This Annual Report on Form 10-K contains
“forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including
statements regarding our future results of operations and financial position, business strategy, prospective products, product
approvals, timing and likelihood of success, plans and objectives of management for future operations, and future results of current
and anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other
important factors that may cause our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking
statements by terms such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “could,” “intend,” “target,” “project,” “contemplates,”
“believes,” “estimates,” “predicts,” “potential” or “continue” or
the negative of these terms or other similar expressions. The forward-looking statements in this Annual Report on Form 10-K are
only predictions. We have based these forward-looking statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking
statements speak only as of the date of this Annual Report on Form 10-K and are based on information we have when those statements
are made or our management’s good faith belief as of that time with respect to future events, and are subject to risks and
uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences include, but are not limited to:
For a more detailed discussion of these
and other that may affect our business and that could cause our actual results to differentiate equally from those projected in
these forward-looking statements, see the risk factors and uncertainties described under the heading “Risk Factors”
in Part I, Item 1A of this Annual Report on Form 10-K. The forward-looking statements contained in this Annual Report on Form
10-K are expressly qualified in their entirety by this cautionary statement. Because forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control,
you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected
in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected
in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge
from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable
law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new
information, future events, changed circumstances or otherwise.
ITEM 1. BUSINESS.
Overview
We are a biopharmaceutical company developing
a portfolio of products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement
therapy, or i-ERT, and expect to generate clinical safety and efficacy data in 2018. We are not aware of any other enzyme replacement
therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe
that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market
for conventional enzyme replacement therapy, or ERT, which includes drugs such as Cerezyme ® . Our i-ERT approach is enabled
by our proprietary Hybrid messenger RNA, or Hybrid mRNA Technology™ platform, which allows synthesis of the missing enzyme
inside the cell. Our initial product portfolio targets the three urea cycle disorders ornithine transcarbamylase deficiency, or
OTCD, argininosuccinate lyase deficiency, or ASL deficiency, and argininosuccinate synthetase deficiency, or ASS1 deficiency.
We have preclinical proofs of concept in two mouse models of the urea cycle disorders showing significant reductions in the level
of blood ammonia, which we believe is an approvable endpoint by the Food and Drug Administration, or the FDA, for the demonstration
of efficacy in human clinical trials of the urea cycle disorders. To our knowledge, there are no ERT products on the market to
treat these diseases, because the urea cycle reaction occurs inside the cell and is inaccessible to the administered enzyme. In
contrast, we expect delivery of the missing enzyme using i-ERT with our Hybrid mRNA Technology to be a promising approach to treat
these patients. Beyond the urea cycle disorders, we believe there are a significant number of inherited disorders of metabolism
in the liver that are candidates for our therapeutic approach and that our Hybrid mRNA Technology can be adapted to develop mRNA
therapeutics for the treatment of other inherited liver disorders using our platform.
Our i-ERT approach is accomplished by delivering
normal copies of the mRNA that make the missing enzyme inside the liver cell, thereby enabling proper physiological function and
correcting the disease. A key challenge with mRNA therapeutics historically has been their satisfactory delivery into the patients’
cells. We believe that our Hybrid mRNA Technology addresses these difficulties and enables synthesis of the desired protein in
the hepatocyte, which is the chief functional cell type in the liver harboring the metabolic cycles that need to be corrected
in metabolic liver diseases. We believe our technology is superior to alternative technologies because, based upon peer-reviewed
journal articles and presentations of our competitors and our internal preclinical studies, it results in high-level synthesis
of the desired protein in the hepatocyte, has better tolerability and can be repeat-dosed without loss of effectiveness, thus
enabling treatment of chronic conditions.
We are focused on inherited, single-gene
disorders of metabolism in the liver that result in deficiency of an intracellular enzyme and thus have been unable to be treated
with conventional ERT. Some inherited orphan liver diseases, such as the lysosomal storage disorders, can be successfully treated
with conventional ERT. However, this approach does not work for many of the inherited orphan liver diseases, including the urea
cycle disorders, because the missing enzyme is inside the cell, and the administered enzyme is unable to get inside the target
cell where it is needed to be therapeutically active. Our approach is to deliver mRNA encoding the missing enzyme into the cell
using our Hybrid mRNA Technology, such that the mRNA makes the missing enzyme inside the cell, restores the intracellular enzyme
function and corrects the disease.
As noted above, our initial focus is on
urea cycle disorders, which are a group of rare genetic diseases generally characterized by the body’s inability to remove
ammonia from the blood. The urea cycle consists of several enzymes, including OTC, ASL and ASS1. Since the urea cycle reactions
occur inside the cell, conventional ERT does not work as a treatment for these disorders. Urea cycle disorders are caused by a
genetic mutation that results in a deficiency of one of the enzymes of the urea cycle that is responsible for removing ammonia
from the bloodstream, causing elevated levels of ammonia in the blood. The elevated ammonia then reaches the brain through the
circulation, where it causes cumulative and irreversible neurological damage, and can result in coma and death. While currently
marketed ammonia scavengers such as Ravicti
®
(glycerol phenylbutyrate) and Buphenyl
®
(sodium
phenylbutyrate) provide palliative care of the symptoms, liver transplant is the only currently available cure for urea cycle
disorders. Our goal is to treat the urea cycle disorders by intravenous delivery of mRNA that makes the relevant missing urea
cycle enzyme inside the cell, thus reinstating control of blood ammonia. We believe that anticipated improvements in newborn screening
and the availability of corrective therapy will lead to improved diagnosis and survival rates among patients with urea cycle disorders.
We have three therapeutic urea cycle disorder
programs under development: PRX-OTC to treat OTCD, PRX-ASL to treat ASL deficiency and PRX-ASS1 to treat ASS1 deficiency. Preclinical
efficacy has been established for PRX-OTC with two biological measures, including normalization of the level of ammonia in the
blood. In June 2016, we selected PRX-OTC as our lead product candidate and demonstrated preclinical proof of concept for the treatment
of a second product candidate, PRX-ASL. In 2016, we initiated scale up of the manufacturing of PRX-OTC, and in November 2016,
we announced positive safety results from our single escalating dose response study in non-human primates using our Hybrid mRNA
Technology. In November 2016, PRX-OTC received orphan drug designation from the FDA. We intend to initiate Investigational New
Drug-enabling, or IND-enabling, studies in the first half of 2017 and plan to start manufacturing clinical supplies of the lead
urea cycle disorder product candidate consistent with current good manufacturing practices, or cGMP, in the third quarter of 2017.
We expect to file an IND application with the FDA in the fourth quarter of 2017 for this candidate and to conduct Phase 2a/2b
single- and repeat-dose clinical proof of concept studies in OTCD patients that are expected to generate Phase 2a safety and efficacy
data in the first half of 2018 and Phase 2b safety and efficacy data in the second half of 2018, including measurement of reduction
in blood ammonia.
We are engaged in discussions with a number
of prospective biopharmaceutical companies regarding partnership opportunities focused on our product pipeline, the use of our
Hybrid mRNA Technology for the delivery of potential partners’ mRNAs and the use of Hybrid mRNA Technology for in vivo gene
editing. In vivo gene editing is a type of in vivo genetic engineering in which DNA is inserted, deleted or replaced in the genome
of an organism using proteins called nucleases. Gene editing requires the delivery of mRNA and/or DNA into cells, which can be
accomplished by several methods, the two most common of which are using engineered viruses as gene delivery vehicles, or viral
vectors, and those that use naked DNA/RNA or DNA/RNA complexes, or non-viral methods. Gene editing companies are interested in
our Hybrid mRNA Technology for its potential to express nucleases-encoding mRNAs in the hepatocyte, providing a non-viral delivery
platform for in vivo gene editing, ultimately correcting the genetic defects in the liver of patients. We believe that our approach
offers advantages over viral vectors for in vivo gene editing, which can persist in the patient over the long term, and thus may
cause continued modification of the genome after the intended change to the desired gene has been made. If successful, we believe
that our technology would enable genes to be added, repaired or deleted in a patient’s hepatocytes for therapeutic benefit.
To date, we have not entered into any partnerships or collaborations for our current product candidates.
Our pipeline includes our most advanced
mRNA therapeutic program for the treatment of OTCD, for which we have shown preclinical proof of concept, and programs for ASL
deficiency and ASS1 deficiency which are under development as summarized in the table below:
Our Strategy
Our strategy is to use our proprietary
Hybrid mRNA Technology to develop mRNA therapeutics for the treatment of orphan liver diseases. We believe that our focus on urea
cycle disorders maximizes the leverage of our know-how and proprietary technology and allows us to build value through our programs
by moving them forward into development in a cost-efficient manner with the goal of promptly delivering safe and effective therapies
to urea cycle disorder patients in need of effective treatment.
Our business strategy includes the following:
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Rapidly develop a portfolio of mRNA therapeutics to treat orphan liver diseases that are intractable to ERT, with initial
focus on the urea cycle disorders
. In June 2016, we selected PRX-OTC as our lead product candidate and demonstrated
preclinical proof of concept for the treatment of a second product candidate, PRX-ASL. In November 2016, we announced positive
safety results from our single escalating dose response study in non-human primates using our Hybrid mRNA Technology. In
November 2016, PRX-OTC received orphan drug designation from the FDA. We intend to initiate IND-enabling studies
in the first half of 2017, file an IND in the fourth quarter of 2017 and expect to generate clinical proof of concept in urea
cycle disorder patients in the first half of 2018.
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Leverage our Hybrid mRNA Technology across a broad range of additional orphan liver diseases
. There
are many other orphan liver diseases beyond the urea cycle disorders that we believe would be good candidates for mRNA replacement
therapy. Given that the delivery system will be the same across the programs, once the Hybrid mRNA Technology is successful
with one mRNA and orphan liver disease, we anticipate that the costs and risks associated with developing new mRNA therapeutics
for other orphan liver diseases will be relatively low.
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Pursue and form strategic collaborations that leverage our Hybrid mRNA Technology
. We are engaged in
discussions with potential partners for developing mRNA programs in various disease indications. We intend to pursue partnerships
in order to accelerate the development and maximize the market potential of our Hybrid mRNA Technology platform. In particular,
we intend to partner with larger biopharmaceutical companies that possess market know-how and marketing capabilities to complete
the development and commercialization of mRNA therapeutics. Our Hybrid mRNA Technology also enables us to deliver nuclease-encoding
mRNAs to the liver. The combination of our Hybrid mRNA Technology and gene editing technology has the potential to enable
in vivo gene editing, to either add or delete gene function in humans, which, if successful, could have a variety of important
potential medical applications. For example, deleting gene function could be used for lowering cholesterol, and adding gene
function could be used to correct certain types of hemophilia.
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Our Competitive Strengths
With our proprietary Hybrid mRNA Technology,
intellectual property portfolio and experienced management team, we believe we are well positioned to advance our development
candidates and partner our technology platform to expand future development and commercial opportunities. Although our technology
is at a preclinical stage of development and will require substantial resources and clinical and regulatory validation of efficacy,
we believe that our delivery technology will provide opportunities to create value with therapeutic mRNAs for the treatment of
orphan liver diseases in a cost-effective way.
We believe that our competitive strengths
include:
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Specific production of desired proteins in hepatocytes
. Based on the internal preclinical studies we
have conducted, the Hybrid mRNA Technology enables protein production specifically in hepatocytes in the liver with minimal
impact in other major organs and tissues. This outcome is accomplished by attaching the hepatocyte-specific targeting ligand
molecule N-acetyl galactosamine, or GalNAc to the polymer used in our Hybrid mRNA Technology, which results in hepatocyte-specific
expression of the desired protein. GalNAc targeting of mRNA expression is a notable aspect of our technology and we are not
aware of any competitor that is using GalNAc to target expression of mRNA therapeutics. This specificity limits off-target
effects that may occur by producing proteins in tissues outside the liver.
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Ability to repeat dose
. Our preclinical data shows that the Hybrid mRNA Technology enables repeat dosing
at therapeutically efficacious doses without loss of protein production. This ability enables treatment of chronic indications
that require multi-dose treatment regimens.
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Better tolerability relative to other nucleic acid delivery systems
. In our preclinical studies, the
Hybrid mRNA Technology has been tested in mice, rats and non-human primates. In all species tested, the delivery formulation
was well-tolerated, as demonstrated by minimal or no induction of a variety of immune inflammatory cytokines (inter-cellular
signaling chemicals primarily involved in immune-inflammatory mechanisms). Moreover, at doses well above those needed
for a therapeutic effect, liver transaminase levels, a measure of liver damage, remained within normal ranges in mice. This
ability to dose at high mRNA levels in combination with the ability to multi-dose without loss of expression upon subsequent
dosing represents one of the significant strengths of the Hybrid mRNA Technology.
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Potential for rapid development of follow-on products with unusually low cost and risk
. There are many
single-gene inherited metabolic disorders of the liver which may be candidates for our mRNA therapeutic approach. Once proof
of concept has been established for one orphan liver disease with the Hybrid mRNA Technology, we believe that the same delivery
platform may be used to deliver many different mRNAs. Because our delivery technology platform is largely complete and the
sequence of all mRNAs is widely known and in public domain, once we successfully develop an mRNA therapeutic for one of the
single-gene inherited metabolic disorders of the liver, we believe that development of an mRNA therapeutic targeting other
single-gene inherited metabolic disorders of the liver can be made in a significantly shorter amount of time and at less cost
relative to a conventional drug discovery process, which generally takes several years to discover new drugs. In addition,
we believe that the precise specificity of mRNA for its target minimizes off-target risks associated with conventional drug
development, which we believe will contribute to lower cost and risks. For these reasons, while not mitigating potential future
regulatory or clinical risks, and not shortening regulatory or clinical timelines for drug approval, we believe our approach
can lead to the generation of new drugs more rapidly and with lower risk compared to conventional drug development.
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Ability to develop high-barrier to entry products
. Due to our propriety know-how in nucleic acid therapeutics
and their delivery, we expect to develop high barrier to entry therapeutics which we believe will result in our products being
subject to relatively less competition in the market.
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Experienced team
. Our management team has an extensive track record and experience in the research,
development and delivery of RNA therapeutics. Our management team has over 50 years of combined experience in RNA delivery
technologies and RNA therapeutics, and our team is well placed to further develop the Hybrid mRNA Technology for orphan liver
disease therapeutics and for gene editing applications.
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Patent protection for our Hybrid mRNA Technology
. In order to protect our innovations, we have aggressively
built upon our extensive and enabling intellectual property estate worldwide. Our portfolio of patents and patent applications
includes multiple families and is primarily focused on synthetic polymers and related compositions, the use of polymer and
polymer-lipid nanoparticle, or LNP compositions for delivery of mRNA and other therapeutic agents, including the use of polymer-LNP
compositions in our core platform technology, and methods for treating protein deficiency diseases such as orphan diseases
characterized by single-gene metabolic defects in the liver, including OTCD. As of March 24, 2017, we own or have in-licensed
16 issued U.S. patents, 25 issued foreign patents, and over 15 pending U.S. and foreign patent applications.
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While future manufacturing, regulatory
and clinical challenges have not yet been addressed by us, our Hybrid mRNA Technology has proven highly effective in preclinical
testing. However, to date, none of the above described studies involved human subjects. As such, there can be no assurance that
we will achieve the same results upon the commencement of human clinical trials. Should we fail to achieve similar results in
human clinical trials, it could result in a material adverse effect on our business and operations. Establishing the efficacy
of our technology in human subjects will require substantial funds and could take multiple years. In addition, our successful
development is subject to many risks, both known and unknown that may impede our ability to ever bring this technology to market
or to generate revenue. See “Risk Factors” beginning on page 34.
The main competitive technologies to provide
treatment for our target diseases are adeno-associated virus, or AAV vectors, and mRNA delivery using conventional LNPs. AAV vectors
offer the potential of longer-term correction of the liver disease by gene therapy, and Dimension Therapeutics, Inc. announced
they had an open IND with the FDA for AAV gene therapies targeting OTCD in December of 2016. These vectors are in clinical development
to treat orphan liver diseases such as hemophilia. However, triggering of multiple types of immune response to the virus represents
a major challenge facing development of these viral vectors and can make repeat dosing ineffective. If the therapy wanes over
time, or if the cells targeted by a first AAV treatment turnover or die, then a repeat administration may be ineffective. mRNAs
may also be delivered by conventional LNPs. We believe at least one mRNA/LNP formulation may have been reviewed by the FDA to
enter clinical trials for an orphan liver disease indication. While LNPs are effective in delivering mRNA cargo into the liver,
and hence, if successfully developed, could become a significant competitive technology for us, LNPs generally contain fusogenic
lipids that can activate the innate immune system and result in dose-limiting toxicities.
Achievement of Milestones
During 2016, we achieved a number of milestones
which we believe as significant. In June 2016, we demonstrated preclinical proof of concept for the treatment of a second product
candidate, PRX-ASL, which further established the breadth of our Hybrid mRNA Technology. This was closely followed by selection
of our lead product candidate, PRX-OTC. We tested our Hybrid mRNA Technology’s ability to deliver mRNA in a large animal
tolerability study with non-human primates. Since there is no large animal model of OTCD, we used human erythropoietin, or hEPO,
as a surrogate reporter mRNA, formulated with the same delivery components as PRX-OTC. We believe that the dose responsive increase
in hEPO expression, the increase in the hematocrit levels, which indicates higher production of red blood cells promoted by hEPO
and the safety and tolerability profile observed in the study have laid the foundation for us to proceed with further preclinical
and clinical development of PRX-OTC.
EVENT
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Completion
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Proof of Concept in Second Disease Model
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2Q 2016 – Achieved
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Declare Lead Development Candidate
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2Q 2016 – Achieved
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Large Animal Tolerability Study
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4Q 2016 – Achieved
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Our Team
We were founded by Robert W. Overell, Ph.D.,
our president and chief executive officer, and world leaders in polymer-based drug delivery systems Patrick S. Stayton, Ph.D.,
professor of bioengineering at the University of Washington, and Allan S. Hoffman, Ph.D., professor emeritus of bioengineering
at the University of Washington, together with Oliver W. Press, M.D., Ph.D., a member of the Fred Hutchinson Cancer Research Center
and a professor of medicine at the University of Washington, and Paul H. Johnson Ph.D., our founding chief scientific officer.
We believe that success in the field of
in vivo nucleic acid delivery and therapeutics requires a highly specialized team. We have a highly experienced management team
with over 50 years of combined experience in the delivery and development of nucleic acid therapeutics working in state-of-the-art
chemistry and biology facilities in Seattle, Washington. In addition to the experience of our management team, leadership in research
and development includes Michael Houston, our chief scientific officer who has more than 12 years of experience in oligonucleotide
chemistry and delivery systems and was the former vice president of chemistry and formulations at Nastech Pharmaceutical Company
Inc., which became MDRNA Inc. and Marina Biotech, Inc., Mary Prieve, Ph.D., vice president of biology, Sean Monahan, Ph.D., vice
president of chemistry, each of whom have over 10 years of experience in nucleic acid delivery, and Gordon Brandt, M.D., our chief
medical officer, who has served as president and executive vice president of clinical affairs for Nastech Pharmaceutical Company,
Inc., which became MDRNA Inc., where he worked on the development of nucleic acid therapeutics from 2004 until 2008. We also use
consultants and advisors who provide us with key advice in specific areas. These include James Watson, MBA, who serves as our
head of corporate development and most recently served as chief business officer at Alvine Pharmaceuticals, Inc. from 2011 to
2016, and, prior to that, was a managing director and head of private equity at Burrill & Company and chief executive officer
of Burrill & Company’s merchant banking group; and Stuart Swiedler, M.D., Ph.D., our clinical advisor for orphan drug
development, who has been working with us since 2014 and most recently served as senior vice president of clinical affairs at
BioMarin Pharmaceutical Inc., an orphan drug company, where for over a 10-year period he contributed to both the non-clinical
and clinical aspects of drug development for the regulatory approvals of the orphan drugs Aldurazyme®, Naglazyme® and
Kuvan®.
Our Mission and Culture
We are dedicated to the development of
mRNA therapeutics that hold promise for treatment of orphan diseases for which few, if any, effective therapeutic options are
available. Our guiding principles, against which all employees have been evaluated annually as a key component of our performance
management system since our inception, are:
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Open Communication
. This is especially important in a drug development company, where tremendous value
can be built from close collaboration between team members.
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Teamwork
. Talented multidisciplinary teams, with the right skill set, that collaborate effectively against
a common goal can create a practically unstoppable force.
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Mutual Respect
. We each have different points of view, and nobody is right all of the time. Trust your
instincts, but respect those of others too, especially in areas of their expertise.
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Excellence and Integrity
. We strive for excellence in everything we do, and do it with the highest level
of personal and professional integrity.
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Company Information
We were incorporated on March 9, 2006 as
a Delaware corporation. Our principal executive office is located at 410 W. Harrison Street, Suite 300, Seattle, Washington 98119.
Our telephone number is 206-805-6300. Our website address is
www.phaserx.com
. Information contained in, or accessible through,
our website does not constitute a part of this Annual Report on Form 10-K.
Our Initial Target Diseases: Urea Cycle Disorders
Our initial target diseases are urea cycle
disorders. Urea cycle disorders are a family of inherited rare genetic metabolic disorders, each of which is caused by a mutation
that results in a deficiency of one of the enzymes that are necessary for the normal function of the urea cycle to remove ammonia
from the bloodstream. When proteins are broken down by the body, ammonia is produced as a waste byproduct. The urea cycle involves
a series of biochemical steps which removes ammonia from the blood. Normally, in individuals with a functioning urea cycle, ammonia
is converted into a compound called urea and excreted in urine. In patients with urea cycle disorders, the liver’s ability
to convert ammonia to urea is diminished or absent, and the process of removing ammonia from the bloodstream is disrupted. As
a result, excess ammonia accumulates in the blood, a condition known as hyperammonemia. Ammonia is a potent neurotoxin, and when
ammonia reaches the brain through the bloodstream, it causes severe medical complications including cumulative and irreversible
brain damage, and can cause coma and death.
Urea cycle disorders are diagnosed either
through newborn screening or when symptoms occur and are recognized as a urea cycle disorder by further testing. Initial urea
cycle disorder symptoms range from catastrophic illness with coma occurring within a few days of birth to milder and non-specific
symptoms such as difficulty sleeping, headache, nausea, vomiting, disorientation and seizures, particularly in patients who present
later in life.
