statement of operations. The Company
recognized other expense in connection with the Derivative Liability of $0.3 million and $0.8 million during the three and nine months ended September 30, 2018, respectively. The
Company recognized other income in connection with the Warrant Liability of $38 thousand and $65 thousand during the three and nine months ended September 30, 2018, respectively.
4. INVESTMENTS
Marketable Securities
Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper,
corporate bonds, and U.S. government debt obligations. Marketable securities with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term;
otherwise, they are classified as long-term on the condensed consolidated balance sheets.
The
following tables provide the Company's marketable securities by security type as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Commercial Paper and corporate bonds
|
|
$
|
7,527
|
|
$
|
|
|
$
|
(5
|
)
|
$
|
7,522
|
|
US government agency debt security
|
|
|
12,351
|
|
|
16
|
|
|
|
|
|
12,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,878
|
|
$
|
16
|
|
$
|
(5
|
)
|
$
|
19,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
4. INVESTMENTS (Continued)
Contractual
maturities of the Company's marketable securities as of September 30, 2019 and December 31, 2018 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Due in one year or less
|
|
$
|
19,878
|
|
$
|
16
|
|
$
|
(5
|
)
|
$
|
19,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,878
|
|
$
|
16
|
|
$
|
(5
|
)
|
$
|
19,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2019, the Company had $11 thousand of net unrealized gains primarily due to an increase in the fair value of certain U.S. government agency debt
securities.
During
the three and nine months ended September 30, 2019, the Company recorded no net realized gains or losses from the sale of marketable securities.
As
of September 30, 2019, we did not intend to sell and it was not likely that we would be required to sell these investments before recovery of their amortized cost basis, which
may be at maturity. Unrealized losses related to these investments are primarily due to interest rate fluctuations as opposed to changes in credit quality. Therefore, as of September 30, 2019,
we have recognized no other-than-temporary impairment loss.
5. CONVERTIBLE PROMISSORY NOTES
There were no convertible promissory notes outstanding as of September 30, 2019 and December 31, 2018.
On
February 5, 2018, the Company issued the 2018 Notes in the aggregate principal amount of $6.0 million. The 2018 Notes bore interest at a rate of 15.0% per annum, were
unsecured and were due and payable, including accrued interest, on August 8, 2019. In the event of a qualified sale of preferred stock to one or more investors resulting in gross proceeds to
the Company of at least $8.0 million, all principal and accrued and unpaid interest under the 2018 Notes was automatically convertible into a number of shares of the Company's preferred stock
issued in such a financing equal to the outstanding principal and accrued but unpaid interest under the 2018 Notes, divided by an amount equal to 80% of the lowest price per share of the preferred
stock sold in the financing. In the event of a corporate transaction or change of control event, the 2018 Notes contained a put option whereby the Company was required to pay to the holders of 2018
Notes an amount equal to (i) the principal amount then outstanding under the 2018 Notes plus any accrued but unpaid interest, plus (ii) an amount equal to 30% of the outstanding
principal amount.
The
terms of the 2018 Notes provided that: (i) all outstanding principal and interest was due and payable in cash upon an event of acceleration, as defined in the 2018 Notes
agreement; (ii) amounts outstanding under the notes were not prepayable without the written consent of the holders of more than 50% of the outstanding principal of the notes, and in addition to
the balance the Company will prepay, the Company will also pay the noteholders an amount equal to 15% of the principal amount of the notes that the Company is prepaying; and (iii) with respect
to subordination, the Company has no outstanding indebtedness for borrowed money or any other liabilities, other than accounts payable arrangements with vendors entered into in the ordinary course of
business and consistent with usual
F-43
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
5. CONVERTIBLE PROMISSORY NOTES (Continued)
trade
terms and will not issue or incur additional indebtedness for borrowed money while the 2018 Notes remain outstanding. There were no financial or negative covenants associated with the
convertible promissory notes.
The
Derivative Liability represents the conversion feature in the event of a qualified financing and the put option, each of which met the definition of an embedded derivative and were
required to be combined and accounted for as a separate unit of accounting. The Company recorded the issuance-date fair value of the Derivative Liability of $1.9 million as a debt discount and
Derivative Liability in the Company's balance sheet (see Note 3).
In
connection with the 2018 Notes, the Company paid legal costs and bank fees of $0.4 million and were obligated to issue the 2018 Notes Warrants (see Note 3 and
Note 9) with an initial fair value of $0.1 million, which were capitalized and recorded as a debt discount. The debt discount, which included the Derivative Liability and 2018 Notes
Warrants, was amortized at an effective interest rate of 54.9% using the effective interest method over the term of the loan. In connection with the 2018 Notes, the Company recognized interest expense
of $0.6 million and $1.4 million during the three and nine months ended September 30, 2018, respectively. The interest expense includes amortization of the debt discount of
$0.8 million and $0.3 million for the three and nine months ended September 30, 2018 , respectively.