Urea cycle disorders occur in approximately
1 in 35,000 births in the United States, with OTCD being most common at a rate of approximately 1 in 56,500 live births, followed
by ASL deficiency at a rate of approximately 1 in 218,750 live births and ASS1 deficiency at a rate of approximately 1 in 250,000
live births according to the journal article “The Incidence of Urea Cycle Disorders” published in
Molecular Genetics
and Metabolism
, 2013, or the Incidence of Urea Cycle Disorders article. Based on demographic data for those patients enrolled
in the National Institutes of Health-sponsored urea cycle disorder consortium longitudinal study, “A Longitudinal Study
of Urea Cycle Disorders” published in
Molecular Genetics and Metabolism
, 2014, or the Longitudinal Study article,
approximately one quarter of patients with urea cycle disorders are diagnosed in the neonatal period (first month of life), seventy
percent are diagnosed after the neonatal period, and 5% remain asymptomatic throughout life. According to the Longitudinal Study
article, approximately 114 newborns are predicted to be born with a urea cycle disorder in the United States each year, and approximately
one quarter of the patients diagnosed in the neonatal period die due to the urea cycle disorder, compared with 11% mortality for
patients with late onset disease. In 2015, there were approximately 4 million births in the United States, according to Centers
for Disease Control and Prevention (source:
http://www.cdc.gov/nchs/births.htm
, last visited Feb 21, 2017).
Our Development Programs
Our mRNA therapeutics for the urea cycle
disorders are intended to provide to patients weekly or once every two week intravenous delivery of mRNA encoding the missing
enzyme, thereby allowing the patient to produce the needed enzyme and correcting the disease. Because our approach addresses the
underlying cause of the disease by reinstating the normal physiology, it is anticipated that no dietary restriction or special
amino acid supplementation will be necessary, and the disease can be managed without hyperammonemic crises or continued neurologic
deterioration. For all of our urea cycle disorder programs, the product profile of our candidates is anticipated to include reversal
of the enzyme deficiency, which would be expected to correct the disorder by restoring the normal physiology, and normalize plasma
ammonia levels, eliminate the need for ammonia scavenger medications and dietary restrictions, and decrease or eliminate hyperammonemic
crises and the consequent neurological damage.
OTCD
Our most advanced program is for OTCD.
OTCD is the most common subtype of the urea cycle disorders and affects all ethnic groups and geographic areas. OTC is an enzyme
in the urea cycle that removes ammonia in the blood. Patients with severe OTCD rapidly develop hyperammonemia soon after birth
and have a disease phenotype which may lead to coma or death in the absence of liver transplant. In some affected individuals,
signs and symptoms of OTCD may be less severe, and may not appear until later in life, but most patients show symptoms of OTCD
by age 12 which typically manifest as hyperammonemic crises. The gene that codes for OTC is located on the X-chromosome, and hence,
the majority of severe patients are male, but females with one abnormal gene can also be affected, usually after the neonatal
period, as reported in the journal article “Diagnosis, Symptoms, Frequency and Mortality of 260 Patients with Urea Cycle
Disorders from a 21-year, Multicentre Study of Acute Hyperammonaemic Episodes” published in
Acta Paediatrica
, 2008.
Patients can present at almost any time of life with a triggering event such as an infection or pregnancy or even a change in
diet, resulting in elevations of plasma ammonia concentration. Despite milder presentations in adulthood, patients are at constant
risk of ammonia level rising, and hyperammonemia, encephalopathy, cerebral edema, and death can occur.
Preclinical Development
In 2015, we achieved preclinical proof
of concept for OTCD in a well-accepted animal model of a human orphan liver disease using
OTC-spf
ash
mice. Like
human OTCD patients, the
OTC-spf
ash
mice have a defective OTC gene, and when OTC expression in these mice is
further impaired, the mice recapitulate the human OTCD disease, including elevated blood ammonia rapidly progressing to death,
as reported in the journal article “Induction and Prevention of Severe Hyperammonemia in the spf
ash
Mouse Model
of Ornithine Transcarbamylase Deficiency Using shRNA and rAAV-mediated Gene Delivery” published in
Molecular Therapy
,
2011. Hyperammonemia is induced in these mice by treating the animals with a viral vector containing a short hairpin RNA designed
to knock down the remaining mouse OTC mRNA. As the mouse OTC mRNA levels are decreased, OTC enzyme levels also decrease resulting
in the mice developing elevated ammonia levels in the blood. Normal mice have ammonia levels of ~50 μM. Delivery of the human
OTC mRNA using our Hybrid mRNA Technology resulted in the production of the natural human OTC enzyme and normalization of two
key clinical biomarkers, ammonia level in the blood and orotic acid level in the urine when dosed once a week or twice a week.
In contrast, the treatment of mice with a human OTC mRNA designed not to be translated (a negative control) resulted in the mice
having higher ammonia and orotic acid levels. As shown in the figure below, treatment of mice twice a week with 3 mg/kg doses
of a functional human OTC mRNA over a three-week period resulted in a statistically significant reduction in blood ammonia levels
and reduced ammonia levels to those observed in the wild type mice. To determine whether data is statistically significant compared
to controls we use standard statistical measures, in this case the t-test. The t-test provides a “p-value” representing
the probability that random chance could explain the result. In general, a 5% or lower p-value (p < 0.05) is considered to
be statistically significant. However, it should be noted that statistical significance alone may not be sufficient to establish
efficacy by the FDA. Rather, efficacy endpoints are generally agreed upon with the FDA prior to commencement of a study, which
may require clinical significance beyond a statistically significant p-value. Notwithstanding that fact, the p-value calculated
in this study was p < 0.001, as shown in the figure below, meaning that the probability that random chance could explain this
result is < 0.1%. Normalization of ammonia levels was also achieved with treatment of mice once a week. The study has shown
meaningful reduction in ammonia levels, the endpoint that was evaluated by the FDA in order to grant approval of Ravicti.
Normalization of Ammonia Levels in
OTC-spfash Mice Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology
Moreover, levels of the other well-accepted
biomarker, urinary orotic acid, were also normalized in this study. As shown in the figure below, treatment of mice twice a week
with 3 mg/kg doses of a functional human OTC mRNA over a three-week period demonstrated that the orotic acid levels were maintained
at the levels similar to the orotic acid levels in normal mice. Similar results were obtained with treatment of mice once a week.
Mice treated with buffer or the negative control mRNA resulted in urinary orotic acid levels that were 10 to 30-fold higher than
mice treated once a week or twice a week.
Normalization of Orotic Acid Levels
in OTC-spf
ash
Mice Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology
The induction of hyperammonemia in
OTC-spf
ash
mice resulted in uncoordinated movements (ataxia), significant body weight loss and, ultimately, death. As shown in
the figure below, mice treated with buffer or the negative control mRNA had a median survival of 19 and 21 days, respectively.
Mice treated twice a week with 3 mg/kg doses of a functional human OTC mRNA showed complete survival as long as 35 days. Additionally,
no signs of ataxia were observed in the treated mice, and all mice in the treated group gained weight. When therapy with the Hybrid
mRNA Technology was terminated in these mice, the mice remained disease-free for more than three additional weeks at which time
the mice started to succumb to the effects of elevated ammonia levels.
Complete Survival of OTC-spfash Mice
Treated with Human OTC mRNA
Delivered by Hybrid mRNA Technology in Hyperammonemia Model
Delivery of the human OTC mRNA using our
Hybrid mRNA Technology in the
OTC-spf
ash
mice was well tolerated, based on our internal tolerability study with
formulation being dosed twice per week for three weeks in
OTC-spf
ash
mice, with normal serum chemistries (electrolytes,
albumin and creatinine levels) observed 48 hours following dosing, and no elevation of alanine aminotransferase, or ALT, level
in the blood, which is a test for liver damage. This is shown in the figure below.
Levels of Liver Enzymes in Mice Dosed
with Hybrid mRNA Technology
Moreover, we observed no detection of the
cytokine IP-10 in
OTC-spf
ash
mice 3 hours following dosing (below limit of quantitation, or BLOQ), indicating
no stimulation of the innate immune system.
Levels of the Cytokine IP-10 in OTC-spf
ash
Mice Treated with Hybrid mRNA Technology
|
*
|
BLOQ: below limit of quantitation
|
Preclinical Non-GLP Safety Data
In 2017, we plan to conduct formal
safety studies to be included in our IND submission to FDA. Such studies must be conducted under good laboratory practices,
or GLP. All our other scientific studies are non-GLP studies, although we believe these studies are conducted with high
levels of scientific excellence and integrity. In 2016, we performed a number of safety studies using our lead
formulation of PRX-OTC in both rats and non-human primates, and, as is customary, these were non-GLP studies. Since there is
no large animal model of OTCD, we used hEPO as a surrogate reporter mRNA, formulated with the same delivery components as
PRX-OTC. The advantages of using hEPO are that one can easily measure hEPO levels in the blood by a standard ELISA assay,
which is an assay used to measure hEPO protein. Additionally, we can determine whether the hEPO that is being produced is
biologically active by measuring increase in reticulocytes and hematocrit.
In rats dosed once a week for 5 weeks with
1 mg/kg of hEPO mRNA formulated in our lead formulation, we observed hEPO levels in the blood thousands of fold above steady state
levels of the rat protein. During the course of this experiment, there was no diminution in protein concentrations following each
mRNA dose, and levels were within 2-fold of each other. Consistent with this high level of hEPO, we observed a significant increase
in hematocrit over time. Levels rose from a baseline of approximately 40% to greater than 55% after 5 weeks of treatment. From
a safety perspective, we observed no increases in the levels of liver alanine aminotransferase, or ALT, which is generally used
to test liver damage, 24 hours after each dose. Moreover, there were no noteworthy changes in serum chemistry and no changes in
histopathology in the target tissue liver, or the spleen or kidney tissues.
In addition to testing in rats, we have
performed testing of the of Hybrid mRNA Technology in non-human primates. In the non-human primate study, hEPO mRNA dosed
at 0.1, 0.3 and 1.0 mg/kg delivered with our Hybrid mRNA Technology platform demonstrated dose-dependent increases in levels of
hEPO protein thousands of fold above normal physiological levels. Peak levels of hEPO were observed at 12 hours after dosing.
In addition, a commensurate increase was also seen in reticulocyte count, which was robust and seen in all dose groups.
Assessment of hEPO Protein Levels
in Non-Human Primates Treated with hEPO mRNA Delivered
Using Hybrid mRNA Technology
In addition, the formulation was well tolerated
in non-human primates with no statistically significant dose-related changes in liver transaminase levels, a measure of liver
damage. Moreover, there were no increases in immune inflammatory cytokines observed 6 hours after dosing, including IL-6, TNF-
a
,
IFN-
g
, IL-12, or IP-10
.
Assessment of ALT Levels in Non-Human
Primates Treated with hEPO mRNA Delivered
Using Hybrid mRNA Technology
Assessment of
Cytokine Levels in Non-Human Primates Treated with hEPO mRNA Delivered
Using Hybrid mRNA Technology
The above results demonstrate the ability
of the Hybrid mRNA Technology to deliver an mRNA therapeutic, produce the intended protein and the safety and tolerability of
the formulation. Additionally, it demonstrates that our Hybrid mRNA Technology is translatable across multiple species, namely,
mouse, rats and non-human primates.
After obtaining this data with hEPO, we
performed an additional non-GLP safety study in 2016 in rats with our lead formulation using hOTC as the mRNA cargo. In this study,
normal rats were dosed at 1, 3 and 5 mg/kg of hOTC mRNA and the levels of hOTC protein were measured 7 days after dosing by western
blot analysis. We observed a linear dose responsive increase in hOTC protein relative to the animals treated with buffer. There
were no toxicities associated with elevated levels of OTC in the treated animals. Consistent with our hEPO study, there was no
significant change in serum chemistry. More importantly, as we increased the dose of mRNA, we did not observe any changes in liver
ALT levels 24 hours after dosing, providing further supportive data that our lead formulation was well tolerated.
With the successful completion of these
non-GLP toxicological studies we are now working with our contract manufacturing organizations, or CMOs, to scale up PRX-OTC in
preparation for additional non-GLP studies, including dose range finding studies, in which ascending doses of a compound are tested
and biodistribution studies are conducted to measure tissue uptake of the compound. We plan to conduct IND-enabling GLP toxicological
studies following the foregoing studies.
ASL Deficiency
ASL deficiency is the second subtype of
urea cycle disorder we are pursuing as a development program. As in OTCD, ASL deficiency often manifests with rapid-onset hyperammonemia
in the newborn period or as a late onset form with episodic hyperammonemia and/or long term complications that include liver dysfunction,
neuro-cognitive deficits and hypertension. The accumulation of ammonia, as well as the urea cycle intermediates citrulline and
argininosuccinic acid is the biochemical hallmark of ASL deficiency. The incidence of ASL deficiency is estimated at 1 in 218,750
live births, according to the Incidence of Urea Cycle Disorders article.
We have established the ASL hypomorphic
mouse model at PhaseRx. This mouse model recapitulates a severe form of the human disease making it a valuable tool for the evaluation
of potential lead compounds (Erez et al., Nat Med 17: 1619-1626). In this model, mice have 16% residual ASL enzyme activity resulting
in elevated levels of arginosuccinic acid, citrulline and ammonia leading to multi-organ failure and death.
In preliminary studies, we have demonstrated
that the ASL hypomorphic mice can express the human protein. Mice treated with 1.4 mg/kg of hASL mRNA with the Hybrid delivery
system demonstrated that hASL protein expression was still detected 11 days post-dose. In ASL hypomorphic mice treated with 5
mg/kg mRNA every third and fourth day, statistically significant reduction in plasma ammonia levels were observed relative to
buffer treatment animals. Concomitantly, we observed statistically significant reductions in the plasma amino acids arginosuccinic
acid and citrulline. These doses were well tolerated and were associated with significant increases in animal body weights in
ASL-treated mice. As these were preliminary studies, further formulation and mRNA optimization should result in significantly
improved efficacy.
Preclinical Development
In June 2016, preclinical studies in ASL
deficiency were conducted using ASL-deficient mice, using the same delivery platform used for our OTCD formulation, which rendered
positive proof of concept data for the PRX-ASL. We performed initial studies to examine production of ASL mRNA in normal mice,
and following confirmation of the synthesis of the corrected gene, we administered therapeutic ASL mRNA into ASL hypomorphic mice
suffering from a genetic mutation, and examined protein production in the liver and reduction of argininosuccinic acid levels
in plasma. After two weeks of mRNA treatment, the ASL-deficient mice showed statistically significant reduction in ammonia levels.
ASS1 Deficiency
ASS1 deficiency is the third subtype of
urea cycle disorder we are pursuing as a development program. The argininosuccinate synthase 1, or ASS1, enzyme is responsible
for combining two amino acids, citrulline made by other enzymes in the urea cycle, and aspartate, to form a molecule called argininosuccinic
acid. A series of additional chemical reactions in the urea cycle uses argininosuccinic acid to form urea. If the ASS1 enzyme
is absent or defective, then a build-up of citrulline and ammonia in the blood can occur, resulting in hyperammonemia. The incidence
of ASS1 deficiency is estimated at 1 in 250,000 live births, according to the Incidence of Urea Cycle Disorders article.
Preclinical Development
We have designed and manufactured the ASS1
mRNA, obtained ASS1-deficient mice and are working with animal disease models for the treatment of ASS1 deficiency internally.
We plan to perform initial studies to examine the production of ASS1 mRNA in normal mice, and following confirmation of the synthesis
of the corrected gene, we plan to administer therapeutic ASS1 mRNA into ASS1-deficient mice to examine protein production in the
liver, reduction of citrulline levels in plasma and presence of argininosuccinic acid levels in plasma. We anticipate using the
same delivery platform used for our OTCD formulation.
IND-Enabling Studies and Clinical Development Plans –
PRX-OTC
We intend to continue to scale up the manufacturing
process for PRX-OTC in the first half of 2017 to initiate IND-enabling studies, including preclinical GLP-compliant toxicology
studies in the second half of 2017.
Based on the results of the preclinical
studies, we expect to demonstrate safety and clinical efficacy of PRX-OTC in a Phase 2a study in the first half of 2018 and in
a Phase 2b study in the second half of 2018 in OTCD patients. The clinical development of PRX-OTC is planned to include a two-stage
clinical trial. ThePhase 2a stage will enroll adults and pediatric patients who are currently on ammonia scavenger drugs and protein
restricted diet for evaluation of safety; pharmacokinetics, as measured by blood concentration; and pharmacodynamics, as measured
by plasma ammonia levels, following administration of our PRX-OTC. The Phase 2b stage is intended to repeat dose adult and pediatric
patients.
In 2016 we had a pre-IND meeting with the
FDA to gain the FDA’s input on manufacturing, toxicology, and clinical programs. In November 2016, the OTCD program received
orphan drug designation in the United States. Orphan drug designation is one of the requirements for eligibility for a Rare Pediatric
Disease Priority Review Voucher. According to the FDA website, under this program, a sponsor who receives an approval for a drug
or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review
of a subsequent marketing application for a different product.
Market Opportunities
Currently, there is no cure for urea cycle
disorders other than liver transplant. Liver transplant is limited by donor availability and patient eligibility, and it is also
associated with significant risks and complications, including perioperative morbidity and mortality, liver rejection, and vulnerability
to infection due to lifelong immunosuppressant medication. Therefore, liver transplant is an option typically reserved for the
most severely affected patients in life-threatening conditions. Moreover, while liver transplantation stops the deleterious effects
of the OTCD disease, patients who undergo liver transplantation may have already incurred neurological damage which is not reversible.
Current management of urea cycle disorders
includes decreasing ammonia production through the reduction of protein in the diet, supplementation with essential and/or branched
chain amino acids, the use of dietary supplements such as arginine and citrulline and ammonia lowering agents, including Ravicti
and Buphenyl, FDA-approved ammonia scavenger products currently being marketed by Horizon Pharma plc. Horizon Pharma plc acquired
Ravicti and Buphenyl in 2015 through the acquisition of Hyperion Therapeutics Inc. for $958 million.
Ravicti was approved by the FDA in 2013
for chronic management of urea cycle disorders in adult and pediatric patients greater than two years of age. It is a three times
daily oral drug that must be used with a protein-restricted diet and amino acid dietary supplements. As reported in the FDA news
release, dated February 1, 2013, announcing approval of Ravicti, the major study supporting Ravicti’s safety and effectiveness
involved 44 adults who had been using Buphenyl. According to this news release, patients were randomly assigned to take Buphenyl
or Ravicti for two weeks before being switched to the other product for an additional two weeks. The FDA news release reported
that blood testing showed Ravicti was as effective as Buphenyl in controlling ammonia levels. Three additional studies in children
and adults provided evidence supporting the long-term safety and effectiveness of Ravicti in patients two years and older. In
2014, Hyperion Therapeutics Inc. reported that the average gross selling price per patient per year for Ravicti was approximately
$385,000. The revenue projection for 2017 for Ravicti is $169 million in the United States, based on the sales data from the
fourth quarter of 2016 reported by Horizon Pharma plc in its press releases. The revenues for Ravicti are growing at approximately
26% per year based on the sales data from the third quarters of 2015 and 2016 reported by Horizon Pharma plc in its press releases.
Buphenyl was approved by the FDA in 1996
and was the only branded FDA-approved therapy for the chronic management of certain subtypes of urea cycle disorders prior to
Ravicti’s approval for the same subtypes. Buphenyl is also available for the treatment of urea cycle disorders in select
countries throughout Europe, the Middle East, and the Asia-Pacific region. Buphenyl is administered in tablet and powder form
and sold in the United States to patients who have not transitioned to Ravicti.
Ammonul (sodium benzoate and phenylacetate),
an intravenous therapy marketed by Ucyclyd Pharma, Inc., a wholly owned subsidiary of Valeant Pharmaceuticals International, Inc.,
was approved by the FDA in the United States in 2005. We believe that Ammonul is the only FDA-approved adjunctive therapy for
the treatment of hyperammonemic crises in adult and pediatric patients with the most prevalent urea cycle disorders. Currently,
Ammonul is not approved for use outside the United States, but is being prescribed by physicians in parts of Europe.
Current commercial products for treatment
of urea cycle disorders such as Ravicti, Buphenyl and Ammonul are ammonia scavengers that provide, in our opinion, palliative
care of the symptoms at best and have substantial limitations. When urea cycle disorders are not well controlled, or even in well-controlled
patients who experience concurrent illness such as infection, physiological stress such as pregnancy or surgery, or even who simply
change their diet, hyperammonemia crises may occur. In a Phase 2 trial of Ravicti, two-thirds of patients with high ammonia levels
at the start of the clinical trial still had high ammonia levels at the end of the trial despite taking Ravicti, as reported in
the journal article “Phase 2 Comparison of a Novel Ammonia Scavenging Agent with Sodium Phenylbutyrate in Patients with
Urea Cycle Disorders: Safety, Pharmacokinetics and Ammonia Control” published in
Molecular Genetics and Metabolism
,
2010. In the Phase 3 trials of Ravicti, sixteen percent of adult patients and 25% of pediatric patients experienced hyperammonemic
crises while taking Ravicti during the one year extension trial, according to the journal articles “Ammonia Control and
Neurocognitive Outcome among Urea Cycle Disorder Patients Treated with Glycerol Phenylbutyrate” published in
Hepatology
,
2013 and “Glycerol Phenylbutyrate Treatment in Children with Urea Cycle Disorders: Pooled Analysis of Short and Long-term
Ammonia Control and Outcomes” as published in
Molecular Genetics and Metabolism
, 2014. In the pivotal Ravicti pediatric
studies, 20% of subjects 0-5 years old and 18% of subjects 6-17 years old required a gastric tube for management of feeding while
on ammonia scavengers according to the journal articles “Ammonia Control in Children Ages 2 Months Through 5 Years with
Urea Cycle Disorders: Comparison of Sodium Phenylbutyrate and Glycerol Phenylbutyrate” published in
The Journal of Pediatrics
in 2013 and “Ammonia Control in Children with Urea Cycle Disorders (UCDs); Phase 2 Comparison of Sodium Phenylbutyrate
and Glycerol Phenylbutyrate” published in
Molecular Genetics and Metabolism
in 2011. In addition, Buphenyl has a
high pill burden or large quantity of powder and frequent dosing of 3 – 6 times per day and a taste and smell
deemed unpleasant by many patients, which makes compliance for many urea cycle disorder patients difficult.
We believe our approach, which is to deliver
mRNA encoding the missing enzyme into the cell, thereby making the missing enzyme and reinstating the normal intracellular physiology,
offers the potential to correct certain subtypes of urea cycle disorders and avoid the need for scavenger therapy, restrictive
diet and dietary supplements. In view of the rapid onset of expression observed with our Hybrid mRNA Technology in our luciferase
expression studies in mice, our approach may also lead to more effective treatment of acute hyperammonemic crises in urea cycle
disease patients. Additionally, the current ammonia scavengers can only remove a fixed amount of ammonia from the blood: each
molecule of Ravicti can remove up to six molecules of ammonia, and each molecule of Buphenyl can remove up to two molecules of
ammonia, according to the U.S. package inserts for Ravicti and Buphenyl, respectively. In comparison, there is no fixed limit
on the number of ammonia molecules which can be removed following replacement of a missing enzyme.
We are not aware of any other enzyme replacement
therapies for intracellular enzyme deficiencies currently being marketed for inherited enzyme deficiencies in the liver, and believe
that the commercial potential for i-ERT is completely untapped and similar to the large and growing $4 billion worldwide market
for conventional ERT, which includes drugs such as Cerezyme (see sales data for 2015 in the press releases and annual reports
filed in 2016 by Sanofi S.A., BioMarin Pharmaceutical Inc., Shire plc and Protalix BioTherapeutics, Inc.). Cerezyme costs approximately
$25,000 for a month’s course of therapy in 2014, according to a news article published in the Boston Globe (Sept. 2, 2014),
and commercially available ERTs list for $290,000 – $1.28 million per patient per year according to goodrx.com
(last visited Mar. 11, 2016). Therapeutics for orphan liver diseases treated with ERT with similar incidences to the urea cycle
disorders (1/56,500 – 1/250,000) have generated substantial sales, including for Gaucher’s disease, with
estimated incidence of 1/60,000, according to GeneReviews®, and worldwide sales of $1.2 billion in 2015 according to sales
data by Sanofi S.A. and Shire plc; Fabry disease, with estimated incidence of 1/50,000 – 1/117,000, according
to GeneReviews, and worldwide sales of $1.1 billion in 2015 according to sales data by Sanofi S.A. and Shire plc; Pompe disease,
with estimated incidence of 1/40,000 – 1/100,000, according to GeneReviews, and worldwide sales of $728 million
in 2015 according to sales data by Sanofi S.A.; and mucoploysaccharidosis type VI, with estimated incidence of 1/250,000 – 1/600,000
according to Genetics Home Reference and worldwide sales of $303 million in 2015 according to sales data by BioMarin Pharmaceutical
Inc. Conventional ERTs are generally dosed intravenously once a week to once every two weeks, according to the article “Enzyme-Replacement
Therapies for Lysosomal Storage Diseases” published online by the National Center for Biotechnology Information (
source:
http://www.ncbi.nlm.nih.gov/books/NBK117223
, last visited Mar. 11, 2016), and can be given by home infusion or in an outpatient
setting, according to the journal article “Intravenous Enzyme Replacement Therapy: Better in Home or Hospital?” published
in
British Journal of Nursing
, 2006.
The value that can be created by orphan
drug companies early in clinical development is exemplified by Shire plc’s acquisition of Dyax Corp. for approximately $5.9
billion, since at the time, Dyax Corp.’s most advanced asset was in a rare disease setting for hereditary angioedema and
had efficacy data based on clinical trial results in approximately 40 patients, according to Shire plc’s press release (
source:
https://www.shire.com/newsroom/2015/november/shire-to-acquire-dyax-corp
). Hereditary angioedema has an incidence of 1/50,000
births, according to the journal article “Hereditary Angioedema: Epidemiology, Management, and Role of Icatibant”
published in Biologics, 2013.
Our Hybrid mRNA Technology
mRNA Therapeutics and Competitive Approaches
mRNAs play an essential role in the process
of encoding and translating genetic information from DNA to proteins. The genes in DNA encode protein molecules, including enzymes,
which are essential building blocks to the functions necessary for life. Expressing a gene means synthesizing proteins encoded
by the gene. The information stored within DNA are “read” and expressed in two major steps: transcription and translation.
During transcription, the genes in the DNA are transcribed into mRNA, which encodes the protein sequence. mRNA serves as the blueprint
for making the desired protein by cellular machinery called ribosomes during translation.
Genetic diseases are the result of a key
protein not being correctly coded in the DNA. As a result, the mRNA corresponding to the gene is either defective or missing,
resulting in a defective or missing protein. Our therapeutic mRNAs seek to restore the normal mRNA encoding of the normal protein,
thereby restoring the missing protein function within target tissues and correcting the disease. In the case of a large number
of inherited metabolic diseases of the liver that are caused by single-gene defects, expression, or synthesis, of a therapeutic
mRNA providing a functional copy of the missing or defective protein has the potential to correct the genetic disorder.
The main impediment in the development
of mRNA therapeutics has been a lack of effective delivery, principally due to the fact that mRNA molecules are (i) fragile and
easily degradable by nucleases in the blood, and (ii) large and highly charged molecules that are typically taken up into cellular
vesicles called endosomes from which they are unable to cross the endosomal membrane and enter the cytoplasm of the cell. These
delivery challenges prevent therapeutic mRNA molecules from reaching the target tissue and being taken up into the cytoplasm of
the target cells so that they can be translated into the desired protein of interest. To overcome these impediments, mRNA has
typically been formulated into LNPs, which function to protect the mRNA from degradation in the blood and enable uptake of the
mRNA inside the cell. While LNPs are effective in delivering mRNA cargo into the liver, and hence, if successfully developed,
could become a significant competitive technology for us, LNPs generally contain fusogenic lipids that can activate the innate
immune system and result in dose-limiting toxicities, according to the journal articles “Lipid-Based Nanocarriers for RNA
Delivery” published in
Current Pharmaceutical Design
, 2015, and “Nanotoxicity: a Key Obstacle to Clinical Translation
of siRNA-based Nanomedicine” published in
Nanomedicine
, 2014.
An alternative approach to treating orphan
liver diseases is gene therapy using AAV vectors; however, triggering of multiple types of immune response to the virus represents
a major challenge facing development of these viral vectors, according to the journal article “Gene Therapy in Liver Diseases:
State-of-the-Art and Future Perspectives” published in
Current Gene Therapy
, 2012. The AAV vectors offer the potential
of longer-term correction of the liver disease by gene therapy, but they can be susceptible to pre-existing neutralizing antibody-mediated
immunity against the virus present in a significant number of patients; they trigger immune responses in the body can prevent
repeat dosing, since the initial dose primes the immune system and can neutralize vector given in a subsequent administration;
and they can stimulate cell mediated immunity against infected liver hepatocytes, according to the journal articles “Hemophilia
Gene Therapy: Caught Between a Cure and an Immune Response” published in
Molecular Therapy
, 2015, and “Immune
Responses to AAV Vectors: Overcoming Barriers to Successful Gene Therapy” published in
Blood
, 2013. Additionally
AAV vectors may not be effective in treating the new born patients, since AAV-mediated correction of OTCD is durable in adult
but not neonatal
OTC-spf
ash
mice, according to a journal article “AAV2/8-mediated Correction of OTC Deficiency
Is Robust in Adult but Not Neonatal Spf
ash
Mice” published in
Molecular Therapy
, 2009.
Our Hybrid mRNA Technology
Our Hybrid mRNA Technology provides a differentiated
polymer-LNP-based formulation approach for the delivery of mRNA into the hepatocytes in the liver. The Hybrid mRNA Technology
utilizes our SMARTT Polymer Technology in combination with an inert LNP which functions as a carrier for the mRNA. The LNP, which
is comprised of several distinct lipids, encapsulates and protects the mRNA following intravenous injection while it transits
the blood and is taken up into the hepatocytes while the polymer delivers mRNAs into the cytoplasm by mediating their escape from
endosomes. The synthetic polymers exploit a proprietary mechanism to effect passage of mRNA molecules across the endosomal membrane.
Our approach does not require fusogenic lipids typical of competitor LNPs and we believe that is one of the reasons why our delivery
system is better tolerated than our competitors’ technologies.
Our SMARTT Polymer Technology is comprised
of a diblock vinyl polymer comprising two blocks of monomers with distinct delivery functionalities. The polymer is targeted to
the asialoglycoprotein receptor on liver hepatocytes by the inclusion of a GalNAc moiety on one end of the polymer. The polymers
have a first hydrophilic block comprising 2-3 hydrophilic monomers which impart water solubility to the polymer and a second hydrophobic
block comprising 2-3 hydrophobic monomers that are pH-tunable and mediate endosome escape of the mRNA cargo into the cytoplasm.
These polymers self-assemble into nanoparticles. The structure of the polymer is shown below.
Schematic Representation of the PhaseRx
Hybrid mRNA Technology
We have performed two studies in collaboration
with external specialist contract research laboratories using one of our polymers as a polymer-siRNA, or small interfering RNA,
conjugate. The polymers had the same diblock architecture as shown above, and were similar in composition to the polymers used
in the Hybrid mRNA Technology. In the first study, we evaluated the absorption, distribution, metabolism, and excretion of a polymer
with a radioactive label in rats which showed rapid uptake into the liver, with greater than 95% of the polymer dose in the liver
within two hours after dosing. Very little or no polymer was detected in other tissues or organs. The main route of polymer clearance
from the liver was into the bile and then feces with 71% of the dose being cleared into bile within 72 hours after dosing. In
the second study, the safety and efficacy of a polymer was evaluated in non-human primates. In a single dose, dose ranging study,
primates received doses of a polymer conjugate ranging from 1 to 2.4 mg/kg. The formulation was well tolerated with no significant
dose-related changes in serum chemistry, hematology, or coagulation. Moreover, no changes in complement activity or increase in
IL-6 cytokine levels, which indicates stimulation of the immune system, were observed, and histopathological evaluation of the
liver, kidneys and spleen of treated animals showed no dose-related effects. In addition, our internal studies using dye-labeled
siRNA conjugates of our polymers have shown that GalNAc-targeted polymers deliver siRNA effectively to the hepatocytes in vivo,
while polymers targeted with mannose were ineffective in mediating siRNA delivery to the hepatocytes.
Our Hybrid mRNA Technology has been shown
in our internal preclinical studies to result in synthesis of intended proteins in hepatocytes with a fast onset of action, suggesting
highly effective delivery of mRNA molecules, and the synthesis of a number of protein classes including cytosolic proteins, mitochondrial
proteins and secreted proteins. By developing a rapid in vivo-based screening program, we have gained valuable information about
the structure-activity relationships of formulation components. The figure below illustrates the dramatic changes in activity
that have resulted from our formulation screening program showing a 5000-fold improvement in the production of luciferase in the
livers of mice treated intravenously with a single 1 mg/kg dose of mRNA encoding luciferase delivered with our Hybrid mRNA Technology,
as measured six hours after dosing. The numbers 1 through 7 at the bottom of the figure below represent the successive generations
of the Hybrid mRNA Technology that were tested in this assay which showed progressively increased activity. In addition, expression
levels within three-fold of maximal luciferase signal were observed within three hours after dosing, which indicates that the
synthesis of the desired protein in the liver can be very rapid following administration of the mRNA therapeutic using our Hybrid
mRNA Technology. The observed levels of fluorescence for formulation 7 are 1 million-fold above background.
5,000-fold Increase in Activity of
Hybrid mRNA Technology Through Formulation Development and
Screening as Measured by Luciferase Expression
Moreover, when the Hybrid mRNA technology
was used to deliver human erythropoietin mRNA and administered intravenously to mice at a dose of 1 mg/kg, it resulted in supraphysiological
levels of the secreted protein erythropoietin 20,000 times above normal levels in untreated mice.
In addition to the ability of the Hybrid
mRNA Technology to effect high levels of production of desired proteins, our internal preclinical studies with luciferase mRNA
showed that luciferase expression is highly specific to the liver, with little or no expression in immune organs such as the spleen
or other tissues. This data is shown in the figure below. Mice were injected intravenously with 0.5 mg/kg of luciferase mRNA delivered
using the Hybrid mRNA Technology, and six hours later the various organs were harvested and analyzed for expression of luciferase.
As can be seen from the data below, expression of the luciferase mRNA was specifically seen in the liver, with no detectable expression
in other organs, including the spleen. This data is in contrast to a recent report with a fusogenic LNP-based mRNA formulation
where expression was also observed in the spleen and pancreas, as reported in Optimization of Lipid Nanoparticle Formulations
for mRNA Delivery in Vivo with Fractional Factorial and Definitive Screening Designs published in ACS Nanoletters, 2015. We believe
that the specificity of mRNA expression to the liver observed with our technology will minimize off-target toxicities that can
result from the unintended expression of therapeutic proteins in other tissues.
Imaging of Expression of Luciferase
in Individual Organs Dissected from Mice Treated with
Luciferase mRNA Delivered using the Hybrid mRNA Technology
In addition to organ specificity, the expression
of the luciferase protein was seen predominantly in the hepatocyte, the desired cell type in the liver, with no apparent expression
in Kuppfer cells in the liver lining the walls of the sinusoids. This result is shown in the immunofluorescence figure below in
which the luciferase expression occurs as bright green areas that are specifically in the hepatocytes. The blue areas represent
nuclei of individual cells. The observed specificity of expression to the hepatocytes, in addition to the organ specificity shown
above, is expected to further improve the safety profile of our products.
Immunofluorescent Staining of Luciferase
Protein in Liver Section from Mice Treated with
Luciferase mRNA Delivered using Hybrid mRNA Technology
Moreover, in our chronic dosing study,
the Hybrid mRNA Technology enabled mRNA to be repeat-dosed every week over a 3-month period without loss of expression at each
dose. In the data presented in the figure below mice were treated intravenously once a week for 12 weeks with 0.5 mg/kg of luciferase
mRNA formulated with Hybrid mRNA Technology without loss of the luciferase fluorescence signal at each dose given. In these studies,
luciferase activity was measured six hours after the weekly dosing. The significance of this result is that our Hybrid mRNA Technology
would likely be able to be chronically administered without the loss of potency after each dose that has been observed with other
LNP-only formulations, as reported in the journal article “Accelerated Blood Clearance of PEGylated Liposomes following
Preceding Liposome Injection: Effects of Lipid Dose and PEG Surface-Density and Chain Length of the First-Dose Liposomes”
published in the
Journal of Controlled Release
, 2005.
Luciferase Expression Measured Immediately
After Each Dose of a Repeat-Dosing Regimen of the
Hybrid mRNA Technology in Mice
Of critical importance to mRNA therapeutics
is the ability to avoid unwanted induction of cytokines which can cause dose-limiting toxicities through activation of the innate
immune system. This type of an acute response can result in lower levels of protein expression. Mice injected with 0.5 mg/kg of
luciferase mRNA delivered using the Hybrid mRNA Technology did not elicit an innate immune response as determined by measuring
levels of cytokines, interferon gamma-induced protein 10 (IP-10), tumor necrosis factor alpha (TNF-α), interleuckin-6 (IL-6),
interferon gamma (IFN-
ϒ
), interleukin 12, (IL-12) and macrophage inflammatory protein
alpha (MIP-1α), as shown in the figure below. The levels of cytokines observed in all cases were generally similar to untreated
mice and differences were not statistically significant. The term “n.s”. in each graph, means “not significant”
and represents a p-value greater than 0.05. We believe that the levels of cytokine induction observed in the preclinical study
support the likelihood of our product candidate having a favorable safety profile, hence offering potential advantages over other
mRNA delivery using fusogenic LNPs or AAV-based approaches.
Assessment of Cytokine Levels in
Mice Treated with Luciferase mRNA Delivered
Using the Hybrid mRNA Technology
We have developed our Hybrid mRNA Technology
into a robust system for in vivo mRNA delivery that allows protection of mRNA in the circulation, endosome escape and targeted
expression in the hepatocytes. Our mRNA therapeutic candidates using our Hybrid mRNA Technology have proven safe and effective
in preclinical models, and have shown proof of concept and efficacy across a number of studies in OTCD mice, including meaningful
reduction in ammonia levels in the blood, which is an approvable endpoint by the FDA for the treatment of urea cycle disorders.
Our delivery technology is designed to provide a versatile, predictable, reproducible and scalable mRNA delivery system with the
ability to manufacture at scale, using a process known as RAFT polymerization which has enabled manufacturing of polymers at the
hundreds of kg scale. We believe that our technology enables rapid deployment of mRNA therapeutics to new disease targets, and
we intend to leverage our technology platform to develop a pipeline of product candidates for the treatment of many chronic and
life-threatening orphan liver diseases. Beyond the urea cycle disorders, these diseases include organic acidemias, a group of
diseases with an aggregate incidence of 1 in 1,000 live births according to GeneReviews; glycogen storage diseases, a group of
diseases with an aggregate incidence of 1 in 20,000 live births according to Medscape: Glycogen Storage Diseases Types I-VII,
2014; porphyria, a group of diseases with an aggregate incidence of 1 in 75,000 live births according to a journal article “Porphyrias”
published in Lancet, 2010; hyperoxalurea, with an incidence of 1 in 175,000 live births according to GeneReviews; phenylketonuria,
with an incidence of 1 in 15,000 live births according to a National Institutes of Health Consensus Statement, “Phenylketonuria:
Screening and Management” published online in 2000; tyrosinemia type 1 with an incidence of 1 in 100,000 live births according
to GeneReviews; and Wilson’s Disease, with an incidence of 1 in 30,000 live births according to GeneReviews. We believe
the i-ERT market potential is as large as the $4 billion ERT market because (1) the incidences of the diseases treatable by ERT
and i-ERT are similar, as noted above, and (2) the numbers of diseases currently treated by ERT (six diseases, according to a
brief “Enzyme Replacement Therapies for Lysosomal Storage Diseases” published by the Agency for Healthcare Research
and Quality in 2013) are similar to the number of target diseases for i-ERT.
Partnering Opportunities
We believe that our Hybrid mRNA Technology
can be of significant interest to potential corporate partners who are interested in developing mRNA therapeutics. There are many
companies interested in mRNA therapeutics to treat orphan liver diseases, including Moderna LLC, Alexion Pharmaceuticals, Inc.,
RaNA Therapeutics and Ultragenyx Pharmaceutical Inc. Also, there are many single-gene inherited metabolic disorders of the liver
beyond the urea cycle disorders that we believe may be good candidates for mRNA replacement therapy. Once proof of concept is
obtained in one orphan liver disease, we believe our technology can be used to rapidly develop mRNA therapeutics to treat other
orphan liver diseases. The mRNA sequences for each of these diseases are readily available in public databases, and we expect
those mRNAs can readily be manufactured by contract manufacturers. As a result, we believe that new potential mRNA therapeutics
may be efficiently developed by combining different mRNAs with our Hybrid mRNA Technology. Given that the delivery system will
be the same across the programs, once the Hybrid mRNA Technology is successful with one mRNA therapeutic to treat an orphan liver
disease, we anticipate that the costs and risks associated with developing new mRNA therapeutics for other orphan liver diseases
will be relatively low. We are engaged in discussions with potential partners for developing mRNA programs in various disease
indications. We intend to pursue partnerships in order to accelerate the development and maximize the market potential of our
Hybrid mRNA Technology platform. In particular, we intend to partner with larger biopharmaceutical companies that possess market
know-how and marketing capabilities to complete the development and commercialization of mRNA therapeutics.
In addition, the ability of our technology
platform to effectively deliver mRNA to the liver hepatocytes provides the potential to apply our technology platform to in vivo
gene editing — the modification of the genome of a patient’s cells in vivo to either delete genes that are
causing disease or to add genes to correct genetic defects, which, if successful, could have a variety of important potential
medical applications. For example, deleting gene function could be used to lower levels of drug targets such as PCSK-9 for lowering
cholesterol, and adding gene function could be used to correct certain types of hemophilia. We believe that such applicability
provides opportunities to form revenue-generating strategic collaborations with partners developing gene editing technologies.
We have received indications of interest from gene editing companies to use our technology to introduce gene editing therapeutics
into the hepatocytes in order to enable in vivo gene editing. Companies developing mRNA and in vivo gene editing therapeutics
have reported to us a common set of challenges that we believe can be addressed by our technology, including in vivo instead of
ex vivo delivery, high levels of expression and activity, specificity of expression to the liver, avoidance of off-target effects
and ability to use repeat dosing regimens without loss of expression on subsequent dosing. Companies focused on gene editing include
bluebird bio, Inc., Cellectis S.A., CRISPR Therapeutics AG, Editas Medicine, Inc., Intellia Therapeutics, Inc., Precision Biosciences,
Inc. and Sangamo Biosciences, Inc.
In 2014, we entered into a collaboration
and development agreement with Synageva, pursuant to which we and Synageva agreed that we would develop mRNA technologies for
the treatment of inherited orphan liver diseases, including development of the Hybrid mRNA Technology. Under this agreement, Synageva
had an option to acquire us. This right was not exercised mainly, we believe, because of the acquisition of Synageva by Alexion
Pharmaceuticals, Inc. in May 2015, which occurred during Synageva’s option period. All rights to the technology and products
generated under this collaboration and development agreement have now reverted to us. Subsequent to our collaboration and development
agreement with Synageva, we have not entered into any additional partnerships, collaborations or license agreements for our current
product candidates.
Competition
The biotechnology industry is characterized
by intense and rapidly changing competition to develop new technologies and proprietary products and affected by new technologies,
new developments, government regulations, health care legislation, availability of financing and other factors. We compete with
numerous other companies that currently operate, or intend to operate, in the industry, including companies that are engaged in
RNA-based therapeutic technologies and other manufacturers that may decide to undertake development of such products, as well
as other companies that are pursuing non-RNA-based approaches for the treatment of urea cycle disorders. While we believe that
our intellectual property portfolio, scientific expertise and our Hybrid mRNA Technology provide us with competitive advantages,
we face potential competition from many different sources, including larger and better-funded biotechnology and pharmaceutical
companies, who, due to their size, may have significant advantages over us. These larger companies have substantially greater
capital resources, larger customer bases, broader product lines, larger sales forces, greater marketing and management resources,
larger research and development staffs and larger facilities than ours and have established reputations and relationships with
physicians and patients, as well as worldwide distribution channels that are more effective than those we will have. In addition,
due to ongoing consolidation in the industry, there are high barriers to entry for small biotechnology companies. For a discussion
of some of these advantages and the competitive risks we face, see “Risk Factors — Risk Related to our Industry.”
We are aware of several companies that
are developing nucleic acid-based therapeutics for orphan liver diseases. There are several companies developing AAV-based approaches
to gene therapy including REGENXBIO Inc., Dimension Therapeutics, Inc. and uniQure N.V. Of these, Dimension Therapeutics, Inc.
has selected OTCD as one of its development programs as of February 2016. In addition, Moderna LLC is developing injectable modified
mRNA therapeutics encoding a variety of proteins. Alexion Pharmaceuticals, Inc. has established an exclusive agreement with Moderna
LLC for the discovery and development of mRNA therapeutics to treat rare diseases. In February 2017, Moderna LLC presented preclinical
data on methylmalonic acidemia, an orphan liver disease. RaNA Therapeutics acquired the mRNA assets, including a development program
for the OTCD, which were divested from Shire plc in January 2017. Arcturus is developing mRNA-based therapeutics for the treatment
of OTCD as well as for iron deficiencies, thrombopoietin and cystic fibrosis. Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals,
Inc. are developing a LNP delivery platform for targeted delivery of small interfering RNA, or siRNA, therapeutics to hepatocytes
for silencing specific mRNA to prevent disease-causing proteins from being made and are using this approach to develop therapeutics
for primary hyperoxalurea and hepatic porphyrias. There are substantial differences regarding what these companies are doing relative
to us. Specifically, through our technology we are seeking to deliver and replace a specific missing mRNA in the cell, whereas
Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals, Inc. are decreasing the amount of a specific mRNA. In addition, although
Alnylam Pharmaceuticals, Inc. and Dicerna Pharmaceuticals, Inc.’s approach uses a covalent GalNAc conjugate to target the
siRNA, we use GalNAc to target the polymer component of the delivery system which enables intracellular delivery of the mRNA.