In
November 2018, in connection with the Company's issuance and sale of Series B Preferred Stock, all of the then-outstanding principal and accrued interest under the 2018 Notes,
totaling $6.6 million, was automatically converted into 1,097,721 shares of Series B Preferred Stock at a price equal to 80% of the $7.49 per share price paid by investors in the
Series B Preferred Stock financing.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Deferred offering costs
|
|
$
|
|
|
$
|
310
|
|
Prepaid research and development expenses
|
|
|
1,543
|
|
|
1,044
|
|
Prepaid rent expenses
|
|
|
78
|
|
|
65
|
|
Prepaid insurance expenses
|
|
|
1,934
|
|
|
1
|
|
Other prepaid expenses and current assets
|
|
|
525
|
|
|
78
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses & other current assets
|
|
$
|
4,080
|
|
$
|
1,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Accrued pre-clinical and clinical expenses
|
|
$
|
3,684
|
|
$
|
865
|
|
Accrued professional fees
|
|
|
248
|
|
|
312
|
|
Accrued compensation and benefits
|
|
|
640
|
|
|
56
|
|
Accrued patent expenses
|
|
|
65
|
|
|
126
|
|
Other
|
|
|
192
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Total accrued expenses & other current liabilities
|
|
$
|
4,829
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. STOCK-BASED COMPENSATION
Equity Incentive Plans
In May 2019, the Company's board of directors (the "Board") adopted its 2019 Equity Incentive Plan ("2019 Plan"), which was subsequently
approved by its stockholders and became effective on May 13, 2019. As a result, no additional awards under the Company's 2016 Equity Incentive Plan, as amended (the "2016 Plan") will be granted
and all outstanding stock awards granted under the 2016 Plan that are repurchased, forfeited, expired or are cancelled will become available for grant under the 2019 Plan in accordance with its terms.
The 2016 Plan will continue to govern outstanding equity awards granted thereunder.
The
2019 Plan provides for the issuance of incentive stock options ("ISOs") to employees, and for the grant of nonstatutory stock options ("NSOs"), stock appreciation rights, restricted
stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to the Company's employees, officers and directors, as well as non-
employees, consultants and affiliates to the Company. Under the terms of the 2019 Plan, stock options may not be granted at an exercise price less than fair market value of the Company's common stock
on the date of the grant. The 2019 Plan will be administered by the Compensation Committee of the Company's Board.
Initially,
subject to adjustments as provided in the 2019 Plan, the maximum number of the Company's common stock that may be issued under the 2019 Plan is 4,530,000 shares, which is the
sum of (i) 1,618,841 new shares, plus (ii) the number of shares (not to exceed 2,911,159 shares) that remained available for the issuance of awards under the 2016 Plan, at the time the
2019 Plan became effective, and (iii) any shares subject to outstanding stock options or other stock awards granted under the 2016 Plan that are forfeited, expired, or reacquired. The 2019 Plan
provides that the number of shares reserved and available for issuance under the 2019 Plan will automatically increase each January 1, beginning on January 1, 2020, by 5% of the
outstanding number of shares of common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Board. Subject to certain changes in capitalization of
the Company, the aggregate maximum number of shares of common stock that may be issued pursuant to the exercise of ISOs shall be equal to 13,000,000 shares of common stock. Stock options awarded under
the 2019 Plan expire 10 years after grant and typically vest over four years.
F-45
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
8. STOCK-BASED COMPENSATION (Continued)
As
of September 30, 2019, there were options to purchase 3,767,571 shares of common stock outstanding under the 2016 Plan and 2019 Plan and 680,441 shares of common stock were
available for future issuance under the 2019 Plan.
Stock-Based Compensation Expense
Total stock-based compensation expense recorded for employees, directors and non-employees during the three and nine months ended
September 30, 2019 and 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Research and development
|
|
$
|
495
|
|
$
|
38
|
|
$
|
2,087
|
|
$
|
88
|
|
General and administrative
|
|
|
724
|
|
|
39
|
|
|
2,736
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,219
|
|
$
|
78
|
|
$
|
4,823
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2019, the Company granted options to purchase 2,657,628 shares of common stock. The Company recorded stock-based compensation expense
for options granted during the three and nine months ended September 30, 2019 of $1.2 million and $4.8 million, respectively. As of September 30, 2019 and
December 31, 2018, there were 3,767,571 and 1,202,979 options outstanding, respectively. The weighted-average fair value of options granted during the nine months ended September 30,
2019 and 2018 was $4.71 and $1.03 per share, respectively. As of September 30, 2019, the total unrecognized stock-based compensation balance for unvested options was $9.8 million
expected to be recognized over a period of 1.8 years.
The
following table summarizes the information about options outstanding at September 30, 2019 (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
1,202,979
|
|
$
|
1.35
|
|
|
9.14
|
|
$
|
4,029
|
|
Options granted
|
|
|
2,657,628
|
|
|
7.34
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(81,988
|
)
|
|
2.77
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,048
|
)
|
|
4.70
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
3,767,571
|
|
$
|
5.54
|
|
|
9.19
|
|
$
|
20,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
1,364,658
|
|
$
|
2.80
|
|
|
8.84
|
|
$
|
11,174
|
|
Nonvested at September 30, 2019
|
|
|
2,402,913
|
|
$
|
7.09
|
|
|
9.39
|
|
$
|
9,686
|
|
In
April 2019, the Company modified certain stock options, originally granted under the 2016 Plan. As a result of this modification, the Company accelerated the vesting for some of the
stock options. There was no incremental stock-based compensation expense as a result of this modification as the
F-46
Applied Therapeutics, Inc.
Notes to Condensed Financial Statements (Unaudited) (Continued)
8. STOCK-BASED COMPENSATION (Continued)
fair-value-based
measures of the modified awards immediately after the modification were less than the fair-value-based measures of the original awards immediately before the modification.