Promethera Biosciences S.A., a Belgian
company, is evaluating stem cell based therapy for treatment of urea cycle disorders in the pediatric population. Promethera Biosciences
S.A. has completed a 20 patient Phase 1/2 trial in Europe and is currently enrolling patients in a Phase 2b trial. Other potential
therapies for the urea cycle disorders in early stage preclinical or clinical testing include gene therapy and mitochondrial enzyme
replacement. For example, Aeglea Biotherapeutics, Inc. has a degrading enzyme treatment in preclinical development for arginase
1 deficiency. Ocera Therapeutics Inc. is developing an ammonia scavenger which they claim has improved properties. Bio Blast Pharma
Ltd., an Israeli biopharmaceutical company, is pursuing a mitochondrial protein replacement platform in OTCD, which is currently
in preclinical development. Synlogic, Inc. is developing a engineered synthetic biotic designed to change the microbiome in the
gut which, according to Synlogic, Inc., could reduce excess ammonia in the blood for the treatment of urea cycle disorders and
other forms of hyperammonemia.
Other companies with mRNA delivery technologies
that may compete for gene editing partnerships include Arcturus Therapeutics, Inc., Acuitas Therapeutics Inc., Arbutus Biopharma
Corporation, CureVac AG, and BioNTech AG.
These companies also compete with us in
recruiting personnel and securing licenses to complementary technologies or specific substances that may be critical to the success
of our business. They also compete with us for potential funding.
Intellectual Property
We rely on a combination of patents, trade
secrets, non-disclosure agreements, and other intellectual property to protect the proprietary technologies that we believe are
important to our business. Our success will depend in part on our ability to obtain and maintain patent and other proprietary
protection for commercially important inventions and know-how, defend and enforce our patents, maintain our licenses, preserve
our trade secrets, and operate without infringing valid and enforceable patents and other proprietary rights of third parties.
We also rely on continuing technological innovation to develop, strengthen, and maintain our proprietary position in the field
of mRNA therapeutics and delivery.
Our Patent Portfolio
Our portfolio of patents and patent applications
includes multiple families that protect various aspects of our business. The patents and patent applications that make up our
patent portfolio are primarily focused on synthetic polymers and related compositions, the use of polymer and polymer-LNP compositions
for delivery of mRNA and other therapeutic agents, including the use of polymer-LNP compositions in our core platform technology,
and methods for treating protein deficiency diseases such as orphan diseases characterized by single-gene metabolic defects in
the liver, including OTCD. As of March 24, 2017, we own or have in-licensed 16 issued U.S. patents, 25 issued foreign patents,
and over 15 pending U.S. and foreign patent applications:
Case Family
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Issued Patents
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Pending
Applications by
Jurisdiction
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Owned or In-licensed
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Enhanced Transport
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US 6,835,393; US 7,374,778;
US 8,003,129; US 8,846,106;
EP 1044021; AU 758368; CA 2317549
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In-licensed
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Enhanced Transport
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US 7,737,108; US 8,318,816
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In-licensed
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Temperature and pH-responsive Compositions
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US 7,718,193
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In-licensed
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Diblock Copolymer
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US 9,476,063; EP 2281011;
AU 2009246327; JP 5911723;
KR 10-1661636
CN ZL200980122888.3;
CN ZL 201310232498.X;
IL 209238; MX 316902; SG 166444; ZA 2010/08729
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US, AU, CA, JP, BR, IN
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Co-owned; UW’s rights in-licensed
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Micellic Assemblies
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US 9,339,558; EP 2285853;
AU 2009246329;
CA 2724014; JP 5755563;
MX 315375
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US, KR
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Co-owned; UW’s rights in-licensed
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Polymeric Carrier
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US 9,006,193
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Co-owned; UW’s rights in-licensed
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Heterogeneous Polymeric Micelles
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US 9,211,250
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Co-owned; UW’s rights in-licensed
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Bispecific Intracellular Delivery Vehicles
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US 8,822,213; 9,220,791
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US
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Co-owned; UW’s rights in-licensed
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Multiblock Copolymers
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US 9,464,300; EP 2364330;
AU 2009313358;
CN ZL200980148153.8;
JP 5766611; MX 330456;
SG 171100; ZA 2011/03289
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Co-owned; UW’s rights in-licensed
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Omega-Functionalized Polymers
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US 9,593,169
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US
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Co-owned; UW’s rights in-licensed
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Targeting Monomers
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US 9,415,113
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Co-owned; UW’s rights in-licensed
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Block Copolymers
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US, AU, EP, CA
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Owned
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Polymer-LNP Delivery
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PCT
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Owned
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A significant portion of our patent portfolio
is in-licensed from UW. The UW license, which is exclusive, worldwide, and sublicensable and is described more fully below under
“— License Agreements — UW License Agreement,” is in the field of drug delivery, human
therapeutics, human prophylactics and research reagents. We co-own, with UW, several families within this in-licensed portfolio.
The co-owned patent filings include an issued U.S. patent, US 9,339,558, and its granted European counterpart, EP 2285853, covering
membrane destabilizing polymer nanoparticle compositions used in our core platform technology. Corresponding patents have also
issued in other foreign jurisdictions, including Australia and Canada, and corresponding applications are pending within the United
States and Korea. These issued patents are projected to expire in 2029.
The co-owned patent filings also include
a second issued U.S. patent, US 9,476,063, and its granted European counterpart, EP 2281011, covering membrane destabilizing polymer
compositions used in our core platform technology. Corresponding patents have also issued in other foreign jurisdictions, including
Australia, Israel, Japan, and Korea, and corresponding applications are pending within the United States and outside the United
States, including Canada and Japan. These issued patents are projected to expire in 2029.
We are the sole owner of an international
Patent Cooperation Treaty, or PCT, application with a U.S. provisional application priority claim. The PCT application is directed
to our core technologies for mRNA delivery, including membrane destabilizing polymer and LNP drug carrier compositions, compositions
and systems comprising a combination of polymer and LNP drug carrier, and methods of using such compositions and systems for delivering
therapeutic agents, such as mRNA, into cells, including targeted delivery of mRNA to the liver. This application is further directed
to related methods for treating diseases characterized by deficiency of a functional protein by in vivo delivery of mRNA encoding
the functional protein, including methods for treating OTCD via liver-specific delivery of OTC-encoding mRNA. Any patent issuing
from this application is projected to expire in 2036.
Patent Term
The term of individual patents and patent
applications in our portfolio will depend upon the legal term of the patents in the countries in which they are obtained. In most
countries, the patent term is 20 years from the date of filing of the patent application or examined priority application, if
applicable. For example, if an international PCT application is filed, any patent issuing from the PCT application in a specific
country expires 20 years from the filing date of the PCT application. Patents issuing from applications filed in the United States
on or after June 8, 1995, will have a term that is twenty years from the filing date of the earliest examined priority application,
absent any patent term adjustment for the U.S. Patent and Trademark Office delay.
Under the Hatch-Waxman Act, the term of
a patent that covers an FDA-approved drug or biological product may also be eligible for patent term extension, or PTE. PTE permits
restoration of a portion of the patent term of a U.S. patent as compensation for the patent term lost during product development
and the FDA regulatory review process if approval of the application for the product is the first permitted commercial marketing
of a drug or biological product containing that active ingredient. The patent term restoration period is generally one-half the
time between the effective date of an IND and the submission date of a new drug application, or NDA, or biologics license application,
or BLA, plus the time between the NDA or BLA submission date and the approval of that application. The Hatch-Waxman Act permits
the owner of a patent to apply for a PTE for only one patent applicable to an approved drug, and the maximum period of restoration
is five years beyond the expiration of the patent. A PTE cannot extend the remaining term of a patent beyond a total of 14 years
from the date of product approval, and a patent can only be extended once, and thus, even if a single patent is applicable to
multiple products, it can only be extended based on one product. Similar provisions may be available in Europe and certain other
foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, depending upon the length of
clinical trials and other factors involved in the filing of an NDA or BLA, we expect to apply for PTEs for patents covering our
product candidates and their methods of use, or to work with our licensors, as owners or co-owners of such patents, to obtain
such extensions, if available.
License Agreements
The University of Washington (“UW”)
License Agreement
In 2006, we obtained from UW an exclusive,
worldwide license to polymer technology for drug delivery, human therapeutics, human prophylactics and research reagents used
for the in vitro and in vivo delivery and/or uptake of any entity including polymers, particles, nucleic acids, proteins, peptides
and/or other molecules into cells, tissues, or organs pursuant to the Exclusive Patent License Agreement, dated as of December
6, 2006, as amended and restated on January 20, 2016, and on February 9, 2016, or the UW License Agreement. Licensed patents include
three patent families owned by UW and nine patent families co-owned by us and UW. One of the licensed patent families is co-owned
by UW and the University of Massachusetts, and the University of Massachusetts’s rights in this patent family are licensed
to us under an inter-institutional agreement between UW and the University of Massachusetts.
Under the UW License Agreement, we are
obligated to use our commercially reasonable efforts to commercialize, manufacture and maximize sales of the licensed products.
The UW License Agreement requires us to pay an annual maintenance fee, low single digit royalty payments based on a percentage
of net sales with a minimum annual royalty payment and certain financial and performance milestone payments. The potential aggregate
milestone payments are in the low single digit millions of dollars per specific drug target. We and our material sublicensees
have the right to sublicense our rights under the UW License Agreement, provided that such sublicensees agree to terms consistent
with the UW License Agreement. The UW License Agreement prohibits us from granting a security interest or allowing any person
to assert or perfect a security interest in our rights under the UW License Agreement.
The UW License Agreement is effective until
either terminated in accordance with the terms of the UW License Agreement or no license patent is valid and subsisting or pending
in any country in the territory set forth in the UW License Agreement. UW may terminate the UW License Agreement upon delivery
of a written notice of termination if we breach or fail to perform any of our obligations under the UW License Agreement and such
breach or failure has not been cured in full within 60 days after the delivery to us of the notice of such breach or failure.
UW may also terminate the UW License Agreement upon 10 days’ notice to us if we become insolvent. We have the right to terminate
our agreement with UW for any reason upon 60 days’ notice.
Commonwealth Scientific and Industrial Research Organisation
License Agreement
In 2009, we obtained from the Commonwealth
Scientific and Industrial Research Organisation, or CSIRO, a non-exclusive, royalty-bearing, worldwide license to RAFT polymerization
technology within the field of membrane destabilizing polymers that are used for the delivery of nucleic acids, proteins, peptides
and/or other molecules in the diagnosis, prophylaxis or treatment of human disease pursuant to the Non-Exclusive License Agreement,
dated as of October 26, 2009, as amended and restated on January 22, 2016, or the CSIRO Agreement.
Under the CSIRO Agreement, we are obligated
to use our reasonable commercial endeavors to exploit the licensed patents to maximize the return from that exploitation to us
and CSIRO. We are solely responsible for the manufacture, quality control, marketing and promotion of the licensed products we
sell under the CSIRO Agreement. The CSIRO Agreement requires an upfront fee, low single digit royalty payments based on a percentage
of net sales revenue, and a minimum annual royalty payment. Under the CSIRO Agreement, we have the right to sublicense to manufacture
for use/sale by us and to sublicense to make and sell licensed products through multiple layers, provided that such sublicensee
agrees to terms consistent with the CSIRO Agreement. We may not assign or encumber any of the rights or obligations under the
CSIRO Agreement without CSIRO’s written consent, unless the assignment is to the successor of our business or purchaser
of our assets.
The CSIRO Agreement is effective until
either terminated in accordance with the terms of the CSIRO Agreement or expiration, lapsing or cessation (including by revocation
or as a result of a final declaration of invalidity or unenforceability) of the last to expire, lapse or cease of the licensed
patents. We have the right to terminate the CSIRO Agreement for any reason upon six months’ notice or immediately by notice
if CSIRO commits a material breach of its obligations under the CSIRO Agreement which is not remedied within 90 days of notice
from us of such breach. CSIRO may immediately terminate the CSIRO Agreement by notice if we commit a material breach of our obligations
under the CSIRO Agreement which is not remedied within 90 days of notice from CSIRO of such breach or if we initiate proceedings
in a court to contest the validity or enforceability of any licensed patent under the CSIRO Agreement, lodge third party observations
to contest the validity or enforceability of any licensed patent or otherwise supply prior art to an examiner or patent office
in respect of any licensed patent or actively assists a third party to take any of such actions.
Manufacturing and Suppliers
We do not currently own or operate manufacturing
facilities for the production of clinical or commercial quantities of our therapeutic candidates. We have small-scale production
capabilities and generally perform early process development for our product candidates to produce quantities of our therapeutic
candidates necessary to conduct preclinical studies of our investigational therapeutic candidates. We do not have and we do not
currently plan to acquire or develop the facilities or capabilities to manufacture bulk drug substance or filled drug product
for use in human clinical studies. We plan to rely on CMOs and third party contractors to generate formulations and produce larger
scale amounts of drug substance and the drug product required for our clinical studies. We expect to rely on CMOs and third party
contractors to manufacture cGMP drug substance and drug product required for our clinical studies for the foreseeable future.
We also plan to contract with CMOs and third party contractors for the labeling, packaging, storage and distribution of investigational
drug products. These arrangements allow us to maintain a more flexible infrastructure while focusing our expertise on researching
and developing our products.
TriLink BioTechnologies, LLC. supplies
us with the mRNA for our PRX-OTC, pursuant to a manufacturing and supply agreement.
To meet our projected needs for commercial
manufacturing, third parties with whom we currently work might need to increase their scale of production or we will need to secure
alternate suppliers. We believe that there are alternate sources of supply that can satisfy our clinical and commercial requirements,
although we cannot be certain that identifying and establishing relationships with such sources, if necessary, would not result
in significant delay or material additional costs.
Research and Development
We spent approximately $6.7 million and
$4.9 million on research and development activities in each of the fiscal years ended December 31, 2016 and 2015, respectively.
Government Regulation
Pharmaceutical companies are subject to
extensive regulation by national, state and local agencies such as the FDA in the United States or the EMA in Europe. The manufacture,
distribution, marketing and sale of pharmaceutical products are subject to government regulation in the United States and various
foreign countries. Additionally, in the United States, we must follow rules and regulations established by the FDA requiring the
presentation of data demonstrating that our products are safe and efficacious and are manufactured in accordance with the cGMP
regulations. If we do not comply with applicable requirements,
the government may
refuse to approve our marketing applications or refuse to allow us to manufacture or market our products, and we may be criminally
prosecuted or fined. We and our manufacturers and clinical research organizations may also be subject to regulations under other
federal, state and local laws, including, but not limited to, the U.S. Occupational Safety and Health Act, and import, export
and customs regulations as well as the laws and regulations of other countries. The United States government has increased its
enforcement activity regarding illegal marketing practices domestically and internationally. As a result, pharmaceutical companies
must ensure they comply with the Foreign Corrupt Practices Act and federal healthcare fraud and abuse laws, including the False
Claims Act.
These regulatory requirements impact our
operations and differ from one country to another, so that securing the applicable regulatory approvals of one country does not
imply the approval of another country. However, securing the approval of a more stringent body, i.e. the FDA, may facilitate receiving
approval by a regulatory authority in a different country where the regulatory requirements are similar or less stringent. The
approval procedures involve high costs, are manpower intensive, usually extend over many years and require highly skilled and
professional resources.
FDA Approval Process
The steps required to be taken before a
new drug may be marketed in the United States generally include:
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completion of preclinical laboratory and animal testing;
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the submission to the FDA of an IND application, which must be evaluated by the FDA before human clinical trials may commence;
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performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed
drug for its intended use; and
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submission and approval of a NDA.
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Clinical studies are conducted under protocols
detailing, among other things, the objectives of the study, what types of patients may enter the study, schedules of tests and
procedures, drugs, dosages, and length of study, as well as the parameters to be used in monitoring safety, and the efficacy criteria
to be evaluated. A protocol for each clinical study and any subsequent protocol amendments must be submitted to the FDA as part
of the IND.
The clinical testing of a drug product
candidate generally is conducted in three sequential phases prior to approval, but the phases may overlap or be combined. A fourth,
or post approval, phase may include additional clinical studies. The phases are generally as follows:
Phase 1. In Phase 1 clinical
studies, the product is tested in a small number of patients with the target condition or disease or in healthy volunteers. These
studies are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of the product candidate in
humans, side effects associated with increasing doses, and, in some cases, to gain early evidence on efficacy. The number of participants
included in Phase 1 studies generally ranges from 20 to 80.
Phase 2. For Phase 2 studies,
in addition to safety, the sponsor evaluates the efficacy of the product candidate on targeted indications to determine the optimal
dosage. Phase 2 studies typically are larger than Phase 1 but smaller than Phase 3 studies and may involve several hundred participants.
Phase 3. Phase 3 studies typically
involve an expanded patient population at geographically-dispersed test sites. They are performed after preliminary evidence suggesting
effectiveness of the product candidate has been obtained and are designed to further evaluate clinical efficacy and safety, to
establish the overall benefit-risk relationship of the product candidate and to provide an adequate basis for a potential product
approval. Phase 3 studies usually involve several hundred to several thousand participants.
Phase 4. Phase 4 clinical trials
are post-marketing studies designed to collect additional safety data as well as potentially expand a product indication. Post-marketing
commitments are required of, or agreed to by, a sponsor after the FDA has approved a product for marketing. These studies are
used to gain additional information from the treatment of patients in the intended therapeutic indication and to verify a clinical
benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has
ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials
to meet all or part of any Phase 4 clinical trial requirement. These clinical trials are often referred to as Phase 4 post-approval
or post-marketing commitments. Failure to promptly conduct Phase 4 clinical trials could result in the inability to deliver the
product into interstate commerce, misbranding charges, and civil monetary penalties.
For an orphan drug product such as the
proposed urea cycle disorder therapies, the clinical development plan is significantly abbreviated due to the limited number of
available patients. Orphan drug NDAs are typically based on approximately one hundred or fewer patients, rather than the thousands
of patients for a non-orphan drug NDA.
Clinical trials must be conducted in accordance
with the FDA’s and EMA’s good clinical practices, or GCP, requirements. The FDA/EMA may order the temporary or permanent
discontinuation of a clinical study at any time or impose other sanctions if it believes that the clinical study is not being
conducted in accordance with requirements or that the participants are being exposed to an unacceptable health risk. An institutional
review board, or IRB, or Ethics Committee, or EC, generally must approve the clinical trial design and patient informed consent
and also may halt a study, either temporarily or permanently, for failure to comply with the IRB/EC’s requirements, or may
impose other conditions. Additionally, some clinical studies are overseen by an independent group of qualified experts organized
by the clinical study sponsor, known as a data safety monitoring board. This group recommends whether or not a trial may move
forward at designated check points based on access to certain data from the study. The clinical study sponsor may also suspend
or terminate a clinical trial based on evolving business objectives and/or competitive climate.
As a product candidate moves through the
clinical testing phases, manufacturing processes are further defined, refined, controlled and validated. The level of control
and validation required by the FDA would generally increase as clinical studies progress. We and the CMOs or third-party manufacturers
on which we rely for the manufacture of our product candidates and their respective components are subject to requirements that
drugs be manufactured, packaged and labeled in conformity with cGMP. To comply with cGMP requirements, manufacturers must continue
to spend time, money and effort to meet requirements relating to personnel, facilities, equipment, production and process, labeling
and packaging, quality control, recordkeeping and other requirements.
Assuming completion of all required testing
in accordance with all applicable regulatory requirements, detailed information on the product candidate is submitted to the FDA/EMA
in the form of an NDA (or MAA for the EMA), requesting approval to market the product for one or more indications, together with
payment of a user fee, unless waived. An NDA/MAA includes all relevant data available from pertinent nonclinical and clinical
studies, including negative or ambiguous results as well as positive findings, together with detailed information on the chemistry,
manufacture, control and proposed labeling, among other things. To support marketing approval, the data submitted must be sufficient
in quality and quantity to establish the safety and efficacy of the product candidate for its intended use to the satisfaction
of the FDA/EMA.
If an NDA submission is accepted for filing,
the FDA begins an in-depth review of the NDA. Under the Prescription Drug User Fee Act, or PDUFA, the FDA’s goal is to complete
its initial review and respond to the applicant within ten months of submission. If the application is determined by FDA to treat
a serious condition and would provide a significant improvement in safety or effectiveness, it may qualify for Priority Review,
in which case the review goal may be within six months of NDA submission. An orphan drug, such as the proposed urea cycle disorder
therapies, would be expected to meet the requirements of Priority Review, and thus be eligible for a six-month review period.
However, PDUFA goal dates are not legal mandates and FDA response often occurs several months beyond the original PDUFA goal date.
Further, the review process and the target response date under PDUFA may be extended if the FDA requests or the NDA sponsor otherwise
provides additional information or clarification regarding information already provided in the NDA. The NDA review process can,
accordingly, be very lengthy. During its review of an NDA, the FDA may refer the application to an advisory committee for review,
evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of
an advisory committee, but it typically follows such recommendations. Data from clinical studies is not always conclusive and
the FDA and/or any advisory committee it appoints may interpret data differently than the applicant.
After the FDA evaluates the NDA and inspects
manufacturing facilities where the drug product and/or its active pharmaceutical ingredient will be produced, it will either approve
commercial marketing of the drug product with prescribing information for specific indications or issue a complete response letter
indicating that the application is not ready for approval and stating the conditions that must be met in order to secure approval
of the NDA. If the complete response letter requires additional data and the applicant subsequently submits that data, the FDA
nevertheless may ultimately decide that the NDA does not satisfy its criteria for approval.
The FDA could also approve the NDA with
a Risk Evaluation and Mitigation Strategies plan to mitigate risks, which could include medication guides, physician communication
plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization
tools. The FDA also may condition approval on, among other things, changes to proposed labeling, development of adequate controls
and specifications, or a commitment to conduct post-marketing testing. Such post-marketing testing may include Phase 4 clinical
studies and surveillance to further assess and monitor the product’s safety and efficacy after approval. Regulatory approval
of products for serious or life-threatening indications may require that participants in clinical studies be followed for long
periods to determine the overall survival benefit of the drug.
If the FDA/EMA approves one of our therapeutic
candidates, we will be required to comply with a number of post-approval regulatory requirements. We would be required to report,
among other things, certain adverse reactions and production problems to the FDA/EMA, provide updated safety and efficacy information
and comply with requirements concerning advertising and promotional labeling for any of our products. Also, quality control and
manufacturing procedures must continue to conform to cGMP after approval, which imposes extensive procedural, substantive and
record keeping requirements. If we seek to make certain changes to an approved product, including certain manufacturing changes,
we will need FDA/EMA review and approval before the change can be implemented. For example, if we change the manufacturer of a
product the FDA/EMA may require stability or other data from the new manufacturer, which will take time and is costly to generate,
and the delay associated with generating this data may cause interruptions in our ability to meet commercial demand, if any. While
physicians may use products for indications that have not been approved by the FDA/EMA, we may not label or promote the product
for an indication that has not been approved. Securing FDA/EMA approval for new indications is similar to the process for approval
of the original indication and requires, among other things, submitting data from adequate and well-controlled studies that demonstrate
the product’s safety and efficacy in the new indication. Even if such studies are conducted, the FDA/EMA may not approve
any change in a timely fashion, or at all.
We plan to rely, and expect to continue
to rely, on third parties for the manufacture of clinical, and future commercial, quantities of our therapeutic candidates. Future
FDA/EMA and local inspections may identify compliance issues at these third-party facilities that may disrupt production or distribution
or require substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure
to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA/MAA,
including withdrawal or recall of the product from the market or other voluntary, FDA/EMA-initiated or judicial action that could
delay or prohibit further marketing. Newly discovered or developed safety or efficacy data may require changes to a product’s
approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of other
risk management measures. Many of the foregoing could limit the commercial value of an approved product or require us to commit
substantial additional resources in connection with the approval of a product. Also, new government requirements, including those
resulting from new legislation, may be established, or the FDA/EMA’s policies may change, which could delay or prevent regulatory
approval of the products under development.
Orphan Drug Designation
The Orphan Drug Act of 1983, or the Orphan
Drug Act, encourages manufacturers to seek approval of products intended to treat “rare diseases and conditions” with
a prevalence of fewer than 200,000 patients in the United States or for which there is no reasonable expectation of recovering
the development costs for the product. For products that receive Orphan Drug designation by the FDA, the Orphan Drug Act provides
tax credits for clinical research, FDA assistance with protocol design, eligibility for FDA grants to fund clinical studies, waiver
of the FDA application fee, and a period of seven years of marketing exclusivity for the product following FDA marketing approval.
Foreign Regulation
In addition to regulations in the United
States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution
of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities
of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process
varies from country to country and the time may be longer or shorter than that required for FDA approval. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
Under European Union regulatory systems,
a company may submit an MAA either under a centralized or decentralized procedure. The centralized procedure, which is compulsory
for medicines produced by biotechnology, provides for the grant of a single marketing authorization that is valid for all European
Union member states.
Reimbursement
In the United States and other countries,
sales of any products for which we receive regulatory approval for commercial sale will depend in part on the availability of
reimbursement from third-party payors, including government health administrative authorities, managed care providers, private
health insurers and other organizations. Each third-party payor may have its own policy regarding what products it will cover,
the conditions under which it will cover such products, and how much it will pay for such products. Third-party payors are increasingly
examining the medical necessity and cost effectiveness of medical products and services in addition to safety and efficacy and,
accordingly, significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Third-party reimbursement
adequate to enable us to realize an appropriate return on our investment in research and product development may not be available
for our products. The passage of the Medicare Prescription Drug and Modernization Act of 2003, or the MMA, sets forth the requirements
for the distribution and pricing of prescription drugs for Medicare beneficiaries, which may affect the marketing of our products.
Moreover, 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 payment rates. Any reduction in payment that results from the MMA may result
in a similar reduction in payments from non-governmental payors.
In addition, in some foreign countries,
the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary
widely from country to country. For example, the European Union provides options for its member states to restrict the range of
medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system
of direct or indirect controls on the profitability of the company placing the medicinal product on the market.
We expect there will continue to be a number
of federal and state proposals to implement governmental pricing controls. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial
condition and profitability.
The Patient Protection and Affordable Care Act
In March 2010, President Obama
signed into legislation the Patient Protection and Affordable Care Act, or the Affordable Care Act, which resulted in
sweeping changes across the health care industry. The Affordable Care Act contained measures designed to promote quality and
cost efficiency in health care delivery and to generate budgetary savings in the Medicare and Medicaid programs.
Pharmaceuticals represent a significant portion of the cost of providing care, and have therefore been the subject of pricing
negotiation, product selection and utilization review. The Affordable Care Act includes significant provisions that encourage
state and federal law enforcement agencies to increase activities related to preventing, detecting and prosecuting those who
commit fraud, waste and abuse in federal healthcare programs, including Medicare, Medicaid and Tricare. Some of the
provisions of the Affordable Care Act have not yet been fully implemented, and certain provisions have been subject to
judicial and Congressional challenges. The healthcare regulatory environment in the United States is still in flux, and
judicial challenges and legislative initiatives to modify, limit, or repeal the Affordable Care Act continue and may increase
in light of the change in administrations following the United States Presidential election. The manner in which the
Affordable Care Act continues to evolve could materially affect the extent to which and the amount at which pharmaceuticals
are reimbursed by government programs such as Medicare, Medicaid and Tricare. We cannot predict all impacts the Affordable
Care Act, or any changes or additional health reform legislation, may have on our products, but they may result in our
products being chosen less frequently or the pricing being substantially lowered.
Fraud and abuse laws in the United States
A variety of U.S. federal and state laws
apply to the sale, marketing and promotion of drugs that are paid for, directly or indirectly, by U.S. federal or state healthcare
programs such as Medicare and Medicaid. The restrictions imposed by these laws are in addition to those imposed by the FDA, the
U.S. Federal Trade Commission and corresponding state agencies. Some of these laws significantly restrict or prohibit certain
types of sales, marketing and promotional activities by drug manufacturers. Violation of these laws may result in significant
criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties and exclusion or debarment
from U.S. federal and state healthcare and other programs. Many private health insurance companies also prohibit payment to entities
that have been sanctioned, excluded or debarred by U.S. federal agencies.
Anti-kickback statutes in the United States
The U.S. federal Anti-Kickback Statute
prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly,
in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending of a good
or service, for which payment may be made in whole or in part under a U.S. federal healthcare program such as the Medicare and
Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including
gifts, discounts, the furnishing of supplies or equipment, payments of cash and waivers of payments. Several courts have interpreted
the statute’s intent requirement to mean that, if any one purpose of an arrangement involving remuneration is to induce
referrals or otherwise generate business involving goods or services reimbursed in whole or in part under U.S. federal healthcare
programs, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other U.S. federal healthcare programs. In addition, some kickback
allegations have been claimed to violate the U.S. False Claims Act (as discussed below). The reach of the federal Anti-Kickback
Statute was broadened by the Affordable Care Act, which, among other things, amends the intent requirement of the federal Anti-Kickback
Statute. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific
intent to violate it in order to have committed a violation. The Affordable Care Act further provides that 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 U.S. False Claims Act or the Civil Monetary Penalties statute, which imposes penalties
against any person who is determined to have presented or caused to be presented a claim to a federal health program that the
person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The U.S. federal Anti-Kickback Statute
is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing
that the statute is broad and may technically prohibit many innocuous or beneficial arrangements, the Office of Inspector General
of the Department of Health and Human Services, or OIG, has issued a series of regulations, known as the “safe harbors.”
These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and
other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to
fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued.
However, conduct and business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutiny
by government enforcement authorities such as the OIG or the U.S. Department of Justice.
Many states have adopted laws similar to
the U.S. federal Anti-Kickback Statute. Some of these state prohibitions are broader than the U.S. federal statute, and apply
to the referral of patients and recommendations for healthcare items or services reimbursed by any source, not only the Medicare
and Medicaid programs. Government officials have focused certain enforcement efforts on marketing of healthcare items and services,
among other activities, and have brought cases against individuals or entities with sales personnel who allegedly offered unlawful
inducements to potential or existing physician customers in an attempt to procure their business.
U.S. False Claims Act
The U.S. False Claims Act prohibits any
person from knowingly presenting, or causing to be presented, a false claim for payment to the U.S. federal government or knowingly
making, or causing to be made, a false statement in order to have a false claim paid. The U.S. federal government’s interpretation
of the scope of the law has in recent years grown increasingly broad. Most states also have statutes or regulations similar to
the U.S. False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor. Sanctions under these U.S. federal and state laws may include civil monetary penalties,
exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment. Several
drug manufacturers have been prosecuted under the false claims laws for allegedly providing free drugs to physician customers
with the expectation that the physician customers would bill U.S. federal programs for the product. In addition, several recent
cases against drug manufacturers have alleged that the manufacturers improperly promoted their products for “off-label”
use, outside of the scope of the FDA-approved labeling.
U.S. Health Insurance Portability and Accountability
Act of 1996
The federal Health Insurance Portability
and Accountability Act of 1996, or HIPAA, created a new U.S. federal healthcare fraud statute that prohibits knowingly and willfully
executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony
and may result in fines, imprisonment or exclusion from government-sponsored programs. Among other things, HIPAA also imposes
new criminal penalties for 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,
along with theft or embezzlement in connection with a healthcare benefits program and willful obstruction of a criminal investigation
involving a U.S. federal healthcare offense.
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 and Clinical Health Act, or HITECH, and its implementing regulations, imposes certain requirements
relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH
makes HIPAA’s privacy and security standards directly applicable to “business associates” — independent
contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service
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 the federal HIPAA laws 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 differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
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 penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, 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.
Compliance with Environmental Laws
Our compliance with applicable environmental
requirements during the years ended December 31, 2016, 2015 and 2014 and subsequently has not had a material effect upon our capital
expenditures, earnings or competitive position.
Employees
As of March 24, 2017 we had 21 total
employees: 19 full-time employees, 15 of whom were engaged in full-time research and development activities and 4 of whom
were engaged in general administration, and 2 part-time employees. None of our employees is represented by any collective bargaining
unit. We believe that we maintain good relations with our employees.
ITEM 1A. RISK FACTORS.
The following risk factors, together with all of the
other information included or incorporated in this Annual Report on Form 10-K, should be carefully considered. If any of the following
risks, either alone or taken together, or other risks not presently known to us or that we currently believe to not be significant,
develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely
affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their
investment.
Risks Relating to Our Financial Condition and Capital Requirements
We are a development-stage company and have a limited
operating history on which to assess our business, have incurred significant losses since our inception and anticipate that we
will continue to incur significant losses for the foreseeable future.
We are a development-stage biotechnology
company with a limited operating history. Our business does not generate the cash necessary to finance our operations. We incurred
net losses of approximately $20.1 million in 2016 and $7.4 million in 2015. As of December 31, 2016, we had an accumulated deficit
of $69.5 million.
We have devoted substantially all of our
financial resources to identify, acquire, license and develop our technology and product candidates, including conducting early
stage research and preclinical studies, paying interest payments of our term loan and providing general and administrative support
for these operations. To date, we have financed our operations primarily through the sale of debt and equity securities. The amount
of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through
equity or debt financings, strategic collaborations or grants. Biopharmaceutical product development, which includes research
and development, preclinical studies and human clinical trials, is a time-consuming, expensive and highly speculative process
that takes years to complete and involves a substantial degree of risk. Our product candidates are in the early stages of preclinical
development. We have established a preclinical proof of concept for two of our product candidates, and it may be several years,
if ever, before we have a product candidate approved for commercialization. Even if we obtain regulatory approval to market a
product candidate, our future revenue will depend upon the size of any markets in which our product candidates may receive approval,
and our ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share
for our product candidates in those markets.
We expect to continue to incur significant
expenses and increasing operating losses for the foreseeable future. We will require significant additional capital to:
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continue our research and preclinical and clinical development
of our product candidates;
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expand the scope of our current preclinical studies for
our product candidates;
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advance our programs into more expensive clinical studies;
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initiate additional preclinical, clinical or other studies
for our product candidates;
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obtain, change or add additional manufacturers or suppliers;
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seek regulatory and marketing approvals for our product
candidates that successfully complete clinical studies;
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establish a sales, marketing, and distribution infrastructure
to commercialize any products for which we may obtain marketing approval;
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seek to identify, assess, acquire, license, and/or develop
other product candidates;
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make milestone or other payments under any license agreements;
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seek to maintain, protect, and expand our intellectual
property portfolio;
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seek to attract and retain skilled personnel;
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make interest and principal payments of our term loan;
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create additional infrastructure to support our operations
as a public company and our product development and planned future commercialization
efforts; and
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address any delays or issues with any of the above, including
but not limited to failed studies, complex results, safety issues or other regulatory
challenges that require longer follow-up of existing studies, additional major studies
or additional supportive studies in order to pursue marketing approval.
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Further, the net losses we incur may fluctuate
significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may
not be a good indication of our future performance. If we fail to achieve or maintain profitability, it would adversely affect
the value of our common stock.
We are dependent on technologies we have licensed and
we may need to license in the future, and if we fail to obtain licenses we need, or fail to comply with our payment obligations
in the agreements under which we in-license intellectual property and other rights from third parties, we could lose our ability
to develop our product candidates.
We currently are dependent on licenses
from third parties for certain of our key technologies relating to mRNA delivery, including the licenses from UW, and CSIRO. Under
the license agreement with UW, we are required pay all ongoing patent expenses. In addition, we are required to pay UW an annual
license maintenance fee, certain milestone payments, and, following regulatory approval from the FDA to market licensed therapeutic
products, royalty payments. Under the license agreement with CSIRO, we are required to pay annual royalties and product based
royalties. No assurance can be given that we will generate sufficient revenue or raise additional financing to meet our payment
obligations in the license agreements with UW or CSIRO or other license agreements we enter into with third parties in the future.
Any failure to make the payments required by the license agreements may permit the licensor to terminate the license. If we were
to lose or otherwise be unable to maintain these licenses, it would halt our ability to develop our product candidates, which
would have an immediate material adverse effect on our business.
We have never generated any revenue from product sales
and may never be profitable.
We have experienced significant operating
losses since inception. We have no products approved for commercialization and have never generated any revenue from product sales.
We are currently developing products based on delivery of mRNAs to correct genetic metabolic defects in the liver. The process
of developing such products requires significant research and development efforts, including basic research, preclinical and clinical
development, and regulatory approval. These activities, together with our general and administrative expenses, have resulted in
operating losses in the past, and there can be no assurance that we can achieve profitability in the future. Our ability to achieve
profitability depends on our ability to develop product candidates, conduct preclinical development and clinical trials, obtain
necessary regulatory approvals and manufacture, distribute, market and sell our therapeutics. We cannot assure you of the success
of any of these activities or predict if or when we will ever become profitable.
We require substantial additional funding to bring our
planned products through clinical trials, regulatory approval, manufacturing and marketing and to become profitable. This additional
financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force
us to delay, limit, or terminate our product development efforts or other operations.
We are currently advancing our mRNA therapeutic
candidates through preclinical development. Developing our product candidates is expensive, and we expect our research and development
expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates
through clinical studies.
As of December 31, 2016, we had cash, cash
equivalents and marketable securities of $15.5 million. Based upon our current expectations, we believe that our currently available
cash, cash equivalents and marketable securities will be sufficient to meet our anticipated expenditures for at least the next
12 months. However, we cannot assure you that our plans will not change or that changed circumstances will not result in the depletion
of our capital resources more rapidly than we currently anticipate, and we expect that we will require substantial additional
capital, whether through the sale of equity or debt securities, entry into strategic partnerships, establishment of other funding
facilities, asset sales or other means, in order to continue the research and development and conduct significant preclinical
and clinical activities for our lead mRNA product candidates and to support our other ongoing activities.
Our future funding requirements will depend
on many factors, including but not limited to:
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the scope, rate of progress, results and cost of our clinical
studies, preclinical testing, and other related activities;
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the cost of manufacturing clinical supplies, and establishing
commercial supplies of our product candidates and any products that we may develop;
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the number and characteristics of product candidates that
we pursue;
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competing technological developments;
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our proprietary patent position, if any, in our products;
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the regulatory approval process for our products;
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the cost and timing of establishing sales, marketing,
and distribution capabilities; and
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the terms and timing of any collaborative, licensing,
and other arrangements that we may establish, including any required milestone and royalty
payments thereunder.
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Any additional fundraising efforts may
divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our
product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders
and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market
price of our shares to decline. To the extent that we raise additional capital through the sale of equity or convertible debt
securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely
affect your rights as a stockholder. The incurrence of indebtedness could result in increased fixed payment obligations and we
may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations
on our ability to acquire, sell, or license intellectual property rights, and other operating restrictions that could adversely
impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners
or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our
technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect
on our business, operating results, and prospects.
If we are unable to obtain funding on a
timely basis, we may be required to significantly curtail, delay, or discontinue one or more of our research or development programs
or the commercialization of any product candidates or be unable to expand our operations or otherwise capitalize on our business
opportunities, as desired, which could materially affect our business, financial condition, and results of operations.
Risks Related to our Reliance on Third Parties
We are dependent on technologies we license, and if we
lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products
would be harmed.
We currently are dependent on licenses
from third parties for certain of our key technologies relating to mRNA delivery, including the licenses from UW and CSIRO. Our
current licenses impose, and any future licenses we enter into are likely to impose, various development, funding, royalty, diligence,
sublicensing, insurance and other obligations on us. For example, the Hybrid mRNA Technology we anticipate utilizing in developing
our product candidates is based upon a multi-component nanoparticle delivery system that includes our SMARTT Polymer Technology®,
which uses novel synthetic polymers we developed pursuant to an exclusive license from UW. UW may terminate the license upon delivery
of a written notice of termination if we breach or fail to perform one or more of our duties under the license agreement or if
we become insolvent. If our license with respect to any of these technologies is terminated for any reason, the development of
the products contemplated by the licenses would be delayed, or suspended altogether, while we seek to license similar technology
or develop new non-infringing technology. We may need to obtain rights to additional intellectual property, and the costs of obtaining
new licenses may be high, or licenses may be unavailable. If our existing licenses are terminated, the development of the products
contemplated by the licenses, including the product candidates for urea cycle disorders we are currently developing, would be
delayed or terminated and we may not be able to negotiate additional licenses on acceptable terms, if at all, which would have
a material adverse effect on our business.
We may become dependent on our collaborative arrangements
with third parties for a substantial portion of our revenue, and our development and commercialization activities may be delayed
or reduced if we fail to initiate, negotiate or maintain successful collaborative arrangements.
We plan to pursue and form partnerships
to accelerate the development and maximize the market potential of our mRNA delivery technology. Such potential partners may provide
the financial resources, preclinical and clinical development, regulatory compliance, sales, marketing and distribution capabilities
required for the success of our business. If we fail to secure or maintain successful collaborative arrangements, our development
and commercialization activities may be delayed, reduced or terminated, and our revenues could be materially and adversely impacted.
Over the next several years, we may depend
on these types of collaborations for a significant portion of our revenue. The potential future milestone and royalty payments
and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development
programs, thereby facilitating the application of our technology to the development and commercialization of our products. These
collaborative agreements might be terminated either by us or by our partners upon the satisfaction of certain notice requirements.
Our partners may not be precluded from independently pursuing competing products and drug delivery approaches or technologies.
Even if our partners continue their contributions to our collaborative arrangements, of which there can be no assurance, they
may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Our partners
may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations. In
addition, our partners may experience financial difficulties at any time that could prevent them from having available funds to
contribute to these collaborations. If our collaborators fail to conduct their commercialization, regulatory compliance, sales
and marketing or distribution activities successfully and in a timely manner, or if they terminate or materially modify their
agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed or terminated
because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our
own.
Although we currently do not have any such
partnership agreements, in the future we may receive milestone and/or royalty payments as a result of each of such agreements.
If our partner with respect to any agreement terminates the applicable agreement or fails to perform its obligations thereunder,
we may not receive any revenues from the technology that we have licensed pursuant to the agreement, including any milestone or
royalty payments.
The mRNAs and formulation components for our product
candidates are currently acquired from a single or a limited number of suppliers. The loss of these suppliers, or their failure
to supply us with the mRNAs and the formulation components, could materially and adversely affect our business.
We currently produce the LNPs and the polymers
we need for discovery research programs and preclinical studies of our therapeutic candidates internally. We rely on a few suppliers
of our formulation components, and for mRNAs, only a single supplier, TriLink BioTechnologies, LLC. We have signed long-term contracts
with some of our suppliers and are currently negotiating long-term contracts with other suppliers. There can be no assurance that
sufficient quantities of product candidates could be manufactured if our suppliers are unable or unwilling to supply such materials.
It is possible that we may be required to switch suppliers in the foreseeable future. In such case, the process of switching suppliers
may be costly and/or time-consuming for us, and that may include the temporary or permanent suspension of a preclinical or clinical
study or commercial sales of our candidate products.
The mRNAs we use are highly specialized,
and we do not currently have a contractual relationship with suppliers for the mRNAs other than TriLink BioTechnologies, LLC.
Although we believe that there are alternate sources of supplies that could satisfy our clinical and commercial requirements with
respect to the mRNAs, we cannot guarantee that identifying alternate sources and establishing relationships with such sources
would not result in significant delay in the development of our product candidates. Additionally, we may not be able to enter
into supply arrangements with alternative suppliers on commercially reasonable terms, or at all. A delay in the development of
our product candidates or having to enter into a new agreement with a different third party on less favorable terms than we have
with our current suppliers could have a material adverse impact on our business.
We anticipate that we will rely completely on third parties
to manufacture certain preclinical and all clinical drug supplies. Our business could be harmed if those third parties fail to
provide us with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.
We do not currently have, nor do we plan
to acquire, the infrastructure or capability internally to manufacture our preclinical and clinical drug supplies for use in the
conduct of our clinical studies, and we lack the resources and the capability to manufacture any of our product candidates on
a clinical or commercial scale. Our internal manufacturing capabilities are limited to small-scale production of non-cGMP material
in quantities necessary to conduct preclinical studies of our product candidates. Our product candidates utilize specialized formulations
with polymer and LNP components whose scale-up and manufacturing could be challenging and require specific technical expertise
that we may not be able to access on acceptable terms, if at all. We also have very limited experience in such scale-up and manufacturing,
requiring us to depend on a limited number of third parties, who might not be able to deliver in a timely manner, or at all. In
order to develop products, apply for regulatory approvals and commercialize our products, we will need to develop, contract for,
or otherwise arrange for access to the necessary manufacturing capabilities. We anticipate that we will rely on CMOs, and other
third party contractors, some of whom may have limited cGMP experience, to manufacture formulations and produce larger scale amounts
of drug substance and the drug product required for any clinical trials that we initiate.
The manufacturing process for any products
based on our technologies that we or our partners may develop is subject to the FDA and foreign regulatory authority approval
process, and we or our partners will need to contract with manufacturers who can meet all applicable FDA and foreign regulatory
authority requirements on an ongoing basis. In addition, if we receive the necessary regulatory approval for any product candidate,
we also expect to rely on third parties, including our commercial collaborators, to produce materials required for commercial
supply. We may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or
maintain contract manufacturing for these product candidates, or to do so on commercially reasonable terms, we may not be able
to successfully develop and commercialize our products.
To the extent that we enter into manufacturing
arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner and consistent
with regulatory requirements, including those related to quality control and quality assurance. The failure of a third-party manufacturer
to perform its obligations as expected could adversely affect our business in a number of ways, including:
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we may not be able to initiate or continue preclinical
and clinical trials of products that are under development;
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we may need to repeat pivotal clinical trials;
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we may be delayed in submitting regulatory applications,
or receiving regulatory approvals, for our product candidates;
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we may lose the cooperation of our collaborators;
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our products could be the subject of inspections by regulatory
authorities;
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we may be required to cease distribution or recall some
or all batches of our products; and
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ultimately, we may not be able to meet commercial demands
for our products.
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If a third-party manufacturer with whom
we contract fails to perform its obligations, we may be forced to manufacture the materials ourselves, for which we may not have
the capabilities or resources, or enter into an agreement with a different third-party manufacturer, which we may not be able
to do on reasonable terms, if at all. In some cases, the technical skills required to manufacture our product may be unique to
the original manufacturer and we may have difficulty transferring such skills to a back-up or alternate manufacturer, or we may
be unable to transfer such skills at all. In addition, if we are required to change manufacturers for any reason, we will be required
to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable
regulations and guidelines. We will also be required to demonstrate that the newly manufactured material is similar to the previously
manufactured material, or we may need to repeat clinical trials with the newly manufactured material. The delays associated with
the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or
within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidate that such
manufacturer owns independently, which would increase our reliance on such manufacturer or require us to obtain a license from
such manufacturer in order to have another third party manufacture our products.
We intend to rely on third parties to conduct our preclinical
studies and clinical trials and perform other tasks for us. If these third parties do not successfully carry out their contractual
duties, meet expected deadlines, or comply with regulatory requirements, we may not be able to obtain regulatory approval for
or commercialize our product candidates and our business, financial condition and results of operations could be substantially
harmed.
We plan to rely upon third-party CROs,
medical institutions, clinical investigators and contract laboratories to monitor and manage data for our licensed ongoing preclinical
and clinical programs. We have relied and expect to continue to rely on these parties for execution of our preclinical studies
and clinical trials, and we control only certain aspects of their activities. Nevertheless, we maintain responsibility for ensuring
that each of our clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory,
and scientific standards and our reliance on these third parties does not relieve us of our regulatory responsibilities. We and
our CROs and other vendors are required to comply with cGMP, current good clinical practices or cGCP, and current GLP, or cGLP,
which are a collection of laws and regulations enforced by the FDA or comparable foreign authorities for all of our product candidates
in clinical development. Regulatory authorities enforce these regulations through periodic inspections of manufacturing facilities,
preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other
contractors. If we or any of our CROs or vendors fails to comply with applicable regulations, the data generated in our preclinical
studies and clinical trials may be deemed unreliable and the FDA or comparable foreign authorities may require us to perform additional
preclinical studies and clinical trials before approving our marketing applications. We cannot assure that upon inspection by
a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations.
In addition, our clinical trials must be conducted with products produced consistent with cGMP regulations. Our failure to comply
with these regulations may require us to repeat clinical trials, which would delay the development and regulatory approval processes.
If any of our relationships with these
third-party CROs, medical institutions, clinical investigators or contract laboratories terminate, we may not be able to enter
into arrangements with alternative CROs on commercially reasonable terms, or at all. In addition, our CROs are not our employees,
and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient
time and resources to our ongoing preclinical and clinical programs. If CROs do not successfully carry out their contractual duties
or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is
compromised due to the failure to adhere to our protocols, regulatory requirements, or for 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
our product candidates. CROs may also generate higher costs than anticipated. As a result, our business, financial condition and
results of operations and the commercial prospects for our product candidates could be materially and adversely affected, our
costs could increase, and our ability to generate revenue could be delayed.
Switching or adding additional CROs, medical
institutions, clinical investigators or contract laboratories involves additional cost and requires management time and focus.
In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays
occur, which can materially impact our ability to meet our desired clinical development timelines.
If any of our product candidates are approved for marketing
and commercialization and we are unable to develop sales, marketing and distribution capabilities on our own or enter into agreements
with third parties to perform these functions on acceptable terms, we will be unable to commercialize successfully any such future
products.
We currently have no sales, marketing or
distribution capabilities or experience. If any of our product candidates is approved, we will need to develop internal sales,
marketing and distribution capabilities to commercialize such products, which would be expensive and time-consuming, or enter
into collaborations with third parties to perform these services. If we decide to market our products directly, we will need to
commit significant financial and managerial resources to develop a marketing and sales force with technical expertise and supporting
distribution, administration and compliance capabilities. If we rely on third parties with such capabilities to market our products
or decide to co-promote products with collaborators, we will need to establish and maintain marketing and distribution arrangements
with third parties, and there can be no assurance that we will be able to enter into such arrangements on acceptable terms or
at all. In entering into third-party marketing or distribution arrangements, any revenue we receive will depend upon the efforts
of the third parties and there can be no assurance that such third parties will establish adequate sales and distribution capabilities
or be successful in gaining market acceptance of any approved product. If we are not successful in commercializing any product
approved in the future, either on our own or through third parties, our business, financial condition, results of operations and
prospects could be materially adversely affected.
Risks Related to the Development and Regulatory Approval
of Our Product Candidates
The Hybrid mRNA Technology and mRNA-based drug development
is unproven and may never lead to marketable products.
Our future success depends on the successful
development, by us or together with our future partners, of mRNA-based products and technologies as therapeutic agents. The scientific
discoveries that form the basis for our efforts to discover and develop the Hybrid mRNA Technology and mRNA-based therapeutics
are relatively new. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both
preliminary and limited.
Relatively few mRNA-based therapeutic product
candidates have ever been tested in animals or humans, and we are not aware of any mRNA-based therapeutic product having received
marketing approval. We currently have only limited preclinical data suggesting that we can deliver mRNA molecules to hepatocytes
in the liver using our Hybrid mRNA Technology, as our business plan contemplates, resulting in the intended expression of proteins
to treat orphan liver diseases. In addition, mRNA-based compounds delivered using our Hybrid mRNA Technology may not demonstrate
in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human
biological systems in unforeseen, ineffective or harmful ways. We may make significant expenditures developing mRNA-based therapeutics
without success. In addition, our Hybrid mRNA Technology polymer-LNP-based delivery system has never been tested in humans and
may not be effective. Our mRNA technology may result in unanticipated side effects that may prevent the further development of
our products. As a result, we may never develop a marketable product utilizing our technologies. If we, independently or together
with potential future partners, do not develop and commercialize drugs based upon our technologies, our operations will not become
profitable, and we may cease operations.
As all of our programs are in preclinical studies or
early stage research, we cannot be certain that any of our product candidates will receive regulatory approval or be commercialized.
If we are unable to receive regulatory approval or commercialize our product candidates, our business will be adversely affected.
Our key strategy is to discover, develop
and commercialize a portfolio of novel proprietary mRNA therapeutics for the treatment of inherited orphan liver diseases through
internal efforts and through those of our future strategic partnerships. Our future results of operations depend, to a significant
degree, upon our and our collaborators’ ability to successfully develop and commercialize our product candidates. To date,
no pivotal clinical trials of mRNA therapeutics designed to provide clinically and statistically significant proof of efficacy,
or to provide sufficient evidence of safety to justify approval, have been completed. All of our product candidates are in the
early stages of development and will require additional preclinical and clinical development and studies to evaluate their toxicology,
carcinogenicity and optimize their formulation, management of nonclinical, clinical, and manufacturing activities, regulatory
approval, obtaining adequate manufacturing supply, building of a commercial organization, and significant marketing efforts before
we generate any revenue from product sales. The development and commercialization process, particularly with respect to innovative
products, is both time-consuming and costly and involves a high degree of business risk. Successful product development in the
pharmaceutical industry is highly uncertain, and very few research and development projects result in a commercial product. Positive
results obtained during early development do not necessarily mean later development will succeed or that regulatory clearances
will be obtained. Our development efforts may not lead to commercialization, or even if we ultimately receive regulatory approval
for any of these product candidates, we or our potential future partners, if any, may be unable to commercialize them successfully
for a variety of reasons, including the following:
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a product candidate may, after additional studies, be
shown to have harmful side effects or other characteristics that indicate it is unlikely
to be effective;
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a product candidate may not receive necessary regulatory
approvals in a timely manner, if at all;
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competitors may develop alternatives that render our product
candidates (or those of our future partners) obsolete;
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a product candidate may not have a sustainable intellectual
property position in major markets;
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a product candidate may not be able to be successfully
and profitably produced and marketed; or
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a product candidate may not be accepted by patients, the
medical community or third-party payors.
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If any of our product candidates fail to
demonstrate safety or efficacy at any time or during any phase of development, we would experience potentially significant delays
in, or be required to abandon, development of the product candidate.
To date, we have invested substantially
all of our efforts and financial resources to identify, acquire, license, and develop our technology and lead compounds, including
conducting preclinical studies and providing general and administrative support for these operations. We currently have one product
candidate with a preclinical proof of concept and are currently evaluating programs for two other subtypes of urea cycle disorders
for a second potential product candidate. None of our product candidates has been approved by the FDA or any foreign regulatory
authority, and we do not anticipate that any of our current product candidates will be eligible to receive regulatory approval
from the FDA or comparable foreign authorities and begin commercialization for a number of years, if ever. There can be no assurance
that any of our product candidates that have entered, or may enter, research or development will ever be successfully commercialized,
and delays in any part of the process or the inability to obtain regulatory approval could adversely affect our operating results.
If we fail to commercialize one or more of our current product candidates in a timely manner or at all, we may be unable to generate
sufficient revenues to attain or maintain profitability, and our financial condition and stock price may decline.
Our data from the OTCD program is limited and may not
be indicative of future results.
We have conducted a limited number of experiments
in our OTCD program with the hyperammonemia model, and there is significant uncertainty as to whether the early results from our
preclinical studies on mice will translate into a successful therapeutic product candidate. Our OTCD program may fail to reach
clinical stage for a number of reasons, including the following:
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We have performed a limited number of experiments in the
hyperammonemia model.
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We anticipate a minimum level of OTC protein will have
to be made to cure OTCD patients, but it is unclear whether the protein levels produced
in mice using our OTCD program will be sufficient for the human disease.
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It is unclear whether the doses of mRNA required to normalize
ammonia and orotic acid levels in mice will translate into larger animal species and
ultimately humans. Dose levels will affect the cost of the ultimate therapeutic and high
dosage levels may be cost prohibitive.
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It is unknown if the dosing frequency used in mouse studies
will translate into larger animal species and humans. The dosing frequency may be inconsistent
with acceptable dosing frequency for a commercial product.
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While the OTC-encoded mRNA treatment appears to be well
tolerated in mice, rats and non-human primates, it is unclear whether tolerability studies
in animals will fully translate into humans which may be more susceptible to the side
effects of the drug.
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The development of our product candidates including clinical
trials utilizing our technologies will be expensive and time-consuming, and if the development of our product candidates does
not produce favorable results or commencement or completion of clinical trials are delayed, we and our collaborators may be unable
to commercialize these products.
Our research and development programs with
respect to mRNA-based products are at an early stage. To receive regulatory approval for the commercialization of our current
product candidates, or any other candidates that we may develop, extensive preclinical studies and adequate and well-controlled
clinical trials must be conducted to demonstrate safety and efficacy in humans to the satisfaction of the FDA and comparable foreign
authorities. In order to support marketing approval, these agencies typically require successful results in one or more Phase
3 clinical trials, which our current product candidates have not yet reached and may never reach. Preclinical and clinical testing
is expensive, can take many years and has an uncertain outcome, and the historical failure rate for product candidates is high.
The length of time generally varies substantially according to the type of drug, complexity of clinical trial design, regulatory
compliance requirements, intended use of the product candidate and rate of patient enrollment for the clinical trials, and we
do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. Delays in the commencement
or completion of clinical trials could significantly impact our product development costs. In addition, our clinical trials may
also be delayed by the limited number of patients who have the orphan diseases we are pursuing or by slower than expected enrollment.
A failure of one or more preclinical studies
or clinical trials can occur at any stage of the development process. We or our future partners may experience numerous unforeseen
events during, or as a result of, the preclinical testing and the clinical trial process that could delay or prevent the commencement
and completion of clinical trials, and as a result, the receipt of regulatory approval or the commercialization of our product
candidates, including:
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preclinical tests or clinical trials may produce negative
or inconclusive results, and we or a partner may decide, or a regulator may require us,
to conduct additional preclinical testing or clinical trials, or we or a partner may
abandon projects that were previously expected to be promising;
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regulators may not authorize us to commence a clinical
trial or conduct a clinical trial at a prospective trial site;
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prospective third-party contract research organizations,
or CROs, and clinical trial sites may not reach an agreement with us on acceptable terms,
or at all;
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enrollment in clinical trials may be slower than anticipated
or participants may drop out of clinical trials at a higher rate than anticipated, resulting
in significant delays;
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CROs may fail to conduct the clinical trial in accordance
with regulatory requirements or clinical protocols or meet their contractual obligations
in a timely manner;
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product candidates may have very different chemical and
pharmacological properties in humans than in laboratory testing and may interact with
human biological systems in unforeseen, ineffective or harmful ways;
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collaborators who may be responsible for the development
of our product candidates may not devote sufficient resources to these clinical trials
or other preclinical studies of these candidates or conduct them in a timely manner;
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clinical trials may be suspended or terminated if the
participants are being exposed to unacceptable health risks;
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regulators, including the FDA, may require that clinical
research be held, suspended or terminated for various reasons, including noncompliance
with regulatory requirements;
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the cost of clinical trials may be greater than anticipated;
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lack of adequate funding to continue the clinical trial;
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the supply or quality of product candidates or other materials
necessary to conduct clinical trials may be insufficient or inadequate; and
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product candidates may not have the desired effects or
may include undesirable side effects or the product candidates may have other unexpected
characteristics that delay or preclude regulatory approval or limit their commercial
use or market acceptance, if approved.
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Further, even if the results of preclinical
studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of
drug development or that results seen in clinical trials will not continue with longer term treatment. Drugs in late stages of
clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical
testing. For example, positive results in early Phase 1 or Phase 2 clinical trials may not be repeated in larger Phase 2 or Phase
3 clinical trials. This product candidate development risk is heightened by any changes in the planned clinical trials compared
to the completed clinical trials. As product candidates are developed through preclinical to early to late stage clinical trials
towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing
and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of
changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization,
such changes carry the risk that they will not achieve these intended objectives. Any of these changes could make the results
of our planned clinical trials or other future clinical trials we may initiate less predictable and could cause our product candidates
to perform differently, including causing toxicities, which could delay completion of our clinical trials, delay approval of our
product candidates, and/or jeopardize our ability to commence product sales and generate revenues.
It is expected that all of the product
candidates that may be developed by us or in collaboration with future partners based on our technologies will be prone to the
risks of failure inherent in drug development. The clinical trials of any or all of our product candidates could be unsuccessful,
which would prevent the commercialization of these drugs. We currently do not have strategic collaborations in place for clinical
development of any of our current product candidates. Therefore, in the future, we or any potential future collaborative partner
will be responsible for establishing the targeted endpoints and goals for development of our product candidates. These targeted
endpoints and goals may be inadequate to demonstrate the safety and efficacy levels required for regulatory approvals. Even if
we believe data collected during the development of our product candidates are promising, such data may not be sufficient to support
marketing approval by the FDA or comparable foreign authorities. Further, data generated during development can be interpreted
in different ways. The FDA or comparable foreign authorities conducts its own independent analysis of some or all of the preclinical
and clinical trial data submitted in a regulatory filing and often comes to different and potentially more negative conclusions
than the analysis performed by the drug sponsor. Our failure to adequately demonstrate the safety and efficacy of our product
candidates would prevent our receipt of regulatory approval, and ultimately the potential commercialization of these product candidates.
We in-license some of the intellectual
property related to our product candidates from UW and CSIRO pursuant to the license agreements. Since our experience with our
product candidates is limited, we will need to train our existing personnel and hire additional personnel in order to successfully
administer and manage our clinical trials and other studies as planned, which may result in delays in completing such planned
clinical trials and preclinical studies.
Since we do not currently possess the resources
necessary to independently develop and commercialize our product candidates or any other candidates that we may develop, we may
seek to enter into collaborative agreements to assist in the development and potential future commercialization of some or all
of these assets as a component of our strategic plan. However, our discussions with potential collaborators may not lead to the
establishment of collaborations on acceptable terms, if at all, or it may take longer than expected to establish new collaborations,
leading to development and potential commercialization delays, which would adversely affect our business, financial condition
and results of operations.
If we experience delays in the completion
or termination of any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed,
and our ability to commence product sales and generate product revenues from any of our product candidates will be delayed. In
addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development
and approval process. Delays in completing our clinical trials could also allow our competitors to obtain marketing approval before
we do or shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates.
Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors
that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of
regulatory approval of our product candidates.
We expect to continue to incur significant research and
development expenses, which may make it difficult for us to attain profitability.
We expect to expend substantial funds in
research and development, including preclinical studies and clinical trials of our product candidates, and to manufacture and
market any product candidates in the event they are approved for commercial sale. We also may need additional funding to develop
or acquire complementary companies, technologies and assets, as well as for working capital requirements and other operating and
general corporate purposes. Moreover, our planned increases in staffing will dramatically increase our costs in the near and long-term.
Because the successful development of our
product candidates is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially
commercialize them. In addition, we may not be able to generate sufficient revenue, even if we are able to commercialize any of
our product candidates, to become profitable.
Gene editing technology is relatively new, and if we
are unable to use our technology in gene editing applications, our revenue opportunities from such partnerships will be limited.
Delivering mRNA encoding gene editing nucleases
to the liver involves the relatively new approach of gene editing, and the scientific evidence to support the feasibility of developing
drugs based on these discoveries is both preliminary and limited. Gene editing technologies have been subject to only a limited
number of animal studies and clinical trials, and we are not aware of any gene editing products that have obtained marketing approval
from the FDA. Gene editing in humans may cause deaths, serious adverse events, undesirable side effects, or unexpected characteristics,
and if such adverse events were to occur with in vivo gene editing in humans, it could lead to a temporary or permanent cessation
of clinical studies and product development in the field of gene editing, which could lead to the termination of any gene editing
partnership we enter into with our collaborators. Moreover the regulatory requirements that will govern gene editing product candidates
are uncertain and are subject to change. In addition, gene editing products involve new and rapidly evolving technologies that
may render our products or processes obsolete or less attractive. We cannot be certain that we will be able to implement technologies
on a timely basis or at a cost that is acceptable to us. If we or our potential collaborators are unable to use our delivery technology
to develop commercial gene editing products, our revenue opportunities will be limited and our operations may be adversely affected.
We are subject to extensive U.S. and foreign government
regulations, including the requirement of approval before products may be marketed. The regulatory approval processes of the FDA
and comparable foreign authorities are lengthy, time-consuming, and inherently unpredictable. If we are ultimately unable to obtain
regulatory approval for our product candidates, our business will be substantially harmed.
We and the drug product candidates developed
by us or in collaboration with future partners are subject to extensive regulation by governmental authorities in the United States
and other countries. Failure to comply with applicable requirements could result in, among other things, any of the following
actions:
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fines and other civil penalties;
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unanticipated expenditures;
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delays in approving or refusal to approve a product candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions; and
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injunctions and criminal prosecution.
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Our product candidates, developed independently
or in collaboration with future partners, cannot be marketed in the United States without FDA approval or clearance, and they
cannot be marketed in foreign countries without regulatory approval from comparable foreign authority. Neither the FDA nor any
foreign regulatory authority has approved any of the product candidates being developed by us based on our technologies. These
product candidates are in preclinical development and will have to be approved by the FDA or applicable foreign regulatory authorities
before they can be marketed in the United States or abroad. Obtaining regulatory approval requires substantial time, effort, and
financial resources, and may be subject to both unexpected and unforeseen delays, including, without limitation, citizen’s
petitions or other filings with the FDA, and there can be no assurance that any approval will be granted on a timely basis, if
at all, or that delays will be resolved favorably or in a timely manner. Specifically, neither our polymer-LNP technology nor,
to our knowledge, any mRNA-based therapeutic has been approved as a human therapeutic. We have not obtained regulatory approval
for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek
to develop in the future will ever obtain regulatory approval. If our product candidates are not approved in a timely fashion,
or are not approved at all, our business and financial condition may be adversely affected.
In addition, both before and after regulatory
approval, we, our collaborators and our product candidates are subject to numerous requirements by the FDA and foreign regulatory
authorities covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, distribution
and export. These requirements may change and additional government regulations may be promulgated that could affect us, our collaborators
or our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future
legislation or administrative action, either in the United States or abroad. There can be no assurance that neither we nor any
of our future partners will be required to incur significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a material adverse effect upon our business.
Failure to comply with foreign regulatory requirements
governing human clinical trials and marketing approval for drugs could prevent the sale of product candidates based on our technologies
in foreign markets, which may adversely affect our operating results and financial condition.
We generally plan to seek regulatory approval
to commercialize our product candidates in the United States, the European Union, and in additional foreign countries. The requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement for marketing product candidates based
on our technologies outside the United States vary greatly from country to country. We have, and our future partners may have,
limited experience in obtaining foreign regulatory approvals. The time required to obtain approvals outside the United States
may differ from that required to obtain FDA approval. Neither we nor our future partners may be able to obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries,
and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the
FDA. Failure to comply with these regulatory requirements or obtain required approvals could restrict the development of foreign
markets for our product candidates and may have a material adverse effect on our financial condition or results of operations.
Even if regulatory approvals are obtained for our products,
such products will be subject to ongoing regulatory review. If we or a partner fail to comply with continuing U.S. and foreign
regulations, the approvals to market drugs could be lost and our business would be materially adversely affected.
Following any initial FDA or foreign regulatory
approval of any drugs we or a partner may develop, such drugs will continue to be subject to regulatory review, including the
review of adverse drug experiences and clinical results that are reported after such drugs are made available to patients. This
would include results from any post-marketing studies or vigilance required as a condition of approval. The manufacturer and manufacturing
facilities used to make any product candidates will also be subject to periodic review and inspection by regulatory authorities,
including the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result
in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. Marketing, advertising
and labeling also will be subject to regulatory requirements and continuing regulatory review. The failure to comply with applicable
continuing regulatory requirements may result in fines, suspension or withdrawal of regulatory approval, product recalls and seizures,
operating restrictions and other adverse consequences.
We have used, and may continue to use, hazardous chemicals
and biological materials in our business. Any disputes relating to improper use, handling, storage or disposal of these materials
could be time-consuming and costly.
Our research and development operations
have involved, and if continued in the future will likely continue to involve, the use of hazardous and biological, potentially
infectious, materials. Such use subjects us to the risk of accidental contamination or discharge or any resultant injury from
these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of
these materials and specific waste products. We could be subject to damages, fines or penalties in the event of an improper or
unauthorized release of, or exposure of individuals to, these hazardous materials, and our liability could be substantial. The
costs of complying with these current and future environmental laws and regulations may be significant, thereby impairing our
business.
We are also subject to numerous environmental,
health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens
and the handling of biohazardous materials. We maintain workers’ compensation insurance to cover us for costs and expenses
we may incur due to injuries to our employees resulting from the use of these materials. The limits of our workers’ compensation
insurance are mandated by state law, and our workers’ compensation liability is capped at these state-mandated limits. We
do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with
our storage or disposal of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations
affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or
penalties if we violate, any of these laws or regulations.
We may be subject, directly or indirectly, to federal
and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable
to comply, or have not fully complied, with such laws, we could face substantial penalties.
If we obtain FDA approval for any of our
product candidates and begin commercializing those products in the United States, our operations may be directly or indirectly
through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback
Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things,
our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the
federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
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the federal Anti-Kickback Statute, which prohibits, among
other things, persons from knowingly and willfully soliciting, receiving, offering or
paying remuneration, directly or indirectly, to induce, or in return for, the purchase
or recommendation of an item or service reimbursable under a federal healthcare program,
such as the Medicare and Medicaid programs;
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federal civil and criminal false claims laws and civil
monetary penalty laws, including the False Claims Act, which prohibit, among other things, individuals or entities from
knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid,
or other third-party payors that are false or fraudulent;
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HIPAA, which created new federal criminal statutes that
prohibit executing a scheme to defraud any healthcare benefit program and making false
statements relating to healthcare matters;
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HIPAA, as amended by HITECH, and its implementing regulations,
which imposes certain requirements relating to the privacy, security, and transmission
of individually identifiable health information;
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the federal physician sunshine requirements under the
Patient Protection and Affordable Care Act, which requires manufacturers of drugs, devices,
biologics, and medical supplies to report annually to the U.S. Department of Health and
Human Services information related to payments and other transfers of value to physicians and teaching hospitals and ownership and investment interests
held by physicians and their immediate family members; and
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state law equivalents of each of the above federal laws,
such as anti-kickback and false claims laws that may apply to items or services reimbursed
by any third-party payor, including commercial insurers, 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, or otherwise
restrict payments that may be made to healthcare providers and other potential referral
sources; 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 laws governing the privacy and security of health information
in certain circumstances, many of which differ from each other in significant ways and
may not have the same effect, thus complicating compliance efforts.
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Because of the breadth of these laws and
the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could
be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these
laws. For example, the Patient Protection and Affordable Care Act, among other things, amends the intent requirement of the federal
anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute
or specific intent to violate it. Moreover, the Patient Protection and Affordable Care Act provides that 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 False Claims Act.
If our operations are found to be in
violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to
penalties, including civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm,
diminished profits and future earnings, exclusion from participation in government health care programs, such as Medicare and
Medicaid, imprisonment, 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.
Risks Related to our Intellectual Property
If we are unable to adequately protect our proprietary
technology from legal challenges, infringement or alternative technologies, our competitive position may be hurt and our operating
results may be negatively impacted.
Our business is based upon the development
of mRNA-based therapeutics, and we rely on the issuance of patents, both in the United States and internationally, for protection
against competitive technologies. As of March 24, 2017, we own or have in-licensed 16 issued U.S. patents, 25 issued foreign
patents, and over 15 pending U.S. and foreign patent applications. Although we believe we exercise the necessary due diligence
in the patent filings we make in connection with the patents we own or in-license, our proprietary position is not established
until the appropriate regulatory authorities actually issue a patent, which may take several years from initial filing or may
never occur.
Moreover, even the established patent positions
of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Although we believe our issued
patents are valid, third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability
of our patents. The issuance of a patent is not conclusive as to its claim scope, validity or enforceability. Challenges raised
in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our
patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any
such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying us
licensing fees or royalties, which could significantly diminish the value of these discoveries or technologies. Responding to
challenges initiated by third parties, including in response to a suit we initiate regarding infringement or other intellectual
property violations, may require significant expenditures and divert the attention of our management and key personnel from other
business concerns.
Furthermore, it is possible others will
infringe or otherwise circumvent our issued patents and that we will be unable to fund the cost of litigation against them or
that we would elect not to pursue litigation. In addition, enforcing our patents against third parties may require significant
expenditures regardless of the outcome of such efforts. We also cannot assure you that others have not filed patent applications
for technology covered by our pending applications or that we were the first to invent the technology. There may also exist third
party patents or patent applications relevant to our potential products that may block or compete with the technologies covered
by our patent applications and third parties may independently develop intellectual property similar to our patented intellectual
property, which could result in, among other things, interference proceedings in the U.S. Patent and Trademark Office to determine
priority of invention.
In addition, we may not be able to protect
our established and pending patent positions from competitive technologies, which may provide more effective therapeutic benefit
to patients and which may therefore make our products, technology and proprietary position obsolete.
If we are unable to adequately protect
our proprietary intellectual property from legal challenges, infringement or alternative technologies, we will not be able to
compete effectively in the drug discovery and development business.
We license patent rights from third-party owners or licensees.
If such owners or licensees do not properly or successfully obtain, maintain or enforce the patents underlying such licenses,
or if they retain or license to others any competing rights, our competitive position and business prospects may be adversely
affected.
We do, and will continue to, rely on intellectual
property rights licensed from third parties to protect our technology. We are a party to a number of licenses that give us rights
to third-party intellectual property that is necessary or useful for our business. See “Business-License Agreements.”
We also intend to license additional third-party intellectual property in the future. Our success will depend in part on the ability
of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those
patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications licensed
to us. Even if patents issue or are granted, our licensors may fail to maintain these patents, may determine not to pursue litigation
against other companies that are infringing these patents, or may pursue litigation less aggressively than we would. Further,
we may not obtain exclusive rights, which would allow for third parties to develop competing products. Without protection for,
or exclusive right to, the intellectual property we license, other companies might be able to offer substantially identical products
for sale, which could adversely affect our competitive business position and harm our business prospects.
If we are unable to protect the confidentiality of our
trade secrets or know-how, such proprietary information may be used by others to compete against us.
In addition to filing patents, in an effort
to maintain the confidentiality and ownership of our trade secrets, know-how, and other proprietary information, we have typically
required parties to whom we disclose confidential information to execute confidentiality or non-disclosure agreements. These parties
include our employees, consultants, advisors, and potential or actual collaborators. We also enter into agreements that purport
to require the disclosure and assignment to us of the rights to the ideas, development, discoveries, and inventions of our employees,
consultants, and advisors while we employ or engage them. However, it is possible that these agreements may be breached, invalidated
or rendered unenforceable, and if so, there may not be an adequate corrective remedy available. In addition, others may independently
develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets or know-how.
The disclosure to, or independent development by, a competitor of any trade secret, know-how, or other technology not protected
by a patent could materially adversely affect any competitive advantage we may have over such a competitor. Furthermore, like
many companies in our industry, we may from time to time hire scientific personnel formerly employed by other companies involved
in one or more areas similar to the activities we conduct. In some situations, our confidentiality and non-disclosure agreements
may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment
or consulting relationships. Although we have typically required our employees and consultants to maintain the confidentiality
of all confidential information of previous employers, we or these individuals may be subject to allegations of trade secret misappropriation
or other similar claims as a result of their prior affiliations. If a dispute arises with respect to any proprietary right, enforcement
of our rights can be costly and unpredictable and a court may determine that the right belongs to a third party. Our failure to
protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market
and to execute our business strategies.
Because intellectual property rights are of limited duration,
expiration of intellectual property rights and licenses will negatively impact our operating results.
Intellectual property rights, such as patents
and license agreements based on those patents, generally are of limited duration. Our operating results depend on our patents
and intellectual property licenses. Therefore, the expiration or other loss of rights associated with intellectual property and
intellectual property licenses can negatively impact our business. For example, due to the extensive time needed to develop, test,
and obtain regulatory approval for our therapeutic candidates, any patents that may be issued that protect our therapeutic candidates
may expire prior to or early during commercialization. This may reduce or eliminate any market advantages that such patents may
give us. Following patent expiration, we may face increased competition through the entry of generic or biosimilar products into
the market and a subsequent decline in market share and profits.
Our patent applications may be inadequate in terms of
priority, scope or commercial value.
We apply for patents covering our discoveries
and technologies as we deem appropriate and as our resources permit. However, we or our partners may fail to apply for patents
on important discoveries or technologies in a timely fashion or at all. Also, our pending patent applications, and those that
we may file in the future or those we may license from third parties, may not result in the issuance of any patents. These applications
may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable
patents covering the related discoveries or technologies we may want to commercialize. In addition, because patent applications
are maintained in secrecy for approximately 18 months after filing, other parties may have filed patent applications relating
to inventions before our applications covering the same or similar inventions. In addition, foreign patent applications are often
published initially in local languages, and until an English language translation is available it can be impossible to determine
the significance of a third party invention. Any patent applications filed by third parties may prevail over our patent applications
or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the
freedom to practice the claimed inventions.
Although we have acquired and in-licensed
a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial
value. Also, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able
to design around our issued patents or independently develop products having effects similar or identical to our patented product
candidates. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may
obtain similar patents of uncertain scope.
Third-party claims of intellectual property infringement
may require us to spend substantial time and money and could prevent us from developing or commercializing our therapeutic candidates.
The development, manufacture, use, offer
for sale, sale or importation of our therapeutic candidates may infringe on the claims of third party patents or other intellectual
property rights. Also, the nature of claims contained in unpublished patent filings around the world is unknown to us, and it
is not possible to know in which countries patent holders may choose for the extension of their filings under the Patent Cooperation
Treaty, or other mechanisms. The cost to us of any legal proceeding arising from a third party’s assertion of intellectual
property rights, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs
of such litigation or proceedings more effectively because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation or defense of intellectual property litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace and could result in an injunction prohibiting certain activities.
Legal proceedings to resolve third party claims of intellectual property infringement may also absorb significant management time.
Consequently, we are unable to guarantee that we will be able to manufacture, use, offer for sale, sell or import our therapeutic
candidates in the event of an infringement action or other dispute regarding intellectual property rights.
While we are aware that there are third
party patents having claims that may be considered relevant to certain technologies for which we plan to seek regulatory approval,
we believe those patents will expire prior to the time we expect to obtain regulatory approval for our first product. The estimated
expiration dates for those patents were determined according to information on the face pages of the patents, and certain factors
that could influence patent term, such as patent term extension, for example, were not factored into these estimates. Accordingly,
the estimated expiration dates of those patents may not be accurate and one or more of those patents may not expire before we
obtain regulatory approval for an applicable technology. Owners or licensees of one or more of those patents may bring a patent
infringement suit against us. If one or more of those patents are asserted against us, we expect to be able to assert a defense
for a safe harbor to patent infringement under 35 U.S.C. 271(e)(1) if certain requirements are met. It is possible that (1) certain
of these requirements may not be met, and/or (2) one or more of the third party patents might expire after one or more of our
technologies obtain regulatory approval, and consequently we may not successfully assert such a defense to patent infringement.
If we are unsuccessful in asserting a defense under 35 U.S.C. 271(e)(1), it is possible we may not prevail in defending against
claims of infringement and/or challenging the validity of claims in those patents. We may not successfully develop alternative
technologies or enter into agreements by which we obtain rights to applicable patents. These rights, if necessary, may not be
available on terms acceptable to us or at all.
In the event of patent infringement claims,
or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required
to pay license fees or royalties, or both. These licenses may not be available on acceptable terms, or at all. Even if we were
able to obtain a license, the rights may be non-exclusive, which could potentially limit our competitive advantage. Ultimately,
we could be prevented from commercializing a therapeutic candidate or be forced to cease some aspect of our business operations
if, as a result of actual or threatened patent infringement or other claims, we are unable to enter into licenses on acceptable
terms. This inability to enter into licenses could harm our business significantly or even prevent us from commercializing one
or more therapeutic candidates.
We may be subject to other patent-related litigation
or proceedings that could be costly to defend and uncertain in their outcome.
In addition to infringement claims against
us, we may in the future become a party to other patent litigation or proceedings before regulatory agencies, including interference,
derivation, or post-grant proceedings filed with the U.S. Patent and Trademark Office or opposition proceedings in other foreign
patent offices regarding intellectual property rights with respect to our therapeutic candidates, as well as other disputes regarding
intellectual property rights with our potential or actual corporate partners, or others with whom we have contractual or other
business relationships. Post-issuance proceedings, including oppositions, are not uncommon and we will be required to defend these
proceedings as a matter of course. These post-grant procedures may be costly, and there is a risk that we may not prevail.
If we fail to comply with our obligations under any license,
collaboration or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary
for developing and protecting our product candidates and delivery technologies or we could lose certain rights to grant sublicenses.
Our current licenses with UW and CSIRO
impose, and any future licenses we enter into are likely to impose, various development, commercialization, funding, milestone,
royalty, diligence, sublicensing, insurance, patent prosecution and enforcement, and other obligations on us. If we breach any
of these obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages
and the licensor may have the right to terminate the license, which could result in us being unable to develop, manufacture and
sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology. Moreover,
our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to
claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while
we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future products, if
any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual
property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop
and commercialize products, we may be unable to achieve or maintain profitability.
We may not be able to protect our intellectual property
rights throughout the world.
Filing, prosecuting and defending patents
on drug candidates throughout the world would be prohibitively expensive. Competitors may use our licensed and owned technologies
in jurisdictions where we have not licensed or obtained patent protection to develop their own products and, further, may export
otherwise infringing products to territories where we may obtain or license 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 and other intellectual property protection,
particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our licensed
patents and future patents we may own, or marketing of competing products in violation of our proprietary rights generally. Further,
the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the
United States. As a result, we may encounter significant problems in protecting and defending our licensed and owned intellectual
property both in the United States and abroad. Proceedings to enforce our future patent rights, if any, in foreign jurisdictions
could result in substantial cost and divert our efforts and attention from other aspects of our business.
Many countries, including European Union
countries, India, Japan and China, have compulsory licensing laws under which a patent owner may be compelled under certain circumstances
to grant licenses to third parties. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce
intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual
property that we own or license.
Risks Related to Our Business Operations
Even if we are successful in developing and commercializing
a product candidate, it is possible that the commercial opportunity for mRNA-based therapeutics will be limited.
The product candidates based on our technologies
that are being developed are based on new technologies and therapeutic approaches, none of which has been brought to market. Key
participants in pharmaceutical marketplaces, such as physicians, third-party payors and consumers, may not accept a product intended
to improve therapeutic results based on mRNA mechanisms of action. Accordingly, while we believe there will be a commercial market
for mRNA-based therapeutics utilizing our technologies, there can be no assurance that this will be the case, in particular given
the novelty of the field. Many factors may affect the market acceptance and commercial success of any potential products, including:
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establishment and demonstration of the effectiveness and
safety of the drugs;
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timing of market entry as compared to competitive products
and alternative treatments;
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benefits of our drugs relative to their prices and the
comparative price of competing products and treatments;
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availability of adequate government and third-party payor
reimbursement;
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marketing and distribution support of our products;
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safety, efficacy and ease of administration of our product
candidates;
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willingness of patients to accept, and the willingness
of medical professionals to prescribe, relatively new therapies; and
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any restrictions on labeled indications.
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In addition, we focus our research and
product development on treatments for orphan liver diseases. Given the small number of patients who have the diseases that we
are targeting, it is critical to our ability to grow and become profitable that we continue to successfully identify patients
with these diseases. Our projections 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 estimates.
These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient
foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence
of these diseases. The number of patients may turn out to be lower than expected. The effort to identify patients with diseases
we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment might be possible.
Additionally, the potentially addressable patient population for each of our product candidates may be limited or may not be amenable
to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which
would adversely affect our results of operations and our business.
If we fail to obtain or maintain orphan drug exclusivity
for our products, our competitors may sell products to treat the same conditions and our revenue will be reduced. In addition,
if a competitor obtains orphan drug designation and is first to market for a product we are developing, it could prevent or delay
us from marketing our product.
We currently focus on the development of
drugs that are eligible for the FDA and European Union orphan drug designation. Under the Orphan Drug Act, the FDA may designate
a product as an orphan drug if it is intended to treat a rare disease or condition, defined as a patient population of fewer than
200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation
that the cost of developing the drug will be recovered from sales in the United States. In the European Union, the Committee for
Orphan Medicinal Products, or COMP, of the European Medicines Agency, or EMA, grants orphan drug designation to promote the development
of products that are intended for the diagnosis, prevention, or treatment of a life-threatening or chronically debilitating condition
affecting not more than five in 10,000 persons in the European Union community. Additionally, designation is granted for products
intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition
and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary
investment in developing the drug or biological product.
In the United States, orphan drug designation
entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages,
and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan designation,
the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same
drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority
over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. In the European
Union, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and ten
years of market exclusivity is granted following drug or biological product approval. This period may be reduced to six years
if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable
not to justify maintenance of market exclusivity. If a competitor obtains orphan drug designation and is first to market for a
product we are developing, it could prevent or delay us from marketing our product.
Because the extent and scope of patent
protection for our products may in some cases be limited, orphan drug designation is especially important for our products for
which orphan drug designation may be available. For eligible drugs, we plan to rely on the exclusivity period under the Orphan
Drug Act to maintain a competitive position. If we do not obtain orphan drug exclusivity for our drug products and biologic products
that do not have broad patent protection, our competitors may then sell the same drug to treat the same condition sooner than
if we had obtained orphan drug exclusivity and our revenue will be reduced.
Even though we may obtain orphan drug designation
for our products in the United States, we may not be the first to obtain marketing approval for any particular orphan indication
due to the uncertainties associated with developing pharmaceutical products. Further, even if we obtain orphan drug exclusivity
for a product, that exclusivity may not effectively protect the product from competition because different drugs with different
active moieties can be approved for the same condition. Even with orphan drug exclusivity, if a third party were to prepare or
market a product which infringes upon our intellectual property, we may need to initiate litigation, which may be costly, to enforce
our rights against such party. Even after an orphan drug is approved, the FDA can subsequently approve the same drug with the
same active moiety for the same condition if the FDA concludes that the later drug is safer, more effective, or makes a major
contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug
nor gives the drug any advantage in the regulatory review or approval process.
If we are not able to retain our key management or attract
and retain qualified scientific, technical and business personnel, our ability to implement our business plan may be adversely
affected.
Our success largely depends on the skill,
experience and effort of our senior management. The loss of the service of any of these persons, including Robert Overell, Ph.D.,
our president and chief executive officer, Michael Houston, Ph.D., our chief scientific officer and Gordon Brandt, M.D., our chief
medical officer, would likely result in a significant loss in the knowledge and experience that we possess and could significantly
delay or prevent successful product development and other business objectives. There is intense competition from numerous pharmaceutical
and biotechnology companies, universities, governmental entities and other research institutions, seeking to employ qualified
individuals in the technical fields in which we operate, and we may not be able to attract and retain the qualified personnel
necessary for the successful development and commercialization of our product candidates.
If our product candidates advance into clinical trials,
we may experience difficulties in managing our growth and expanding our operations.
We have limited experience in product development
and have not begun clinical trials for any of our product candidates. As our product candidates enter and advance through preclinical
studies and any clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contract
with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships
with collaborators or partners, suppliers and other organizations. Our ability to manage our operations and future growth will
require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may
not be able to implement improvements to our management information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls.
We may be required to defend lawsuits or pay damages
for product liability claims.
Our business exposes us to significant
product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic treatments. We may face
substantial product liability exposure in human clinical trials that we may initiate and for products that we sell, or manufacture
for others to sell, after regulatory approval. The risk exists even with respect to those drugs that are approved by regulatory
agencies for commercial distribution and sale and are manufactured in facilities licensed and regulated by regulatory agencies.
Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such
claims could result in an FDA investigation of the safety and effectiveness of our products, our manufacturing processes and facilities
or our marketing programs and potentially a recall of our products or more serious enforcement action, limitations on the approved
indications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome,
liability claims may also result in decreased demand for our products, injury to our reputation, costs to defend the related litigation,
a diversion of management’s time and our resources, substantial monetary awards to trial participants or patients and a
decline in our stock price. We currently do not have product liability insurance. We will need to obtain such insurance as we
believe is appropriate for our stage of development and may need to obtain higher levels of such insurance if we were ever to
market any of our product candidates. Any insurance we have or may obtain may not provide sufficient coverage against potential
liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may
be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims
that could have a material adverse effect on our business.
Our employees may engage in misconduct or other improper
activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee
fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide
accurate information to the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare
fraud and abuse laws and regulations, 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, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit
a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business
arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials,
which could result in regulatory sanctions and 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 governmental investigations or other actions or lawsuits stemming from a
failure to be in compliance with such 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 have a significant impact on our business, including the imposition
of significant fines or other sanctions.
Risks Related to our Industry
The biotechnology and pharmaceutical industries are intensely
competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be
unable to commercialize successfully any drugs that we develop.
The biotechnology and pharmaceutical industries
are intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other public and private research organizations are pursuing the development of novel drugs for the
same diseases that we are targeting or expect to target. Many of our competitors have:
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much greater financial, technical and human resources
than we have at every stage of the discovery, development, manufacture and commercialization
of products;
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more extensive experience in preclinical testing, conducting
clinical trials, obtaining regulatory approvals, and in manufacturing, marketing and
selling pharmaceutical products;
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product candidates that are based on previously tested
or accepted technologies;
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products that have been approved or are in late stages
of development; and
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collaborative arrangements in our target markets with
leading companies and research institutions.
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Products based on our technologies may
face competition from drugs that have already been approved and accepted by the medical community for the treatment of the conditions
for which we may develop drugs. We also expect to face competition from new drugs that enter the market. We believe a significant
number of drugs and delivery technologies are currently under development, and may become commercially available in the future,
for the treatment of conditions for which we and our partners may try to develop drugs. These drugs may be more effective, safer,
less expensive, or marketed and sold more effectively, than any products we and our partners develop.
If we and our partners successfully develop
product candidates based on our technologies, and obtain approval for them, we will face competition based on many different factors,
including:
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safety and effectiveness of such products;
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ease with which such products can be administered and
the extent to which patients accept relatively new routes of administration;
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timing and scope of regulatory approvals for these products;
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availability and cost of manufacturing, marketing and
sales capabilities;
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reimbursement coverage; and
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Our competitors may develop or commercialize
products with significant advantages over any products we develop based on any of the factors listed above or on other factors.
Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our
competitive position and business. Competitive products may make any products we develop obsolete or noncompetitive before we
can recover the expenses of developing and commercializing our product candidates. Such competitors could also recruit our future
employees, which could negatively impact our level of expertise and the ability to execute on our business plan. Furthermore,
we also face competition from existing and new treatment methods that reduce or eliminate the need for drugs, such as the use
of advanced medical devices. The development of new medical devices or other treatment methods for the diseases we are targeting
could make our product candidates noncompetitive, obsolete or uneconomical.
We may be unable to compete successfully against other
companies that are working to develop novel drugs and technology platforms using technology similar to ours.
In addition to the competition we face
from competing drugs in general, we also face competition from other biotechnology and pharmaceutical companies and medical institutions
that are working to develop novel drugs using technology that competes more directly with our own. Among those companies that
are or may be working in the field of RNA therapeutics to treat orphan liver disease and/or the urea cycle disorders are: Moderna
LLC, Bio Blast Pharma Ltd., Alnylam Pharmaceuticals, Arcturus Therapeutics, Inc., Acuitas Therapeutics, Arbutus Biopharma Corporation,
CureVac AG, Dicerna Pharmaceuticals, Inc., Horizon Pharma plc, Ocera Therapeutics, Inc., Cytonet GmbH & Co., Promethera Biosciences
S.A., BioNTech AG, Synlogic, Inc. and Aeglea Biotherapeutics, Inc. Any of these, or other, companies may develop their technology
more rapidly and more effectively than us.
In addition to competition with respect
to our technology and with respect to specific products, we face substantial competition to discover and develop safe and effective
means to deliver mRNAs to the hepatocytes. Substantial resources are being expended by third parties, both in academic laboratories
and in the corporate sector, in an effort to discover and develop a safe and effective means of delivery into the hepatocytes.
If safe and effective means of delivery to the hepatocytes are developed by our competitors, our ability to successfully commercialize
a competitive product would be adversely affected.
Many of our competitors, either alone or
together with their partners, have substantially greater research and development capabilities and financial, scientific, technical,
manufacturing, sales, marketing, distribution, regulatory and other resources and experience than us. They may also have more
established relationships with pharmaceutical companies. Even if we and/or our partners are successful in developing products
based on our technologies, in order to compete successfully we may need to be first to obtain intellectual property protection
for, or to commercialize, such products, or we may need to demonstrate that such products are superior to, or more cost effective
than, products developed by our competitors (including therapies that are based on different technologies). If we are not first
to protect or market our products, or if we are unable to differentiate our products from those offered by our competitors, any
products for which we are able to obtain approval may not be successful.
Universities and public and private research
institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop
proprietary technologies related to the drug delivery field or secure protection that we may need for development of our technologies
and products. We may attempt to license one or more of these proprietary technologies, but these licenses may not be available
to us on acceptable terms, if at all.
Any drugs based on our technologies that we develop may
become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which
could have a material adverse effect on our business and financial results.
The success of the products based on our
technologies will depend upon the extent to which third-party payors, such as Medicare, Medicaid and other domestic and international
government programs, private insurance plans and managed care programs, provide reimbursement for the use of such products. Most
third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective
treatment methods, as determined by the third-party payor, or was used for an unapproved indication.
Third-party payors also may refuse to reimburse
for experimental procedures and devices. Furthermore, because our programs are in the early stages of development, we are unable
at this time to determine their cost-effectiveness and the level or method of reimbursement. Increasingly, the third-party payors,
who reimburse patients, such as government and private insurance plans, are requiring that drug companies provide them with predetermined
discounts from list prices, and are challenging the prices charged for medical products. If the price charged for any products
based on our technologies that we or our partners develop is inadequate in light of our development and other costs, our profitability
could be adversely affected.
We expect that drugs based on our technologies
that we or a partner develop may need to be administered under the supervision of a physician. Under currently applicable law,
drugs that are not usually self-administered may be eligible for coverage by the Medicare program if they:
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are “incidental” to a physician’s services;
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are “reasonable and necessary” for the diagnosis
or treatment of the illness or injury for which they are administered according to accepted
standards of medical practice;
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are not excluded as immunizations; and
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have been approved by the FDA.
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There may be significant delays in obtaining
insurance coverage for newly-approved drugs, and insurance coverage may be more limited than the purpose for which the drug is
approved by the FDA. Moreover, eligibility for insurance coverage does not imply that any drug will be reimbursed in all cases
or at a rate that covers costs, including research, development, manufacture, sale and distribution. Interim payments for new
drugs, if applicable, may also not be sufficient to cover costs and may not be made permanent. Reimbursement may be based on payments
for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for drugs may be reduced
by mandatory discounts or rebates required by government health care programs or private payors and by any future relaxation of
laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States.
Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates.
The inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for
new drugs based on our technologies that we or our partners develop could have a material adverse effect on our operating results,
our ability to raise capital, and our overall financial condition.
We believe that the efforts of governments
and third-party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals to broaden the availability
of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies.
A number of legislative and regulatory changes in the healthcare system in the United States and other major healthcare markets
have occurred in recent years, and interpretation and application of such changes continue to evolve. These developments have
included prescription drug benefit legislation that was enacted and took effect in January 2006, healthcare reform legislation
recently enacted by certain states, and implementation of the Patient Protection and Affordable Care Act, or the Affordable Care
Act, enacted in 2010 which resulted in significant changes to the health care industry. These developments could, directly or
indirectly, affect our ability to sell our products, if approved, at a favorable price.
The Affordable Care Act includes significant
provisions that encourage state and federal law enforcement agencies to increase activities related to preventing, detecting and
prosecuting those who commit fraud, waste and abuse in federal healthcare programs, including Medicare, Medicaid and Tricare.
The Affordable Care Act continues to be implemented through regulation and government activity but is subject to possible, amendment,
additional implementing regulations and interpretive guidelines. The manner in which the Affordable Care Act continues to evolve
could materially affect the extent to which and the amount at which pharmaceuticals are reimbursed by government programs such
as Medicare, Medicaid and Tricare. We cannot predict all impacts the Affordable Care Act may have on our products, but it may
result in our products being chosen less frequently or the pricing being substantially lowered. Or, the new legislation could
have a positive impact on our future net sales due to increasing the number of persons with healthcare coverage in the United
States.
We cannot predict what additional healthcare
reform initiatives may be adopted in the future or how federal and state legislative and regulatory developments are likely to
evolve, but we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an
adverse effect on anticipated revenues from product candidates based on our technologies that are successfully developed and for
which regulatory approval is obtained, and may affect our overall financial condition and ability to develop product candidates.
Risks Related to Ownership of our Common Stock
We expect that our stock price will fluctuate significantly.
The trading price of shares of our common
stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond
our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these
factors include:
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actual or anticipated fluctuations in our results of operations;
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announcement or expectation of additional financing efforts;
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the timing and results of preclinical studies for our
urea cycle disorder programs and any product candidates that we may develop;
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commencement or termination of collaborations for our
product development and research programs;
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failure or discontinuation of any of our product development
and research programs;
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variance in our financial performance from the expectations
of market analysts;
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announcements by us or our competitors of results of preclinical
studies, clinical trials, or regulatory approvals of product candidates, significant
business developments, changes in distributor relationships, acquisitions or expansion
plans;
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adverse regulatory decisions;
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changes in the prices of our raw materials or the products
we sell;
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data concerning the safety and efficacy profile of our
products;
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sales of our common stock by us, our insiders, or other
stockholders;
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expiration of market stand-off or lock-up agreements;
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our involvement in litigation;
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our sale of common stock or other securities in the future;
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market conditions in our industry;
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changes in key personnel;
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the trading volume of our common stock;
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changes in the structure of healthcare payment systems;
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changes in the estimation of the future size and growth
rate of our markets;
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the recruitment or departure of key personnel;
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developments or disputes concerning patent applications,
issued patents, or other proprietary rights;
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market conditions in the pharmaceutical and biotechnology
sectors;
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general economic, industry, and market conditions; and
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the other factors described in the “Risk Factors”
section of this Annual Report on Form 10-K.
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In recent years, the stock markets in general
have experienced extreme price and volume fluctuations, especially in the biotechnology sector. Broad market and industry factors
may materially harm the market price of shares of our common stock, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted
against that company. If we were involved in any similar litigation, we could incur substantial costs and our management’s
attention and resources could be diverted.
The market price of our common stock could be negatively
affected by future sales of our common stock in the public market by our existing stockholders and lenders.
Sales by us or our stockholders of a substantial
number of shares of our common stock in the public market, or the perception that these sales might occur, could cause the market
price of our common stock to decline or could impair our ability to raise capital through a future sale of our equity securities.
As of December 31, 2016, we had 11,690,329
shares of common stock outstanding. The resale of 4,745,174 shares, or 40.6% of our outstanding shares as of December 31, 2016
is currently prohibited or otherwise restricted as a result of securities law provisions, market standoff agreements entered into
by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters of our IPO; however,
subject to applicable securities law restrictions, these shares will be able to be sold in the public market beginning as follows:
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4,290,981
shares of our outstanding shares of common stock beneficially owned by certain stockholders
who are subject to lock-up agreements, each of which, subject to limited exceptions,
restricts transfer of the stockholder’s shares of common stock for a period of
12 months after the closing of our IPO without the prior written consent of Titan Multi-Strategy
Fund I, LTD., one of the lenders from the bridge loan financing we received in December
2015; provided that, after 180 days following the IPO, the foregoing restrictions will
automatically terminate if for 20 consecutive trading days on each such trading day (x)
the closing price of our common stock is at least 150% of the IPO price for our common
stock and (y) the trading volume of our common stock is not less than 100,000 shares;
provided further that, Titan Multi-Strategy Fund I, LTD. may unilaterally waive any term
of the lock-up agreement (“Category 1”);
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454,193
shares of our outstanding shares of common stock beneficially owned by certain stockholders
and option holders who are subject to lock-up agreements, each of which, subject to limited
exceptions, restricts transfer of the stockholder’s shares of common stock for
a period of 12 months after the closing of our IPO without our prior written consent,
which restriction will terminate in accordance with the same terms as Category 1; provided
further that, we may unilaterally waive any term of the lock-up agreement (“Category
2”);
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As noted above, we or Titan Multi-Strategy
Fund I, LTD., as applicable, may, in our or their sole discretion, and at any time without notice, release all or any portion
of the shares subject to the corresponding lock-up agreements. After the expiration of the lock-up period, these shares can be
resold into the public markets in accordance with the requirements of Rule 144, subject to certain volume limitations. In addition,
we have also registered the offer and sale of all of the outstanding options of our 2006 Plan as of May 17, 2016 and all of the
shares of common stock issuable under the PhaseRx, Inc. 2016 Long-Term Incentive Plan, and such shares are freely transferable,
except for any shares held by “affiliates,” as such term is defined in Rule 144 under the Securities Act of 1933,
as amended. The market price of our common stock may drop significantly when the restrictions on resale by our existing stockholders
lapse and these stockholders are able to sell our common stock into the market.
Upon the expiration of the lock-up restrictions
described above, the number of shares of our common stock that are potentially available for sale in the open market will increase
materially, which could make it harder for the value of our common stock to appreciate unless there is a corresponding increase
in demand for our common stock. This increase in available shares could cause the value of your investment in our common stock
to decrease.
In addition, a sale by us of additional shares
of common stock or similar securities in order to raise capital might have a similar negative impact on the share price of our
common stock. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance
of additional shares of common stock or other equity securities, and may cause you to lose part or all of your investment in our
common stock.
The concentration of the capital stock ownership with our
insiders may limit the ability of the stockholders to influence corporate matters.
As of December 31, 2016, our executive officers,
directors, 5% or greater stockholders, and their respective affiliated entities in the aggregate beneficially owned approximately
56.5% of our outstanding common stock. As a result, these stockholders, acting together, have control over matters that require
approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate
actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying
or preventing a corporate transaction that other stockholders may view as beneficial.
We have broad discretion in the use of a portion of the net
proceeds from our IPO and our investment of these proceeds may not yield a favorable return. We may invest the proceeds of the
offering in ways with which investors disagree.
Our management has broad discretion in the
application of the net proceeds from our May 2016 IPO in ways our stockholders may not agree with or that do not yield a favorable
return, if at all. If we do not invest or apply the proceeds in ways that improve our operating results, we may fail
to achieve expected financial results, which could cause a material adverse effect on our business, financial condition and results
of operation.
If securities or industry analysts do not publish research
or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock will,
to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do
not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion
of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume
to decline.
We do not intend to pay dividends for the foreseeable future,
which could reduce the attractiveness of our stock to some investors.
We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable
future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock
increases. In addition, our loan and security agreement with Hercules Capital, Inc. (“Hercules”), dated June 7, 2016,
prohibits us from declaring or paying cash dividends or making cash distributions on any class of our capital stock.
See “Dividend Policy.” Any return to stockholders will therefore be limited to the increase, if any, of our share
price.
An active public trading market for our common stock may
not be sustained.
Prior to our IPO in May 2016, there was no
public market for our common stock. Although our common stock is listed on The NASDAQ Capital Market, the market for our shares
has demonstrated varying levels of trading activity. Furthermore, an active trading market may not be sustained in the future.
The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that
you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also
impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other
companies or technologies by using our shares as consideration.
Provisions in our certificate of incorporation and bylaws
and Delaware law may discourage, delay or prevent a change of control of our company and, therefore, may depress the trading price
of our stock.
Our certificate of incorporation and bylaws
contain certain provisions that may discourage, delay or prevent a change of control that our stockholders may consider favorable.
These provisions:
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authorize
the issuance of “blank check” preferred stock that our board of directors
could issue to increase the number of outstanding shares to discourage a takeover attempt;
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prohibit
stockholder action to elect or remove directors by majority written consent;
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provide
that the board of directors is expressly authorized to make, alter or repeal our bylaws;
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prohibit
our stockholders from calling a special meeting of stockholders; and
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establish
advance notice requirements for nominations for elections to our board of directors or
for proposing matters that can be acted upon by stockholders at stockholder meetings.
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Our 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 employee
s.
Our certificate of incorporation provides that
the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General
Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by
the internal affairs doctrine. The choice of forum provision 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 such lawsuits
against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision
contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs
associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Financial reporting obligations of being a public company
in the United States are expensive and time-consuming, and our management will be required to devote substantial time
to compliance matters.
As a public company whose common
stock is listed on The NASDAQ Capital Market, we incur significant additional accounting, legal and other expenses that we did
not incur as a private company, including costs associated with our reporting requirements under the Securities Exchange Act of
1934, as amended, or other rules and regulations, implemented by the Securities and Exchange Commission and The NASDAQ
Stock Market LLC. Following our IPO, we are working with our legal and accounting advisors to identify those areas in which changes
should be made to our financial and management control systems to manage our growth and our obligations as a public company. These
areas include corporate governance, corporate control, disclosure controls and procedures in financial reporting and accounting
systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required
in order to operate as a public company are, and could continue to be, material, particularly if we cease to be an “emerging
growth company.” Compliance with the various reporting and other requirements applicable to public companies will also require
considerable time and attention of management. In addition, the changes we have made and make may not be sufficient to allow us
to satisfy our obligations as a public company on a timely basis.
As an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, we may take advantage of
certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act of 2002 (and the rules and regulations of
the Securities and Exchange Commission thereunder). When these exemptions cease to apply, we expect to incur additional
expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the
amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. In
addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to
rely on the exemptions related thereto, depending on our status as per Rule 12b-2 of the Securities Exchange Act of 1934, as
amended, our independent registered public accounting firm may also need to attest to the effectiveness of our internal
control over financial reporting under Section 404. We will be performing the system and process evaluation and testing (and
any necessary remediation) required to comply with the management certification and eventual auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act when we are no longer an emerging growth
company. This process will require the investment of substantial time and resources, including by our senior
management. As a result, this process may divert internal resources and take a significant amount of time and effort to
complete.
Changes in the laws and regulations affecting
public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make
it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing
of additional costs we may incur in order to comply with such requirements.
If we are not able to implement the requirements of Section
404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory
authorities.
Section 404 of the Sarbanes-Oxley Act of 2002
and the related rules adopted by the Securities and Exchange Commission and the Public Company Accounting Oversight Board require
that we evaluate and determine the effectiveness of our internal controls over financial reporting and, starting with our annual
report for fiscal year 2017, provide a management report on the effectiveness of our internal control over financial reporting.
If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and
our consolidated financial statements may be materially misstated. We will be evaluating our internal controls systems to allow
management to report on, and eventually allow our independent auditors to attest to, our internal controls. We will be performing
the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification
and eventual auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. The aforementioned auditor attestation
requirements will not apply to us until we are not an “emerging growth company” or 2021, whichever comes first.
We cannot be certain as to the timing of completion
of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement
the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation
by regulatory authorities, such as the SEC or The NASDAQ Stock Market LLC. Any such action could adversely affect our financial
results or investors’ confidence in us and could cause our stock price to fall. Moreover, if we are not able to comply with
the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies
in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by NASDAQ,
the Securities Exchange Commission or other regulatory authorities, which would entail expenditure of additional financial and
management resources and could materially adversely affect our stock price. Inferior internal controls could also cause us to
fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could
have a negative effect on our stock price.
We may be subject to securities litigation, which is expensive
and could divert management attention.
In the past, companies that have experienced
volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of
this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s
attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us
to significant liabilities.
In the event that we fail to satisfy
any of the listing requirements of The NASDAQ Capital Market, our common stock may be delisted, which could affect our market
price and liquidity.
Our common stock is listed on The NASDAQ Capital
Market. For continued listing on The NASDAQ Capital Market, we will be required to comply with the continued listing requirements,
including the minimum market capitalization standard, the corporate governance requirements and the minimum closing bid price
requirement, among other requirements. In the event that we fail to satisfy any of the listing requirements of The NASDAQ Capital
Market, our common stock may be delisted. If our securities are delisted from trading on The NASDAQ Stock Market, and we are not
able to list our securities on another exchange or to have them quoted on The NASDAQ Stock Market, our securities could be quoted
on the OTC Bulletin Board or on the “pink sheets.” As a result, we could face significant adverse consequences including:
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a
limited availability of market quotations for our securities;
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a
determination that our common stock is a “penny stock,” which would require
brokers trading in our common stock to adhere to more stringent rules and possibly result
in a reduced level of trading activity in the secondary trading market for our securities;
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a
limited amount of news and analyst coverage; and
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a
decreased ability to issue additional securities (including pursuant to short-form registration
statements on Form S-3 or obtain additional financing in the future).
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We are an “emerging growth company” and may elect
to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act. For as long as we continue to be an “emerging growth company”, we may take advantage of
exemptions from various reporting requirements that are applicable to other public reporting companies that are not emerging growth
companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley
Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We could be an “emerging
growth company” up until the December 31
st
following the fifth anniversary after our first equity offering, although
circumstances could cause us to lose that status earlier if our annual revenues exceed $1.0 billion, if we issue more than $1.0
billion in non-convertible debt in any three-year period or if the market value of our common stock held by non-affiliates exceeds
$700.0 million as of any June 30
th
, in which case we would no longer be an “emerging growth company” as
of the following December 31
st
. We cannot predict if investors will find our securities less attractive because we
may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading
market for our securities and the price of our securities may be more volatile.
Even after we no longer qualify as an “emerging
growth company”, we may still qualify as a “smaller reporting company,” which would allow us to take advantage
of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements
of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may 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 stock price may be more volatile.
Risks Related to our Indebtedness
Our obligations under our outstanding term loan are secured
by all of our assets other than intellectual property, so if we default on those obligations, the lender could foreclose on our
assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors
or to holders of our equity securities if we were to become insolvent at a time when the value of such assets exceeded the amount
of our indebtedness and other obligations.
Hercules, the lender under our term loan has
a security interest in all of our assets other than our intellectual property. As a result, if we default under our obligations
to the lender, the lender could foreclose on its security interests and liquidate some or all of these assets, which would harm
our business, financial condition and results of operations. The principal amount of the term loan as of December 31,2016, was
$6,000,000.
In the event of a default in connection with
our bankruptcy, insolvency, liquidation, or reorganization, the lender would have a prior right to substantially all of our assets
to the exclusion of our general creditors. In that event, our assets would first be used to repay in full all indebtedness and
other obligations secured by the lender, resulting in all or a portion of our assets being unavailable to satisfy the claims of
any unsecured indebtedness. Only after satisfying the claims of any unsecured creditors would any amount be available for our
equity holders. These events of default include, among other things, our failure to pay any amounts due under the loan and security
agreement or any of the other loan documents, a breach of covenants under the loan and security agreement, our insolvency, a material
adverse effect occurring, the occurrence of certain defaults under certain other indebtedness or certain final judgments against
us.
The pledge of these assets and other restrictions
may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under the
term loan, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired,
which could have an adverse effect on our financial flexibility.
Our outstanding term loan obligations may adversely affect
our cash flow and our ability to operate our business.
Pursuant to the terms of our loan and security
agreement, the lender made a term loan to us in aggregate amount of $6.0 million. We are required to make monthly payments of
interest in the amount of approximately $48,000 until June 2017 and monthly payments of interest and principal in the amount of
approximately $225,000 per month from July 2017 until the loan matures. The principal amount of the term loan as of
December 31, 2016, was $6.0 million. The term loan under the loan and security agreement, as amended, matures on December 2, 2019.
The terms of our term loan could have negative
consequences to us, such as:
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we
may be unable to obtain additional financing to fund working capital, operating losses,
capital expenditures or acquisitions on terms acceptable to us, or at all;
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the
amount of our interest expense may increase because our term loan has a variable rate
of interest at any time dependent on the prime rate.
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we
may be more vulnerable to economic downturns and adverse developments in our industry
or the economy in general.
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Our ability to meet our expenses and debt obligations
will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors.
We will be unable to control many of these factors, such as economic conditions. We cannot be certain that we will continue to
have sufficient capital to allow us to pay the principal and interest on our debt and meet any other obligations. If we do not
have enough money to service our debt, we may be required, but unable to refinance all or part of our existing debt, sell assets,
borrow money or raise equity on terms acceptable to us, if at all, and the lender could foreclose on its security interests and
liquidate some or all of our assets.
Our loan and security agreement contains covenants that could
limit our financing options and liquidity position, which would limit our ability to grow our business.
Covenants in our loan and security agreement
impose operating and financial restrictions on us. These restrictions prohibit or limit our ability to, among other things:
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pay
cash dividends to our stockholders;
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redeem
or repurchase our common stock or other equity;
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incur
additional indebtedness;
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permit
liens on assets;
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make
certain investments (including through the acquisition of stock, shares, partnership
or limited liability company interests, any loan, advance or capital contribution); and
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sell,
lease, license, lend or otherwise convey an interest in a material portion of our assets.
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These restrictions may limit our ability to
obtain additional financing, withstand downturns in our business or take advantage of business opportunities. Moreover, additional
debt financing we may seek, if permitted, may contain terms that include more restrictive covenants, may require repayment on
an accelerated schedule or may impose other obligations that limit our ability to grow our business, acquire needed assets, or
take other actions we might otherwise consider appropriate or desirable.